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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

AMENDMENT NO. 1

(Mark One)

OR

For the fiscal year ended December 31, 2004

OR

Commission file number: 333-11528

PSi TECHNOLOGIES HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

REPUBLIC OF THE PHILIPPINES

(Jurisdiction of incorporation or organization)

FTI Special Economic Zone,

Electronics Avenue,

Taguig City, 1604, Philippines

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

None

Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

American Depository Shares (as evidenced by American Depository Receipts) each representing one common share of

nominal value PHP 1 ²/3 per share

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934:

None

Number of outstanding shares of each of the Registrant’s classes of capital or common stock as of December 31, 2004, the close of the period covered by the annual report:

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  ¨    No  x

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  x

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EXPLANATORY NOTE

We are filing this amendment to our Annual Report on Form 20F to restate our consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 to reflect the following: (a) adoption of Financial Accounting Standards Board Interpretation No. (FIN) 46(R), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, (b) correction of errors with respect to the presentation of restricted cash as a separate item in the 2004 consolidated balance sheet, (c) correction of the accounting for the change in the assumed rate at which pension benefits could be effectively settled and (d) correction for the misclassification of certain general and administrative expenses that should be presented as cost of sales and selling and marketing expenses for the years ended December 31, 2004, 2003 and 2002.

PSi Technologies Holdings, Inc. (PSi Holdings), through PSi Technologies, Inc. (PSi Technologies), a wholly owned subsidiary, has a 40% equity interest in PSitech Realty, Inc (PSitech Realty), in the form of preferred stock. Accordingly, PSi Technologies. holds 2 of 5 board seats in PSitech Realty. PSitech Realty, which is a holding company, has a 60% equity interest in Pacsem Realty, Inc. (Pacsem Realty) in the form of common stock, and PSi Holdings, through PSi Technologies, owns the remaining 40% equity interest in Pacsem Realty in the form of preferred stock. Pacsem Realty principally holds two parcels of land which are currently not in use. The acquisition of these properties was financed through borrowings from PSi Technologies. As of December 31, 2004, the carrying amount of the these assets and the related debt were approximately $2.9 million and $2.3 million, respectively. The total assets and equity of Pacsem Realty as of December 31, 2004 amounted to $2.9 million and $0.6 million, respectively. PSitech Realty principally holds one asset, its 60% equity interest in Pacsem Realty. As of December 31, 2004, the carrying amount of its investment in Pacsem Realty was at nil value. The total assets and capital deficiency of PSitech Realty as of December 31, 2004 amounted to $2,811 and $919, respectively. After reconsideration of FIN 46(R), PSi Holdings has concluded that PSitech Realty should be consolidated into the consolidated financial statements of PSi Holdings pursuant to the provision of FIN 46(R) as it is the primary beneficiary. The Company adopted FIN 46(R) for the years ended December 31, 2004 with retroactive restatement of all prior years presented. We have revised the consolidated financial statements and related disclosures accordingly.

Restricted cash was previously included as part of the “Cash” account in the consolidated balance sheets. Securities and Exchange Commission Regulation S-X Rule 5-02-1 requires any cash or cash items that are legally restricted as to usage or withdrawal to be disclosed separately on the face of the consolidated balance sheet.

We also changed the assumed rate at which pension benefits could be effectively settled. Previously, we used a discount rate of 10% in 2001 and 2002 and 6% in 2003, all of which were based on annuity contracts with a time frame which mirrored the maturity period of the plan assets. Therefore, the discount rates used are equal to the expected rates of return on plan assets. However, since the investment horizon of our plan assets approximate 5 to 7 years whereas our expected pension benefit settlements extend up to 40 years in the future, our assumed discount rates did not reflect the estimated rates at which the pension benefits could be effectively settled. We determined that the appropriate discount rates should be based on the Republic of the Philippines (ROP) treasury bond yield rates which were in effect as at December 31 for each of the years from 2001 to 2004 because these rates fairly reflect the rates at which the pension benefits could be effectively settled. The assumed discount rate was computed as the weighted average of the ROP treasury bond yield rate with maturities that corresponds with the period of time when the pension benefits are expected to be settled. The revised weighted average discount rates used are as follows: 2001 – 17%; 2002 – 14%; and 2003 – 12.4%.

We reclassified the noncurrent portion of accrued retirement expense to noncurrent liabilities. This was previously included as part of current liabilities under “Trade and other payables” account in the consolidated balance sheets. The balance of the current portion of accrued retirement was based on the projected benefit payment for the succeeding year as estimated by our independent actuary. The total accrued retirement expense as of balance sheet date as determined by our independent actuary less the projected benefit payment for the succeeding year was classified as noncurrent. A corresponding reclassification from current to noncurrent assets was also made for the related deferred tax assets in the consolidated balance sheets. The impact of the reclassification of noncurrent portion of accrued retirement expense to noncurrent liabilities, together with the reclassification of the related deferred tax assets is shown in Note 3 to the consolidated financial statements.

We reclassified a portion of rental expense from general and administrative expenses to cost of sales and selling and marketing expenses. The rental expense reclassified to cost of sales consists of rental expense associated with the areas relating to manufacturing and assembly and test operations while the portion allocated to selling and marketing expenses consists of rental expense associated with the areas relating to marketing and sales. The impact of the reclassification of a portion of rental expense from general and administrative expense to cost of sales and selling and marketing expenses is shown in Note 3 to the consolidated financial statements.

We reclassified brokerage and handling charges from general and administrative expenses to cost of sales as these relate to costs associated with importation of materials and customer owned materials that had already been used in the manufacture of our products. The impact of the reclassification of brokerage and handling charges from general and administrative expenses to cost of sales is shown in Note 3 to the consolidated financial statements.

No attempt has been made in this Form 20F/A to modify or update other disclosures presented in the original report on Form

20F, except as required to reflect the effects of the restatements discussed in the foregoing and updated discussion relating to risks and uncertainties as discussed in Note 1 to the consolidated financial statements. This Form 20F/A does not reflect events occurring after the filing of the 2004 Form 20F on July 15, 2005. However, this Form 20F/A includes, as exhibits, new certifications by our principal executive officer and principal financial officer as required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended.

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All amounts listed in this annual report are stated in U.S. dollars, unless otherwise noted. Any discrepancy between the amounts listed and their totals in the tables included in this annual report are due to rounding.

In this annual report, we rely on and refer to information regarding the semiconductor market and our competitors that has been prepared by independent industry research firms, including Dataquest and the Semiconductor Industry Association, or compiled from market research reports and other publicly available information. We have not independently verified the accuracy and completeness of this information.

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PART I

Statements contained in this annual report on Form 20-F/A and in future filings with the Securities and Exchange Commission, or the SEC, in our press releases or in other public or shareholder communications that are not purely historical facts are forward-looking statements that involve risks and uncertainties. Statements looking forward in time are included in the annual report on Form 20-F/A pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about the following:

You may find these statements under “Item 3—Key Information—Risk Factors,” “Item 4—Information on the Company,” Item 5—“Operating and Financial Review and Prospects” or by the use of forward-looking words such as “believe,” “expect,” “intend,” “should,” “anticipate,” “estimate,” “plan,” “project,” “may,” “will” or other similar words. We have based these forward-looking statements on our own information and on information from other sources that we believe are reliable. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict, and therefore, our actual results may differ materially from those expressed, forecasted or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk factors described elsewhere and other factors noted throughout this annual report. Given this level of uncertainty, you should not place undue reliance on the forward-looking statements included in this annual report that only speak as of the date of this filing.

We undertake no obligation to publicly revise these forward-looking statements to reflect events, circumstances or the occurrence of unanticipated events that occur subsequent to the date of this annual report on Form 20-F/A.

