UNITED STATES

SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-27712

OSE USA, Inc.

(Exact name of registrant as specified in its charter)


Delaware		77-0309372
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

2223 Old Oakland Road San Jose, CA		95131-1402
(Address of principal executive offices)		(Zip Code)

(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 May 3, 2005: 56,725,808. As of May 3, 2005 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.

TABLE OF CONTENTS


			Page
Part I.	Financial Information

	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Qualitative and Quantitative Disclosures about Market Risk	15
	Item 4.	Controls and Procedures	15

Part II.	Other Information

	Item 6.	Exhibits	16

	Signatures		16

Page 2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OSE USA, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)


	December 31, 2004			April 3, 2005 (Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	533		$	391
Accounts receivable, net of allowance for doubtful accounts of $135 and $155 respectively		1,708			1,752
Prepaid expense and other current assets		47			206

Total current assets		2,288			2,349
Property and equipment, net		59			55
Intangible assets, net of accumulated amortization of $1,826 and $1,915, respectively		1,731			1,642

Total Assets	$	4,078		$	4,046

Liabilities, Convertible Preferred Stock, and Stockholders’ Deficit
Current liabilities:
Loan payable – related party	$	26,102		$	26,102
Accounts payable - related parties		6,147			6,388
Accrued dividends and interest on unpaid dividends – related party		5,037			5,344
Accrued expenses and other liabilities		1,105			1,179
Liabilities from discontinued operations		667			635

Total current liabilities		39,058			39,648
Deferred gain on sale of facilities		423			389

Total Liabilities		39,481			40,037

Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; 6,023,225 (Series A: 3,000,000 shares, Series B: 3,023,225 shares) issued and outstanding; liquidation preference: Series A: $1.70 per share, Series B: $1.98 per share		11,100			11,100
Stockholders’ deficit:
Common stock, $.001 par value; 300,000,000 shares authorized; 56,725,808 shares issued and outstanding		56			56
Additional paid-in capital		54,458			54,458
Accumulated deficit		(101,017	)		(101,605	)

Total stockholders’ deficit		(46,503	)		(47,091	)

Total liabilities and stockholders’ deficit	$	4,078		$	4,046

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

Page 3

OSE USA, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)


	Three Months Ended
	March 28, 2004			April 3, 2005
Revenues	$	1,023		$	645

Operating expenses:
Selling, general and administrative		824			752

Operating income (loss) from operations		199			(107	)

Interest and other income		—			19
Interest expense		(217	)		(193	)

Net loss from operations		(18	)		(281	)
Preferred stock dividends and interest on unpaid dividend		290			307

Net loss applicable to common stockholders	$	(308	)	$	(588	)

Per share data:
Net loss per share applicable to common stockholders – basic and diluted	$	(0.01	)	$	(0.01	)
Number of shares used to compute per share data basic and diluted		56,726			56,726

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

Page 4

OSE USA, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	For Three Months Ended
	March 28, 2004			April 3, 2005
Cash flows provided by (used in) operating activities
Net loss from continuing operations	$	(18	)	$	(281	)
Adjustments:
Depreciation and amortization		93			93
Gain on sale of facilities, net		(34	)		(34	)
Changes in operating assets and liabilities
Accounts receivable		(215	)		(44	)
Prepaid and other assets		(148	)		(159	)
Accounts payable and accounts payable related party		336			241
Accrued liabilities		(11	)		74

Net cash provided by (used in) continuing operations		3			(110	)
Net cash used in discontinued operations		(152	)		(32	)

Net cash used in operating activities		(149	)		(142	)

Net decrease in cash and cash equivalents		(149	)		(142	)
Cash and cash equivalents at beginning of period		591			533

Cash and cash equivalents at end of period	$	442		$	391

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

Page 5

OSE USA, INC.

NOTES TO CONDENSED CONSOLIDATED 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. 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, 2004 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three month periods ended March 28, 2004 and April 3, 2005 are not necessarily indicative of the results that may be expected for any subsequent period or for the entire year ending December 31, 2005.

Page 6

The Company has experienced fluctuating levels of demand and ongoing net operating losses and has a negative stockholders’ equity of $47.1 million as of April 3, 2005. As a result of these circumstances, the report of the Company’s independent registered public accounting firm on the Company’s December 31, 2004 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. NEW ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the financial statements based on their fair values beginning with the first interim period after December 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to expense recognition. We will adopt SFAS 123R using the modified-prospective method in the first quarter of 2006. We do not expect any significant impact on our financial condition by adopting this standard.

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision is effective for no later than the end of fiscal year ending December 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.

NOTE 3. 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 current financial statements.

As of December 31, 2004 and April 3, 2005, the Company had accrued expenses and other liabilities of $667,000 and $635,000 respectively remaining from discontinued operations.

Page 7

NOTE 4. 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.

