TEMPE, AZ -- Three-Five Systems, a small-tier EMS company, today said it would review a possible sale or merger to as losses continue to mount.

reported first -quarter losses from continuing operations of $24.2 million, down from a loss of $3.8 million last year. The company posted net sales of $20.2 million for the quarter ended March 31, down from $23 million.

The total net loss, which includes discontinued operations, was $39.4 million, 
down from a loss of $6.6 million in the year-ago quarter.

The sales drop was due to significantly reduced EMS sales in the U.S., the company said, primarily from customers rescheduling orders to later in 2005.

Gross margin dollars were $2.6 million less than in the comparable quarter in 2004. Selling, general and administrative expenses rose, due to increased severance, consulting, accounting and legal expenses

During the quarter TFS took a $2.5 million loss on assets relating to ERP implementation, 
and $900,000 for costs associated with continuing lease obligations for vacated facilities. 

The company also took a $12.9 million charge for the impairment of goodwill for its EMS business 
and large panel display business in Marlborough. 

Ina statement, the company said that the substantial losses sustained in the past 
several years has led to the retention of SG Cowen & Co. review strategic alternatives aimed 
at maximizing stockholder value. Based on SG Cowen's advice, the company has exited 
the display business and has signed a nonbinding letter of intent to sell its RF operations in Manila, 
leaving its EMS operations in Penang, Malaysia, and Redmond, WA. It said it is looking at several merger 
or recapitalization options. 

"Our alternatives include sale of all or part of our EMS business, merging with another company, 
recapitalization and continuation of our business, or seeking joint venture partners.

TFS guided for flat second-quarter revenue from ongoing operations. "For the remainder of 2005, our focus 
will be on cost reductions and restructuring our EMS business to achieve cash flow breakeven. We believe that 
the combination of our new product introduction and medical and military operations in Redmond with our 
high-volume, cost-effective offshore operations in Penang will provide a strong foundation for our EMS
business in the future."

At the end of the quarter TFS had cash and restricted cash of $12.4 million vs. $16.2 million 
at the end of the fourth quarter 2004.

Year-on-year, days sales outstanding rose to 46 from 38, inventory turns were flat at 5.1 and cash conversion 
cycle rose to 62 days from 58.