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3 KEY INFORMATION

A. Selected Financial Data

You should read the following selected consolidated financial data in conjunction with “Item 5—Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included elsewhere in this annual report. The summary consolidated statements of operations data in the table below for the years ended December 31, 2002, 2003 and 2004 have been derived from our restated audited consolidated financial statements included elsewhere herein. The summary consolidated balance sheet data in the table below as of December 31, 2000, 2001 and 2002 have been restated to reflect the impact of the amendment identified in the Explanatory Note on page 2 of this Form 20-F/A. Our restated audited consolidated financial statements are reported in U.S. dollars and have been prepared and presented in conformity with U.S. GAAP consistently applied for all years.

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B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

An investment in our American Depositary Shares (ADSs) involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this annual report, including our consolidated financial statements and related notes. If any of the following risks actually materialize, our business, financial condition and results of operations would likely suffer materially, the market price of our ADSs could decline, and you may lose all or part of the money you paid to buy our ADSs.

Our customers may stop or reduce their outsourcing which will reduce demand for our services and cause our revenue to decrease.

We depend on the trend towards increased outsourcing of assembly and test services by integrated device manufacturers. Integrated device manufacturers continually evaluate our services against their own in-house assembly and test services and may decide to shift some or all of their outsourced assembly and test services to their internal capacity at any time. Any shift or a slowdown in this outsourcing trend would reduce demand for our services and cause our revenue to decrease.

We need a significant amount of capital to fund our capital expenditures and execute our business strategies. We may be unable to repay short-term suppliers and bank credit facilities incurred to fund our capital expenditures program, which would have a negative effect on our operations and financial viability.

We may not have sufficient cash flow from operations or available lines of credit to pay short-term suppliers and bank credit facilities. Therefore, we may have to raise capital by accessing external financing sources to meet such liabilities. The terms of any new funding we obtain could restrict our future operations and affect your investment in a number of ways, including, but not limited to:

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In July 2003, we issued a $4.0 million exchangeable senior subordinated note to Merrill Lynch Global Emerging Markets Partners, L.P. (Merrill Lynch), due in 2008 which bears interest at a rate of 10% per annum, net of Philippine withholding taxes. The exchangeable note was issued to pay off certain liabilities related to our capital expenditures incurred in 2002 which were due by the end of the second and third quarters of 2003 and could not be paid out of current cash flow from operations or available lines of credit. Over the course of the first and second quarter of 2003, the Company pursued several possible avenues of financing but no such alternative could be put in place in time to pay for the liabilities. In June 2005, we issued a $7.0 million 4-year exchangeable senior subordinated note due in 2009 to Merrill Lynch Global Emerging Markets Partners, LLC, an affiliate of Merrill Lynch Global Emerging Markets Partners, L.P., which bears interest at a rate of 10% per annum, net of Philippine withholding taxes. The proceeds of the note was used to partially finance capital expenditures related to the introduction of the Company’s Power QFN (Quad Flat No-Lead) Package and for the repayment of due and outstanding suppliers’ credits and capital expenditures payables. See “Item 7—Major Shareholders and Related Party Transactions—The Merrill Lynch Exchangeable Notes.”

We cannot assure you that we will generate sufficient cash flow or that other financings will be available in the future when needed or, if available, that they will be available on satisfactory terms. Failure to obtain any such required additional financings or generate sufficient cash flow to meet our financing obligations could have a material adverse effect on our company. Our ability to make scheduled payments on our debt will depend on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. In addition, any future borrowings we make will most likely be subject to covenants limiting our operating and financial flexibility and would require the consent of Merrill Lynch.

The recurring losses from our operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern.

We incurred recurring losses since 2001. Our net loss for the years ended December 31, 2004, 2003 and 2002 amounted to $14.6 million, $20.7 million and $6.8 million, respectively, while deficit amounted to $30.4 million as of December 31, 2004 and $15.7 million as of December 31, 2003. Further, our negative working capital amounted to $22.8 million as of December 31, 2004 and $11.5 million as of December 31, 2003. In 2004 and 2003, we recognized provision for impairment losses on certain property, plant and equipment amounting to $1.3 million and $11.4 million, respectively, primarily due to the discontinuance of production of certain existing power packages with erratic or low sales volume and decline in the recoverable value of an idle property.

As of December 31, 2004, PSi Holdings and PSi Technologies have not complied with certain financial ratio requirements under the credit facility from the Singapore Branch of Raiffeisen Zentralbank Oesterreich AG (RZB-Austria). However, on December 27, 2004, RZB-Austria waived all financial covenant breaches based on the June 30, 2004 unaudited consolidated financial statements of PSi Holdings and unaudited parent company financial statements of PSi Technologies, prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The waiver is preconditioned on the ability of PSi Holdings and PSi Technologies to remedy any continuing loan covenant breaches based on the December 31, 2004 U.S. GAAP unaudited consolidated financial statements of PSi Holdings and unaudited parent company financial statements of PSi Technologies by requiring the shareholders of PSi Holdings to infuse additional capital (see Note 10). On July 13, 2005, RZB-Austria confirmed that all 2004 breaches have been waived. Further, the next test of compliance with loan covenants will be based on the next U.S. GAAP audited consolidated financial statements of PSi Holdings as of and for the year ended December 31, 2005.

On June 2, 2005, to address the breaches, PSi Technologies issued a $7.0 million four-year exchangeable senior subordinated note due in 2009, which bears interest at 10% per annum, to an affiliate of Merrill Lynch (see Note 27). On April 4, 2006, RZB extended the credit facility to the Company until December 31, 2006 under similar terms and conditions.

The foregoing conditions, risks and uncertainties raise substantial doubt as to our ability to continue as a going concern and could affect our ability to develop advanced technology and expanded services, compete against companies with greater operating capacity and financial resources, increase production capacity, obtain assembly and test equipment to meet the demand for our products and services, obtain favorable terms from suppliers, and repay bank loans and obtain additional bank credit facilities. Our continued operations as a going concern is dependent on our ability to generate sufficient cash flows from operations and/or seek other sources of financing; however there are no assurances that positive operating results can be achieved nor that any additional financing or refinancing can be obtained on favourable terms, if at all. We plan to mitigate our going concern risk by engaging in cost reduction measures through plant closures, rationalizing our capital expenditures and promoting better operating efficiencies. In addition, we plan to increase our revenue by targeting higher volume and margin sales from existing and new customers.

The cyclical nature of the semiconductor industry and the periodic overcapacity that results from this may seriously harm our company.

Our operations are substantially affected by market conditions in the semiconductor industry, which are highly cyclical and, at various times, have experienced significant economic downturns characterized by reduced product demand and production overcapacity which can result in the erosion of average selling prices.

The semiconductor industry experienced a significant downturn in 2001 and the lingering effects of that downturn adversely affected our operating results for 2004. The 2001 downturn was characterized by production overcapacity, reduced product demand, excessive inventories and rapid erosion of average selling prices. Historically, companies in the semiconductor industry have expanded aggressively during periods of increased demand, as we and our competitors have done. As a result, periods of overcapacity in the semiconductor industry have in the past followed periods of increased demand. In addition, the markets for semiconductors are characterized by rapid technological change, evolving industry standards, intense competition and fluctuations in end-user demand. In 2002, the market for semiconductors stabilized, registering growth in worldwide semiconductor revenues as measured by SIA/WSTS of 1.3% and expanded by 20.3% and 28.0% in 2003 and 2004, respectively. Nonetheless, a future downturn in the semiconductor industry could seriously harm our company. In particular, the combination of weak demand, a sharp correction of inventory by our customers and their end markets, deterioration in economic performance, particularly in the United States, and increase in under-utilized capacity in 2005 could seriously harm our industry and our company.

An overall decrease in demand for power semiconductors may significantly decrease the demand for our services and materially reduce our revenue.