SFAS No. 123R, “Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123,” require disclosures as if the Company had applied the fair value method to employee awards rather than the intrinsic value method. The fair value of stock-based awards to employees is calculated through the use of option pricing models. These models were developed originally 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:


	Three month period ended
	March 28, 2004		April 3, 2005
Risk free interest rate for stock option	2.58	%	3.75	%
Risk free interest rate for stock purchase right	*		*
Expected dividend yield	0	%	0	%
Expected volatility	326	%	355	%
Expected life for stock option (years)	4		4
Weighted average fair value of options granted during the period	*		*

*	No option granted and no stock purchased during the three-month period ended March 28, 2004 and April 3, 2005.

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):


	Three month period ended
	March 28, 2004			April 3, 2005
Net loss applicable to common stockholders, as reported-,	$	(308	)	$	(588	)

Stock based compensation expense, pro forma		(2	)		(0	)

Net loss applicable to common stockholders, pro forma	$	(310	)	$	(588	)
Net loss applicable to common stockholders, per share as reported-

Basic and diluted	$	(0.01	)	$	(0.01	)
Net loss applicable to common stockholders, per share, pro forma-

Basic and diluted	$	(0.01	)	$	(0.01	)

Page 8

NOTE 5. ACCOUNTS RECEIVABLE

The majority of the Company’s accounts receivable is due from semiconductor companies. Credit is extended based on evaluation of each customer’s financial condition and, generally, collateral is not required. A majority of accounts receivable is due within 30 days and is 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. Under 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.

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 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 are remitted to OSE directly. The accounts receivable related to products shipped from OSEP as of December 31, 2004 and April 3, 2005 were $1.7 million and $1.8 million, respectively. The Company no longer records accounts receivable for OSE. All other terms and conditions of the distribution agreement remain in effect.

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


	December 31, 2004		April 3, 2005 (Unaudited)
	(in thousands)
Beginning balance	$	8	$	135
Reclassified from discontinued Operation		26		—
Bad debt expense		101		20

Ending balance	$	135	$	155

NOTE 6. INCOME TAXES

No income taxes were recorded for the three-month periods ended March 28, 2004 and April 3, 2005 as the Company had operating losses for both periods. The Company’s current accrued tax liability balance is adequate to cover the tax liability related to the Company’s Massachusetts income tax. The Company believes the realization of its deferred tax assets is unlikely and accordingly, has recorded an offsetting valuation allowance.

NOTE 7. NET LOSS PER SHARE

Net loss per basic and diluted share for the three month periods ended March 28, 2004 and April 3, 2005 was computed using the weighted average number of common shares outstanding during the period but exclude the dilutive potential of common shares from assumed conversions because of their anti-dilutive effect. The dilutive potential of common shares includes conversion of preferred shares (Note 9), and outstanding stock options and warrants, using the treasury stock method. There were options and warrants outstanding at March 28, 2004 and April 3, 2005 to purchase an aggregate of 6,679,181 and 6,082,379 shares of Common Stock, respectively.

Page 9

NOTE 8. 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 $193,000 for the three-month period ended April 3, 2005 related to these loans.

Loan payable to related party at December 31, 2004 and April 3, 2005 consists of:


Unsecured loan payable, interest payments are due in monthly installments of $43,750 at 3.0% per annum. The principal is due on December 25, 2005	$	17,500,000
Unsecured loan payable, interest payments are due in monthly installments of $21,500 at 3.0% per annum. The principal is due on June 29, 2005		8,602,000

Total	$	26,102,000

NOTE 9. PREFERRED STOCK

As of April 3, 2005, 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 preferential payments 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.

On August 9, 2002, the Company executed an agreement pursuant to which it rescinded its previous distribution of common shares issued from July 1999 through January 2002 to its majority shareholder, OSE, in settlement of a preferred dividend obligation of $1.6 million. Under the terms of the agreement, OSE returned to the Company certificates representing 26,344,391 shares of the Company’s 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. The decision to rescind the previous payment of dividends was made after the Company was advised by its counsel (and also by special counsel engaged for this purpose) that the Company’s surplus and earnings may have been insufficient to support the payment of the dividends under the laws of Delaware, the Company’s state of incorporation. Dividends and interest on unpaid dividends of approximately $5.04 million and $5.34 million were recorded as of December 31, 2004 and April 3, 2005, respectively.

Page 10

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 has had significant excess production capacity since the first quarter of 1997. 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. After the disposition of its manufacturing segment in third quarter of 2003, the Company continued to incur operating loss due to its interest expense burden. As a result of these and other related circumstances, the report of the Company’s independent registered public accounting firm on the Company’s December 31, 2004 financial statements included an explanatory paragraph indicating that these matters raise substantial doubt about the Company’s ability to continue as a going concern.

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 three months ended April 3, 2005. Furthermore, since the Company’s expense levels are based in part on anticipated future revenue levels, if revenue were to fall below anticipated levels, the Company’s operating results would be materially adversely affected.

RESULTS OF OPERATIONS

The following discussion compares results of operations for the three month periods ended March 28, 2004 and April 3, 2005.

Revenues

The Company earns revenue through a distribution agreement with OSE, Ltd., 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.