We derive the majority of our revenue from assembly and/or test services for manufacturers of semiconductors used for power conversion or power management applications. Currently, many electronic devices use multiple power semiconductors, but electronics manufacturers are aggressively seeking to decrease the number of components used in devices and simplify system design. Any significant decrease in the need for power semiconductors within electronic devices may decrease the demand for our services and materially reduce our revenue. In addition, the economic slowdown in the technology sector and increase in overall inventory levels have caused a decrease in demand for electronic devices and semiconductors and/or, in turn, our services. These trends could have a negative impact on our business, operating results and financial condition.

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The average selling price for electronic devices tends to decrease over the product life cycle, which may force us to lower our prices and reduce our profitability.

The decreasing average selling price of most electronic devices places significant pressure on the prices of the components, including semiconductors that are used in those devices. If the average selling price of electronic devices continues to decrease, the pricing pressure on our services may reduce our revenue and significantly reduce our gross profit. Pricing pressure on our assembly and test services is likely to continue and our ability to maintain or increase our profitability will depend in large part upon our ability to:

See “Item 5—Operating and Financial Review and Prospects” for a discussion of the historical decline of our average selling price.

We may not be able to develop the advanced technology and expanded services we need to maintain our competitive position and our profitability.

The semiconductor industry is characterized by rapid technological development. We must be able to provide our customers with advanced assembly and testing capabilities and quick production time for their increasingly complex devices. In addition, we must continue to expand our selection of packages to remain competitive. If we rely on older products, our margins and cash flow could be reduced because prices of older products tend to decrease when newer, higher performance products are introduced. Our customers may also opt to phase out or discontinue marketing and selling these older products. Any failure on our part to advance our design and process technologies successfully and in a timely manner could materially harm our competitiveness and our profitability.

We may not be able to compete successfully in our industry because many of our competitors are much larger in size, have greater operating capacity and financial resources and have proven research and development and marketing capabilities.

The semiconductor assembly and testing industry is highly competitive. We face substantial competition from:

These companies may be able to compete more aggressively over a longer period of time than we can due to potentially greater economies of scale, lower costs, more efficient manufacturing processes, higher amounts of cash generated from operations and allocated to research and development and greater financial stability. A number of these companies also have established relationships with many of our current or potential customers. We may also face increasing competition from competitors located in lower cost centers such as Vietnam and China. We cannot assure you that we will be able to compete successfully in the future against existing or potential competitors. See “Item 4—Information on the Company—Business Overview—Competition.”

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We depend on a small number of customers for a significant portion of our revenues and the loss of one or more of our significant customers could reduce our profitability.

Our top five customers accounted for approximately 50% in 2000, 56% in 2001, 76% in 2002, 81% in 2003 and 81% in 2004 of total revenue. Our largest customer accounted for approximately 12% in 2000, 17% in 2001, 22% in 2002, 34% in 2003 and 30% in 2004 of total revenue. Infineon Technologies continued to be our largest customer in 2002, 2003 and 2004. This is attributable to Infineon’s increased practice of outsourcing their power semiconductor assembly and test requirements to our company. On May 25, 2005, we received notice from Fairchild Korea Semiconductor (Fairchild Korea) of its intention to terminate its subcontract assembly and test contract with us, effective June 30, 2005. Fairchild Korea accounted for 5.6% in 2003 and 3.1% in 2004 of total revenue. It would be difficult for us to quickly replace a major customer that permanently discontinues or significantly reduces its commercial relationship with us, as new customers usually require us to pass a lengthy and rigorous qualification process. Also, semiconductor companies generally rely on service providers with which they have established relationships to meet their assembly and testing needs for existing and future applications. If any one of our key customers were to reduce its purchases significantly, any inability on our part to attract new major customers or shift our excess production capacity to our remaining customers could materially impact our financial viability and profitability.

Our finances may be adversely affected by credit risk.

Our customers are from time to time indebted to us as a result of transactions or contracts, as we provide our services on financing terms. We attempt to mitigate credit risk through customer diversification to minimize customer concentration and by screening our customers for creditworthiness. However, the information provided to us by our customers may not be accurate, complete, up-to-date or properly evaluated, in which case we may be unable to properly assess our risks. Also, we cannot assure you that our policies, procedures and ability to diversify and manage credit risk will be effective. Although none of our customers has defaulted on their payments to us due to bankruptcy, deterioration of their creditworthiness, lack of liquidity, operational failure, or other reasons, we cannot assure you that such an event will not occur. We may suffer financially and our liquidity may be severely impaired if our customers do not pay us according to contracts or terms of payment.

We may be unable to increase our production capacity to meet the demand for our products and services.

In 2004, we acquired property, plant and equipment totaling $15.0 million (including equipment acquired on account through suppliers’ credits and equipment acquired under capital lease arrangements of $6.7 million as of December 31, 2004) for our Taguig, Laguna and Chengdu manufacturing facilities, to accommodate the growth of our business. If we experience delays in the purchase and delivery of equipment needed to expand our capacity or support the expansion of capacity, we may not be able to meet the demand for our products and services. Our inability to expand capacity could reduce our ability to meet customer needs which may prompt our customers to place orders with our competitors.

Our profitability may decline if we do not maintain high utilization rates, as we may not be able to meet our high fixed costs.

Our operations are characterized by high fixed costs as a result of the capital-intensive nature of our business. Our ability to maintain or increase our profitability will continue to depend, in large part, upon our ability to maintain high capacity utilization rates. Our capacity utilization rates may be affected by a number of factors and circumstances, including:

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We cannot assure you that we will be able to maintain a high capacity utilization rate. If we are unable to fully utilize our capacity at these facilities, we may be unable to meet our production goals, revenue objectives and profitability targets. Our inability to maintain capacity utilization rates could also increase our costs relative to the revenue that we generate.

We depend on a limited number of suppliers to provide us with sufficient quantities of raw materials on a timely basis and acceptable quality level in order to sustain our operations.

It is important to our operations and general competitiveness that we obtain raw materials from our vendors in a timely manner, in sufficient quantities and qualities and at competitive prices. We obtain most of our critical materials from a limited group of suppliers on a purchase order basis and without the benefit of long-term contracts. Some of our suppliers provide us with equipment and raw materials on a credit basis, with payment for such items deferred until a later date. Our failure to repay these supplier credits in a timely manner could cause our suppliers to cease providing us with such credits or such materials. The loss of such supplier credits or materials could have an adverse impact on our business and operations, including our ability to meet our customers’ requirements.

Shortages occur in our essential raw materials due to interruptions or limitations in supply or increased demand in the industry. While we believe that we have identified adequate alternative suppliers for our raw materials, any transition to a new supplier could take time, increase costs and disrupt our business. In the past, we have experienced difficulty obtaining acceptable raw materials on a timely basis and delays in the delivery of raw materials we have ordered. We experienced delays in the delivery of leadframes from a major European supplier, due to the inability of the supplier to source copper base material on a timely basis. As copper supply remains constrained, we may continue to occasionally experience these delays in delivery.

We may reject and return to our suppliers those raw materials that do not meet our quality criteria. While we believe that we have identified and qualified suppliers according to specific qualification criteria, we cannot assure you that our suppliers will supply us with raw materials that consistently meet our quality criteria. This may limit the amount of raw materials available to meet customers’ order requirements. Our inability to obtain satisfactory raw materials could limit our ability to fill our customer orders and/or increase our costs relative to the revenue that we generate.

Upward changes in the price of crude oil and certain other commodities used by our suppliers or by us as raw materials for our products could materially harm our business by increasing our costs.

We are particularly affected by fluctuations in the prices of commodities such as aluminum, copper, nickel, gold, silver and other metals used in our raw materials and manufacturing process, and higher energy costs. In 2004, the Reuters/Jefferies CRB Spot Index (an index that tracks the prices of certain commodities) increased by 3.3%. Crude oil prices were higher by 33.6%, gold prices were higher by 6.9%, silver prices were higher by 20.5%, copper prices were higher by 49.0%, and nickel prices were higher by 7.4% in 2004 as compared to 2003.

We attempt to negotiate competitive prices for raw materials with our suppliers, which helps to reduce the impact of any increases in the price of raw materials linked to commodities. Similarly, we attempt to mitigate the impact of higher crude oil prices, which leads to higher energy and utilities expenses, through improvements in our operating efficiencies and adjustments in scheduling our production according to forecasted loadings. We cannot assure you that the prices of these commodities will not continue to rise, or that we will be able to negotiate competitive pricing with our suppliers, or that we will be able to mitigate the increase in our utilities expense. As a result, we may have to pass on to our customers such increases in costs. Any inability on our part to negotiate competitive pricing for raw materials as prices increase or inability on our part to mitigate the increase in utilities expense or to pass on to our customers such higher costs could materially impact our financial viability and profitability.

We depend on our customers to provide us with a satisfactory supply of wafers, and shortages or disputes regarding the supply and quality of wafers may reduce our ability to fill our customers’ orders, reduce our revenue and increase our costs.

Our operations and general competitiveness depend on a satisfactory supply of wafers from our customers for assembly and test services. Shortages or shipments of defective wafers can result from supply chain interruptions, including disruptions from a change in manufacturing site or wafer provider, and inferior manufacturing or design flaws. Moreover, disputes as to the origin of defects and responsibility for defective wafers or dice already built into finished products could strain our relationships with existing customers. An insufficient supply of wafers, defective wafers, defective dice in finished products and any disputes relating thereto could reduce our ability to fulfill our customers’ orders, decrease our revenue, increase our costs and materially impact our financial viability and profitability.

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We may be unable to obtain assembly or test equipment when we need it, which will prevent us from expanding our business and increasing our revenue.

Our operations and expansion plans are highly dependent upon our ability to obtain a significant amount of capital equipment, which is manufactured by a limited number of suppliers. In periods of high demand, the lead time from order to delivery for assembly and test equipment can be between four and six months. If we cannot obtain equipment in a timely manner, we may be unable to fill our customers’ orders or accept orders from new customers, which could reduce revenue and materially harm our business, financial condition and results of operations.

Most of our customers are not obligated to purchase any minimum amount of our products or services and we do not have a significant backlog. We may not receive sufficient customer orders in the future to meet our costs and remain profitable.

Most of our customers are not obligated to purchase any minimum amount of our assembly and test services or to provide us with binding forecasts for any period. As a result, we have no significant backlog which makes it difficult for us to forecast our revenue for any future period. We expect that revenue in any quarter will continue to be substantially dependent on orders received during that quarter. The level of orders we receive from our customers has varied and may continue to vary significantly from quarter to quarter. In some cases, we experienced unfilled orders as our customers encountered wafer supply constraints arising from the time required to ramp-up their wafer fabrication facilities. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as they have in prior periods.

We may be unable to recoup the cost of significant capital expenditures made in anticipation of increased sales which would have a negative effect on our profitability and financial viability.

We increased and plan on continuing to increase our assembly and test capacity in order to grow our business. This required and will require substantial capital expenditures, primarily for additional assembly and test equipment, and facilities and facilities support equipment. We have already made and will continue to make these capital expenditures and we cannot assure you that our sales will increase or that our revenues and cash flow are sufficient to cover these capital expenditures and the outcomes and results of our investments and capital expenditures may differ materially from our expectations. Our failure to increase our revenue and/or margins or obtain additional financing following significant capital expenditures could materially harm our business, financial condition and results of operations, as we may not be able to offset our increased costs, cash flow requirements and related depreciation expense.

We may not be able to keep or replace key executive officers and employees, which would impair our ability to implement our business plan and continue our assembly and test processes.

We depend on our key executive officers and employees to implement our business plan and oversee our assembly and test processes. It is difficult to attract and retain highly skilled technical, managerial and marketing personnel, and replace key personnel, as competition for qualified personnel in the Philippines and China is intense. In March 2005, Bryan C. Rigg, our Managing Director for Taguig operations, elected to seek employment with a competitor and terminated his employment contract with us. In June 2005, we announced the appointment of Gordon J. Stevenson, formerly of Royal Philips Electronics, as our Executive Vice President and Chief Operating Officer. However, we cannot assure you that we will be successful in attracting and retaining the personnel we require to successfully develop new and enhanced assembly and test services and to continue to grow and operate profitably. We maintain limited directors and officers liability insurance.

We may be unable to develop and protect the intellectual property needed to compete successfully with other assembly and test companies.

Our ability to compete successfully and achieve future growth in revenue will depend, in part, on our ability to develop and protect our proprietary technology and the proprietary technology of our customers entrusted to us during the assembly or testing process. We cannot assure you that we will be able to develop or protect proprietary technology or that our competitors will not develop, patent or gain access to similar know-how and technology. We cannot assure you that any confidentiality and non-disclosure agreements that we rely on to protect trade secrets and other proprietary information will be adequate to protect our or our customers’ proprietary technology.

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We may become subject to intellectual property rights disputes that may be costly and limit our ability to continue our business operations as planned.

Our ability to compete successfully will depend on our ability to operate without infringing on the proprietary rights of others. We have not established procedures to help prevent us from infringing the patented technology of our competitors or other parties. As a result, we may not be aware of the intellectual property rights of others or familiar with the laws governing intellectual property rights in countries where our products are sold. If we become aware that third party-owned intellectual property may affect our business, we intend to either avoid processes protected by existing patents, cross-license, or otherwise obtain the right to use the process or package technologies we require. We believe that companies in our industry will face more frequent patent infringement claims as the number and coverage of patents, copyrights and other third party intellectual property rights in our industry increases. In the event a valid claim is made against us, we may be required to:

We may be required to seek licenses from or enter into agreements with third parties covering intellectual property. We cannot guarantee that any of those licenses can be obtained on acceptable terms, if at all. We may also have to commence lawsuits against companies who infringe on our intellectual property rights. Those potential claims could result in substantial costs and diversion of our resources.

Our assembly and test processes are susceptible to human error which can reduce our productivity and harm our operations.

Our failure to maintain high training standards and monitor our operators could result in significant operator error which could reduce our production yields, cause us to miss committed deliveries to our customers, erode product quality, damage our customer relationships and materially harm our business. Any lost customers, increased costs, production delays, substantial amounts of returned goods and claims by customers resulting from human error could materially harm our business, financial condition and results of operations.

We may be unable to maintain the clean room environment we need for our operations, which can reduce our productivity and harm our operations.

Our assembly and test operations take place in areas where air purity, temperature and humidity are controlled. If we are unable to control our assembly and test environment, our equipment may malfunction or our products may be defective. See “Item 4—Information on the Company—Business Overview—Quality Management.” Any prolonged interruption in our operations due to problems in our clean room environment could materially harm our business, financial condition and results of operations.

Environmental, health and safety laws could require us to incur additional capital and operational costs.

We are subject to liabilities and compliance obligations arising under environmental, health and safety laws. These laws impose various controls on the quality of our air and water discharges, on the storage, handling, discharge and disposal of chemicals the company uses, and on employee exposure to hazardous substances in the workplace. Environmental, health and safety laws could require us to incur capital and operational costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination. See “Item 4—Information on the Company—Property, Plants and Equipment—Environmental Matters” for more details. We cannot assure you that applicable environmental, health and safety laws will not in the future impose the need for additional capital equipment or other process requirements upon the company, curtail its operations, or restrict its ability to expand its operations. The adoption of new environmental, health and safety laws, the failure to comply with new or existing laws, or issues relating to hazardous substance contamination could subject the company to future material liability.