Total revenues decreased 37% from $1,023,000 for the three-month period ended March 28, 2004 to

Page 11

$645,000 for the three-month period ended April 3, 2005. Revenue decreased as a result of declining demand in the semiconductor industry in North America. In additions, OSE is switching its focus to FMC (Flash Memory Card) related products and thus depends less on the North American market. Most of FMC related product demand is coming from Asia.

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 $824,000 and $752,000 for the three-month periods ended March 28, 2004 and April 3, 2005, respectively. The decrease in selling, general and administrative expenses in 2005 was mainly due to decreases in payroll expenses and rent income from the sublease of a portion of the Company’s headquarters. As a percentage of revenues, selling, general and administrative expense increased from 81% to 117% for the three-month periods ended March 28, 2004 and April 3, 2005. The increase in percentage was mainly caused by lower revenue in 2005.

Interest and Other Income

Interest income is primarily comprised of interest earnings from investments in cash equivalents. Interest and other income increased from $0 for the three-month period ended March 28, 2004 to $19,000 for the three-month period ended April 3, 2005. The increase of other income was mainly due to an employer tax refund for an overpayment from 2004.

Interest Expense

Interest expense consists of interest payable on inter-company loans payable to OSE. Interest expense was $217,000 and $193,000 for the three-month periods ended March 28, 2004 and April 3, 2005, respectively.

Provision for Income Taxes

The Company had no provision for income tax for the three-month periods ended March 28, 2004 and April 3, 2005 due to operating losses in both periods.

Liquidity and Capital Resources

During the three-month period ended April 3, 2005, the Company’s net cash used in operations was $110,000. Net cash used in operations was comprised primarily of a net loss of $281,000, increased by $93,000 of non-cash charges for depreciation and amortization, reduced by a non-cash $34,000 gain on sale of facility, and an $112,000 net decrease in working capital items. The net decrease in working capital items primarily reflected a $44,000 increase in accounts receivable, a $159,000 increase in prepaid and other current assets, a $241,000 increase in accounts payable and accounts payable to related party, and a $74,000 increase in accrued liabilities. During the three-month period ended April 3, 2005, the Company’s net cash used in discontinued operations was $32,000. The Company had no cash provided by or used in investing and financing activities for the three-month periods ended March 28, 2004 and April 3, 2005. At April 3, 2005, the Company had cash and cash equivalents of $391,000.

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Cash provided by or used in operating, investing, and financing activities for the three-month periods ended March 28, 2004 and April 3, 2005 is summarized in the following table. (in thousands)


	March 28, 2004			April 3, 2005
Net cash provided by (used in) continuing operations	$	3		$	(110	)
Net cash used in discontinued operations		(152	)		(32	)

Net cash (used in) operating activities	$	(149	)	$	(142	)

The increase of $7,000 in cash used in operating activities from 2004 to 2005 was mainly due to (1) a $171,000 difference in changes in accounts receivable (accounts receivable increased by $215,000 during the three-month period in 2004 compared with a $44,000 increase during the same period in 2005),(2) a $85,000 difference in accrued liabilities (accrued liabilities decreased by $11,000 during the three-month period in 2004 compared with a $74,000 increase during the same period in 2005) and (3) a $120,000 difference in cash used in discontinued operations (cash used in discontinued operation in operating activities was $152,000 during the three-month period in 2004 compared with $32,000 during the same period in 2005). These were offset by:

(1) a $263,000 increase in net loss from continuing operations due to lower revenue, and (2) a $95,000 difference in accounts payable and accounts payable to related party (accounts payable and accounts payable to related party increased by $336,000 during the three-month period in 2004 compared with a $241,000 increase during the same period in 2005).

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 was originally due on June 26, 2004 and has been extended to December 25, 2005 with reduced interest at 3%. The $8.6 million was due on December 29, 2004 and has been extended 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 OSE does not renew the loans when they are due, the Company will not be able to continue its operations.

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 significant backlog, effectiveness of OSE’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.

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Risk of lack in funding for operations and credit facilities

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. 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 OSE. Inability to generate needed cash from operations or debt financing would have a material adverse effect on meeting the Company’s debt obligation and funding continued operations.

Risk related to dependence on OSE 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 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 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 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 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

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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, 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 and the Public Company Accounting Oversight Board created by the Act have 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.

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.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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. 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 transaction and the related dispute in Note 1 to the Financial Statements in Item 1.) 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. Before December 2004, interest payments were paid directly to the Company’s landlord by the purchaser. Starting January 2005, interest payments were paid to the landlord through the Company. 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 loans from the Company’s parent OSE 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.

ITEM 4. CONTROLS AND PROCEDURES

Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our

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“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 annual 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 annual 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.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

(a)

Exhibits


31.1		Certification by Chief Executive Officer pursuant to Section 302
31.2		Certification by Chief Accounting Officer pursuant to Section 302
32		Certification pursuant to Section 906

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.


		OSE USA, Inc.

Date: May 18, 2005		/s/ EDMOND TSENG
		Edmond Tseng
		Chief Executive Officer
		and Acting Chief Financial Officer

Date: May 18, 2005		/s/ ELTON LI
		Elton Li
		Corporate Controller
		and Chief Accounting Officer

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OSE USA INC 10-Q