We may be unable to maintain the non-unionized status of our workforce or limit employee turnover, which can reduce our productivity and harm our operations.

Our ability to compete successfully will depend on our ability to keep labor costs low. We provide compensation, benefits, and a working environment in accordance with standards mandated by Philippine and Chinese law, labor regulations and codes, which has resulted in a union free workplace. Any initiative by the workforce to unionize or the occurrence of high employee turnover in any of our three manufacturing facilities may result in lost productivity and higher labor costs that could materially harm our business, financial condition and results of operations.

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The global economic slowdown has negatively affected our business.

The Asian economic crisis, which took place between 1997 and 1999, the economic slowdown which began in mid-2000, and the decline in the demand for electronic products and systems where our products are used as components, has adversely affected most countries in Asia, including the Philippines. Many Asian countries have experienced considerable currency volatility and depreciation, high interest rates and decreasing asset values and some have experienced political and social unrest, including changes in political leadership. These and other factors have reduced economic activity throughout Asia and restricted access to financing.

Effect on the Philippines. The Philippines has experienced many of these difficulties, including:

These events have created uncertainty as to the stability of the Philippine economy. The Philippine government has implemented a number of measures designed to mitigate the effects of the region’s financial crisis on the Philippine economy. The Philippine government’s stated objective has been to restore economic confidence and stability by strengthening economic fundamentals. We cannot assure you that the Philippines, which has suffered lower levels of economic disruption and reductions in growth and economic performance compared to other Asian countries, will not be subject to increased economic difficulties in the future or that the current trends will significantly improve in the near future.

Effect on us. Similar to other companies throughout Asia and the Philippines, we have experienced negative effects from the Asian economic crisis, and the global decline in electronic products demand. These negative effects have included difficulty in accessing capital in the Philippines for future expansion and high debt service costs, which totaled $0.4 million in 2002, $1.2 million in 2003 and $2.1 million in 2004, net of interest income. We had net interest income in 2000 and 2001 due to the cash infusion from our initial public offering in the United States; however, we will incur higher service costs in future years due to our increasing use of debt to finance operations and capital expenditures. In 2002, due to the economic slowdown, downturn in industry, and losses incurred by the company, we were unable to obtain long-term financing to fund our capital expenditures program. Consequently, we funded our capital expenditures program with cash generated from operations, short-term supplier credits and bank financing. These short-term supplier credits came due in the second and third quarter of 2003, resulting in the need to issue to Merrill Lynch a US$4 million exchangeable senior subordinated note on July 3, 2003. In 2005, due to continuing losses incurred by the company, we were unable to obtain long-term financing to partially finance certain capital expenditures and for the repayment of due and outstanding suppliers’ credits and capital expenditures payables, resulting in the need to issue to Merrill Lynch a $7.0 million 4-year exchangeable senior subordinated note on June 2, 2005. See Item 7 “Major Shareholders and Related Party Transactions—The Merrill Lynch Exchangeable Notes.”

A continuation or worsening of the current financial and economic conditions in the Philippines could materially harm our business, financial condition and results of operations. In particular, our lenders could cancel our short-term credit facilities which would limit our access to capital to finance our operations, future expansion and development. The cancellation of such facilities or the inability to obtain sufficient capital to finance our operations could materially harm our business.

New laws and regulations, currency devaluation and political instability in the Philippines and foreign countries could make it more difficult for us to operate successfully.

We generate a significant portion of our revenues from international markets, including customers in Southeast Asia and Europe. All of the facilities currently used to provide our packaging services are located in the Philippines and China. Our future operations and earnings could be affected by new laws, new regulations, a volatile political climate, and changes in or new interpretations of existing laws or regulations in countries where we have customers or operations. If future operations are negatively affected by these changes, our sales or profits may suffer.

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The Company opened a new assembly and test facility in Chengdu, Sichuan Province, PRC, and there are numerous risks related to operating in China.

We incurred $3.1 million in capital expenditures for our new Chengdu facility on the expectation that it will reduce future production costs as a result of the relatively inexpensive labor costs in the region. We also hope that our Chengdu facility will create new business and sales opportunities in China. However, the outcomes and results of our new facility may differ materially from our expectations, due to a variety of operational and financial risks, including but not limited to:

Our China venture in Chengdu, Sichuan Province, PRC, may negatively affect our profitability and drain our financial resources.

Pre-operating expenses attributable to our China venture start-up activities resulted in higher operating expenses for our company. Start-up activities are activities that are undertaken prior to the commencement of production, including but not limited to, the installation of facilities and facilities support equipment, the uncrating and installation of production equipment, purchase and delivery of other equipment and tools necessary for production, and the hiring and training of management, staff, technical personnel and operators. In 2004, we incurred a $2.4 million net loss from our Chengdu facility. If we experience delays or impediments in the transfer of the remaining manufacturing lines from Philips’ facility in the Philippines, fail to fully utilize these facilities and equipment, or need to increase capital expenditures, we may experience a significant increase in operating costs and be unable to meet our production goals, revenue objectives and profitability targets.

Further, the China venture requires investments in facilities and facilities support equipment, and certain production and support equipment. We cannot assure you that we will not need additional investment and/or generate sufficient cash flow to pay for this investment. Even if we have sufficient cash flow, the investment may limit the amount of financial resources available to fund our ongoing operations in the Philippines and in China, and capital expenditure, research and development and expansion program in the Philippines. Each of these factors taken on its own or in conjunction with the others could have a material adverse effect on our company.

Fluctuations in exchange rates could materially harm our business by increasing costs or affect the value of our ADSs.

All of our revenues are U.S. dollar denominated and our consolidated financial statements are prepared in U.S. dollars. The largest share of our costs is U.S. dollar denominated. Some of our raw material costs are incurred in Euros and Japanese yen. All of our operating expenses are incurred in U.S. dollars, Philippine pesos, and Chinese Renminbi while our capital expenditures are primarily denominated in U.S. dollars and Japanese yen. As a result, we are particularly affected by fluctuations in the exchange rate between the U.S. dollar and the Philippine peso, the Japanese yen and the U.S. dollar, the Chinese Renminbi and the U.S. dollar, and the Euro and the U.S. Dollar. Since all of our revenues are in U.S. dollars, fluctuations in foreign currency exchange rates, particularly the Euro and Japanese yen, could also increase the price we pay for equipment and raw materials, which could also increase our raw material and equipment costs.

We are vulnerable to disasters and other disruptive events since most of our operations are conducted in facilities in Metro Manila, Laguna and Chengdu.

We currently conduct our assembly and test operations at our facilities in Metro Manila, Laguna and Chengdu. Significant damage or other impediments to these facilities as a result of:

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could disrupt our manufacturing operations and/or significantly increase our operating costs. To date, we have not experienced significant damage or other disruptions at our facilities as a result of these events. However, such events may occur in the future which could have a negative impact on our business.

We maintain insurance, including business interruption insurance, against some, but not all, of these events. We cannot assure you that our insurance will be adequate to cover any direct or indirect losses or liabilities we may suffer.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war such as the conflict in Iraq may affect the markets on which our securities trade, the markets in which we operate, our operations and our profitability.

Terrorist attacks and other acts of violence or war may negatively affect our operations and your investment. There can be no assurance that there will not be further terrorist attacks against the United States, United States businesses or other countries or foreign businesses. These attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Our current facilities include sales offices in the United States and Japan, and administrative, sales, and manufacturing facilities in the Philippines and China. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect the sales of our products in the United States and overseas.

The armed conflict between coalition forces led principally by the United States against armed forces in Iraq could have a further impact on our domestic and international sales, our supply chain, our production capability and our ability to deliver product to our customers. The Philippines has experienced terrorist incidents in the southern islands of Mindanao and bombing threats within Metro Manila. We cannot assure you that political and economic instability in the Philippines or in China or other regions of the world may not also result and will not negatively impact our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could ultimately have an adverse effect on our business or your investment.

Epidemics, such as the Severe Acute Respiratory Syndrome, may affect our operations and our profitability.

Epidemics such as the Severe Acute Respiratory Syndrome (SARS) could materially affect our operations and our financial health. We rely on more than 3,000 individuals located in manufacturing facilities in the Philippines and China, without whom it is not possible to assemble and test the company’s products. The Philippines and China were two of the approximately 30 countries identified by the World Health Organization wherein there were confirmed cases of SARS, although the magnitude of the illness in the Philippines is substantially less than in other Asian countries such as China, Hong Kong and Taiwan. For 2004 and the first half of 2005, there have been no reports of SARS in the Philippines or China.

In 2004 and 2005, the Philippine Department of Health reported 25 suspected cases of meningococcemia in the Northern Philippine tourist city of Baguio, of which 8 cases of the disease have been confirmed since October 2004. The World Health Organization, in its January 12, 2005 advisory, stated that there is no need for members of the public—from the Philippines or from abroad—to avoid travel to Baguio.

Illness from an individual that is successively transferred to other individuals could result in a quarantine of our Taguig, Laguna and/or Chengdu manufacturing facilities or mass absences, leading to lost productivity and revenue that could irreparably harm the Company. We cannot assure you that our operations and finances will not be affected should there be a recurrence of SARS in the Philippines, China, within the region or other parts of the world, or any other types of epidemics.

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It may be difficult for you to enforce any judgment obtained in the United States against us or our affiliates.

Our company is incorporated under the laws of the Philippines and substantially all of our directors and executive officers reside outside the United States. In addition, virtually all of our assets and the assets of those persons are located outside the United States. As a result, it may be difficult to effect service of process upon us or one of those persons in the United States to enforce any judgment obtained in U.S. courts against us or any of these persons, including judgments based upon the civil liability provisions of the U.S. securities laws. If original actions are brought in courts in jurisdictions located outside the United States, it may be difficult for investors to enforce liabilities based upon U.S. securities laws. The Philippines is not a party to any international treaty concerning the recognition or enforcement of foreign judgments although the Philippine Rules of Court do provide that a foreign judgment may be enforced in the Philippines through an independent action filed to enforce the judgment. A foreign judgment may not be enforced, however, if there is evidence of a lack of jurisdiction, absence of notice, collusion, fraud or clear mistake of law or fact or if it is found to be contrary to the laws, customs or public policy of the Philippines.

Our public shareholders may have more difficulty protecting their interests than they would as shareholders of a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by-laws and by the laws governing companies incorporated in the Philippines. Legal principles such as a director’s or officer’s duty of care and loyalty, and the fiduciary duties of controlling shareholders exist in the Philippines. However, these principles are relatively untested in Philippine courts, and their application is uncertain in comparison to their application in U.S. courts. As a result, our public shareholders may have more difficulty in protecting their interests in connection with actions taken by our management, members of our board of directors or our controlling shareholders than they would as shareholders of a company incorporated in the United States.

We rely on income tax incentives to preserve funds allocated for specific business purposes and a loss of these tax benefits would prevent us from using funds in accordance with our business plan.

As a result of PSi Technologies, Inc.’s decision to register with the Philippine Economic Zone Authority (PEZA) as a tax planning strategy, PSi Technologies, Inc. shall henceforth be subject to a final tax, in lieu of all taxes, computed at 5% of gross income less allowable deductions as defined in Republic Act (RA) No. 8748 of the Philippines. No income tax incentives were availed of by our Taguig facility in 2003 and 2004. Laguna, through PSi Technologies Laguna, Inc. however, received tax incentives amounting to $12,400 in 2004. Our Chengdu facility is also entitled to fiscal incentives granted by the various governing authorities in China. See Item 5 “Operating and Financial Review and Prospects—Special Tax Status.” If we lose our fiscal incentives, we will be required to use funds earmarked for other business purposes to pay income and other business taxes. This reallocation of funds could reduce the amount of funds available to us for our business activities and materially harm our business, financial condition and results of operations.

Our existing principal shareholders own a large percentage of our voting shares and their interests may conflict with the interests of our company.

Our principal shareholders, Merrill Lynch Global Emerging Markets Partners, L.P. and NJI No. 2 Investment Fund, a fund managed by JAFCO Investment (Asia Pacific) Ltd., own, in the aggregate, approximately 68.5% of our outstanding voting securities as of December 31, 2004. Acting together, or in Merrill Lynch’s case, individually, our principal shareholders will be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions. See “Item 10—Additional Information—Articles of Incorporation and By-laws.” Matters that require shareholder approval through two-thirds vote include, among other things:

Our principal shareholders have entered into a Shareholders Agreement relating to their ownership, transfer and voting of our shares. As a result of the level of their shareholdings and the provisions of the Shareholders Agreement, our principal shareholders will have the power to determine the election of our directors and the approval of any other action requiring the approval of our shareholders, including any amendments to our articles of incorporation and by-laws. In addition, our principal shareholders could prevent us from entering into transactions that could be beneficial to us or the holders of our ADSs.

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Under the terms of the exchangeable notes issued to Merrill Lynch in July 2003 and June 2005, Merrill Lynch also has the right to approve a broad range of material transactions undertaken by us or our subsidiaries. See “Item 7—Major Shareholders and Related Party Transactions—Related Transactions—The Merrill Lynch Exchangeable Notes.”

Your percentage ownership in our company could be diluted by the action of our principal shareholders.

Our shareholders do not have preemptive rights. Our principal shareholders have a sufficient number of votes to approve the authorization, sale and issuance of additional shares of common stock or other securities of our company. You do not have a right to participate in any such sale or issuance and as a result your ownership interest in us could be diluted. See “Item 10—Additional Information—Articles of Association and Bylaws” for a discussion on the rights of shareholders.

We cannot assure you that an active trading market will develop or continue for our ADSs.

Our ADSs are publicly traded but do not necessarily trade actively. In addition, the market price quoted for our ADSs may be adversely affected by changes in our financial performance or prospects, or in the prospects for companies in our industry generally, or in the market in which our ADSs are traded. On March 16, 2005, we applied to transfer the trading of our ADSs to The Nasdaq SmallCap Market from The Nasdaq National Market. The transfer was effected at the opening of business on March 29, 2005. As a result, we cannot assure you that an active or stable trading market will develop or continue for our ADSs.

The market price for our ADSs has fluctuated significantly in the past, and the market price of our ADSs may be lower than you expect.

Since our initial public offering in March of 2000, the closing price of our ADSs has fluctuated significantly, ranging from a high of $25.44 per share to a low of $0.89 per share. Fluctuations in our stock price could continue. Among the factors that could affect our stock price are:

The stock markets in general, and the markets for technology companies in particular, have experienced a high degree of volatility not necessarily related to the operating performance of particular companies. We cannot provide assurances as to the price of our ADSs.

The market price of our ADSs could decrease as our principal shareholders sell their shares.

The market price of our ADSs could decrease if large numbers of ADSs are sold into the public market or if the public expects those sales to occur. These sales could make it difficult for us to sell equity securities in the future at a time and price that we deem appropriate. We have 13,289,525 common shares outstanding, including the common shares represented by our ADSs. The 4,025,000 common shares represented by our ADSs are freely tradeable in the public market unless purchased by our affiliates, as defined in Rule 144 under the Securities Act and which are natural persons or other entities that directly or indirectly control, are controlled by, or are under common control with us. The remaining 9,264,525 common shares are restricted securities, as defined in Rule 144 under the Securities Act, which means they may not be offered or sold unless pursuant to a registration statement that has been filed and declared effective by the Commission or pursuant to an available exemption from registration under the Securities Act. These common shares may be sold in the public market in the form of ADSs, upon a deposit of such shares with the depositary, but only if they are registered under the Securities Act or if they qualify for an exemption from the registration requirements of the Securities Act.

On June 14, 2004, JAFCO Investment (Asia Pacific), Ltd., acting as investment manager for NJI No. 2 Investment Fund, or NJI, requested that we file a registration statement covering the 1,955,741 shares held by NJI pursuant to NJI’s rights under the Registration Rights Agreement described in Item 7—”Major Shareholders and Related Party Transactions—Related Party Transactions.” The registration request was not ultimately pursued by JAFCO.

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Your voting rights as ADS holders are limited by the terms of the deposit agreement for the ADSs. Your ability to participate in the management of our company is impaired relative to our common shareholders.

Holders of ADSs may exercise the voting rights of the common shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs. There are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with the holders of ADSs. For example, our common shareholders receive notices of meetings directly from us and are able to exercise their voting rights by either attending the meeting in person or voting by proxy.

ADS holders, by comparison, do not receive notices directly from us. The deposit agreement provides that upon its receipt of notice from us of any meeting of holders of our common shares, the depositary will then mail to ADS holders as soon as practicable:

To exercise voting rights, ADS holders must instruct the depositary how to vote their shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for ADS holders than for holders of our common shares. ADSs for which the depositary does not receive voting instructions will not be voted at any meeting.

Except as described in this annual report, ADS holders are not able to exercise voting rights attaching to the ADSs. Please see “Item 10—Additional Information—Articles of Incorporation and By-laws” for additional information relating to our common shares.

Your ability to participate in any rights offering of our company is limited, which may dilute your ownership of our company.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities under the deposit agreement relating to the ADSs. The depositary will not offer rights to holders of our ADSs unless both the rights and the securities to which those rights relate are either exempt from registration under the Securities Act or are registered under the provisions of the Securities Act. We are under no obligation to file a registration statement for any of those rights or underlying securities or to cause such a registration statement to be declared effective. As a result, holders of our ADSs may be unable to participate in rights offerings by us and may experience dilution of their holdings as a result.

ITEM 4 INFORMATION ON THE COMPANY

A. History and Development of our Company

Our legal name is PSi Technologies Holdings, Inc. We are incorporated under the Corporation Code of the Philippines, Batas Pambansa Blg. 68 approved on May 1, 1980, in the Republic of the Philippines on December 10, 1999. Our current corporate form will expire on December 10, 2049 and may be extended by shareholder resolution to be approved by the Philippine Securities and Exchange Commission (SEC). Our principal executive and registered offices are located at FTI Special Economic Zone, Electronics Avenue, Taguig City, 1604, Philippines. Our telephone number at that address is (632) 838-4966. We maintain an Internet web site at www.psitechnologies.com. Information contained on our web site does not constitute a part of this annual report. Our agent for service of process in the United States is Michael T. Gholson, Director for Sales, at Pacsem Technologies, 721 E. Citation Lane, Tempe, AZ 85284. Our telephone number at that address is (480) 838-5286.

The following material corporate events occurred in 2004 and the first half of 2005:

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B. Business Overview

Power Semiconductor Assembly and Test Services

We provide comprehensive power semiconductor assembly, test and drop shipment services to meet the needs of our customers. Power semiconductors are single and multi-function semiconductor devices that regulate, control, switch and manage the electrical power used in all electrical devices such as automotive systems, communications and networking equipment, computers and peripherals, consumer electronics, electronic office equipment and industrial products, and home appliances, among others. Power semiconductors typically operate from 35-1200 volts.

Assembly services. We provide a full array of assembly services for power conversion and power management semiconductors. Assembly services refers to the process by which power semiconductors are packaged. The semiconductor package is critical to a chip’s performance and functionality and is the interface that allows the semiconductor device to connect to the end product (i.e. printed circuit boards). Packaging serves to protect the chip and facilitate electrical connections and heat dissipation.

We work exclusively with assembly processes that use leadframes or leaded assembly, the only assembly design that can accommodate the high voltage requirements of most power semiconductors. Power assembly differs from non-power assembly because it often requires special solder alloy die bonding machines and heavy-duty wire bonding machines. In addition to the alloy die bonding capability, we provide our customer with an epoxy-based and eutectic die bonding capability. Equipment designed for traditional non-power wire bonding cannot accommodate the large diameter wire required for power semiconductors. Power wire bonding equipment is also moderately more expensive than non-power wire bonding equipment, although the former has a longer useful life.

Although the outside appearance of power conversion packages has changed little over the years, packaging technology and know-how have continued to evolve to meet the requirements of increasingly complex semiconductors. The chart below illustrates the major steps in the assembly and test process.

Design services. We also offer our customers design services to address their power packaging needs. When implementing new or custom package orders, we interact with customers early in the design process to optimize package design and ensure manufacturability. After a design is finished, we provide quick-turn prototype services. By offering package design and prototype development, we help our customers reduce product development costs, accelerate time-to-volume production, and ensure that new designs are properly packaged at a reasonable cost.

Test services. We provide final test services for power semiconductors. Final test is the last stage in the back-end semiconductor production process before shipping the completed package. We use sophisticated test equipment owned by us, as well as those consigned to us by some of our customers, to test the electrical or product application attributes of each semiconductor.

We have the capability to test most of the power semiconductors we assemble. Outlined below is a brief description of our test capabilities:

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Materials management and drop shipment services. We provide our customers with a full range of materials procurement services and work with key raw material and equipment suppliers to ensure reliable production readiness at reasonable cost. We have installed a materials resource planning system that allows us to maximize the use of information technology in managing inventory. We also provide packaging for shipment, including specialized packaging called embossed carrier taping for surface-mount packages and paper-taping for standard packages. We provide drop shipment services, including the delivery of final tested semiconductors, to our customers’ end-customers in most parts of the world.

Non-Power Semiconductor Assembly and Test Services

We provide assembly, test and special process services for standard non-power semiconductors to maintain long-established customer partnerships. Non-power integrated circuit semiconductors typically operate at lower power levels and integrate multiple functions such as processing and conveying complex information in electronic form. We have assembly lines for a number of standard non-power packages that accommodate various customer requirements. Some of our non-power services are organized as dedicated business units such as a captive test line for various packages for Vishay Intertechnology Asia PT and Microsemi.

Packages

We offer semiconductor packages for both power semiconductor and standard non-power semiconductor applications. Historically, our first package offerings were for standard non-power applications including metal cans for devices such as field effect transistors (FETs), which are devices where the main current is controlled by application of a small on/off voltage, and diodes, ceramics for amplifiers and smart displays for cellular phones. In 1994, we began offering semiconductor packages specifically for power semiconductor applications. Since 1995, we have focused primarily on providing power semiconductor assembly and test services and packaging, increasing that portion of our business to represent approximately 95% of revenue in 2004. Nevertheless, our standard non-power semiconductor assembly and test operations remain profitable, and we continue to offer a limited number of standard non-power semiconductor packages. The following table sets out for the periods indicated the percentage of our revenue by package type:

Power Packages and Applications. Power semiconductors can be found in a vast array of everyday products. We believe we offer our customers the broadest line of power semiconductor packages in the industry. Our packages offer either standard or advanced thermal and electrical characteristics to accommodate varying power semiconductor applications. We focus our package development on producing incremental improvements to customer designs and providing packages that are both more durable and more cost effective for our customers.

All of our power packages are leaded packages. Leaded packages for power semiconductors are characterized by a semiconductor chip encapsulated in a special, non-conducting plastic mold compound with metal leads protruding from one or more edges of the package. The metal leads are designed to be attached to a printed circuit board, thereby integrating the semiconductor device into the ultimate end product. We offer leaded packages that use traditional pin-through-hole technology as well as more advanced surface mount technology. Our pin-through-hole packages are designed to be plugged into printed circuit boards by inserting the leads through holes on the board and are generally used for applications with high power requirements and minimal space restrictions. Our surface mount technology packages are designed to be soldered to the surface of the printed circuit boards and are generally used for applications with tighter space restrictions.

Nearly all of our power semiconductor packages can accommodate more than one power semiconductor product application. Power semiconductors can serve a number of product applications, including input rectification, control, switching and output regulation. Input rectification generally refers to converting alternating current, AC, to direct current, DC. The control function measures incoming electricity and sends a signal to a switch. A switch divides the current into discrete units. Finally, output regulation reconfigures the power into a form usable by the electronic component.

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Outlined below is a brief description of power semiconductors that we assemble and test:

The following table lists the power packages we assemble and test:

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Non-power packages and applications. We assemble and/or test a limited number of standard non-power semiconductor packages primarily for industrial, automotive and military use. The following table lists the non-power packages we assemble and/or test:

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Packages and processes under development. Power semiconductor form-factor and performance requirements continue to evolve to meet ever-increasing demands of end-market applications. We are currently developing packages and related processes to address the need for:

We also continue to increase our support functions for thermal, electrical, package stress and board level reliability characterization. We offer a full range of package functional testing and product analysis for all of our existing packages and packages under development. We have a full service reliability laboratory that can stress test assembled semiconductors.

The Semiconductor Industry and the Power Semiconductor Market

Semiconductors are critical components used in an increasingly wide variety of applications. They are used in telecommunications and networking systems, computers and computer peripherals, consumer electronics and home appliances, electronic office equipment, automotive systems and industrial products. According to the Semiconductor Industry Association, or SIA, revenue for the worldwide semiconductor device market declined from $204.4 billion in 2000, to $139.0 billion in 2001 in the worst recorded downturn in the history of the industry. It grew 1.3% to $140.7 billion in 2002, expanded by 18.3% to $166.4 billion in 2003 and by 28.0% to $213.0 billion in 2004, a record for semiconductor sales, based on SIA data. Although the semiconductor industry is highly cyclical, it has grown by a compounded annual growth rate of 15.6% over the past 20 years according to Semiconductor Business News. The industry’s downturns were caused by a number of factors in the past, including: overcapacity, reduced product demand due excessive purchases in previous periods, obsolescence, the introduction of new products and technologies, reduction in personal disposable incomes and corporate information technology budgets and other factors, increased competition and lower pricing.

The power semiconductor market is a large and steadily growing segment of the semiconductor industry. Power semiconductors are found in virtually every electronic device as they are needed to switch electrical power on and off, regulate the flow of electricity through electronic devices, and protect electronic components from surges and wear and tear. Based on year-end SIA Blue Book Statistics, we estimate that the worldwide market for power semiconductors increased from $17.8 billion in 2003 to $21.2 billion in 2004, a growth of 19.3%. During the downturn in 2001, power semiconductor sales declined by a lower 27% compared to 32% for the overall semiconductor industry. A number of factors contribute to the size of and growth in this industry segment. The proliferation of consumer electronic devices, wireless communications, and mobile computing are factors driving demand for new generations of power semiconductors that are smaller, lighter and more efficient. At the same time, new automotive and industrial applications are creating demand for more powerful, intelligent and reliable power semiconductors for which miniaturization is not a critical factor. Finally, electronics manufacturers are aggressively seeking to reduce manufacturing costs and time-to-market. These factors continue to spur demand for increasingly advanced power semiconductor solutions.

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The power semiconductor market has over time, exhibited seasonality in its billings on a quarter-over-quarter basis. Based on statistics from the Semiconductor Industry Association, growth in quarter-over-quarter billings from power semiconductors are highest during the second and third quarters. Growth is lower in the first quarter and typically negative in the fourth quarter. We believe that the slow first quarter start of the industry is the result of lower demand visibility at the start of the year. As visibility increases over time, orders typically increase, prompting stronger second and third quarter sequential growth. Generally, third quarter billings are higher than fourth quarter billings as customers usually order product in the third quarter to sell during the Christmas season. With the end of the Christmas build, industry billings typically decline during the fourth quarter.

Power semiconductors are easily distinguished from non-power integrated circuit semiconductors. Power semiconductors typically operate at high power levels and perform a discrete function within an electronic system by converting or managing electrical current. The capabilities of power semiconductors are defined largely by the level of power they can handle and their efficiency in converting electric current into a more useful form. In contrast, non-power integrated circuit semiconductors typically operate at lower power levels and integrate multiple functions such as processing and conveying complex information in electronic form. The performance of non-power semiconductors is defined largely by the number of functions that can be integrated within a fixed amount of space on a semiconductor, often referred to as circuit density. Circuit density for non-power semiconductors has increased rapidly over time as a result of improved semiconductor manufacturing and design technology. Rapid increases in circuit densities have led to shorter product life cycles for non-power semiconductors. Power semiconductors have undergone relatively less miniaturization and integration than non-power semiconductors because power semiconductors are required to manage and convert high levels of power, which generate significant amounts of heat. The result is that the power semiconductor market has been characterized by longer product life cycles and less severe average selling price erosion than the market for non-power semiconductors.

Semiconductor Production Process: Front-end and Back-end

The semiconductor production process can be divided into two sequential sub-processes commonly referred to as front-end and back-end production, both of which contain many steps. The entire process, both front-end and back-end production, is complex and requires sophisticated engineering and manufacturing expertise. The diagram below summarizes the process.

Front-end Production: Wafer Fabrication. Front-end production refers primarily to wafer fabrication. It starts with a clean disc-shaped silicon wafer that will ultimately become many silicon chips. First, a photomask that defines the circuit patterns for the transistors and interconnect layers is created. This mask is then laid on the clean silicon wafer and is used to map the circuit design. Transistors and other circuit elements are then formed on the wafer through photolithography. Photolithography involves a series of steps in which a photosensitive material is deposited on the wafer and exposed to light through a patterned mask; unwanted exposed material is then etched away, leaving only the desired circuit pattern on the wafer. By stacking the various patterns, individual elements of the semiconductor chip are defined. During the final phase of the front-end production process, each individual chip on the wafer is electrically tested to identify properly functioning chips for assembly.

Back-end Production: Assembly and Test. Back-end production refers to the assembly and test of individual semiconductors. The assembly process is necessary to protect the chip, facilitate its integration into electronic systems, limit electrical interference and enable the dissipation of heat from the device. Once the front-end production process is complete, the wafer is transferred to an assembly facility, where it is sawed into individual semiconductor chips. These semiconductor chips are then individually attached by means of an alloy or an adhesive to a leadframe, a metallic device used to connect the semiconductor to a circuit board. Leads on the leadframe are then connected by aluminum or gold wires to the input/output terminals on the semiconductor chip through the use of automated machines known as wire bonders. Each semiconductor device is then encapsulated in a plastic molding compound or ceramic case, forming the package.

After assembly, power semiconductors are tested for different operating specifications, including functionality, voltage, current and timing. The completed packages are then shipped to the customer or to their final end-user destination through drop shipment.

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The Trend Toward Outsourcing

In the past, most semiconductors were produced internally by independent device manufacturers or IDMs, who designed, manufactured and assembled semiconductors specifically for their own end products.

This required IDMs to have expertise and equipment for both front-end semiconductor design and fabrication and back-end assembly and test processes. Today, the trend is for IDMs to outsource as much of the manufacture and assembly process as possible. IDMs increasingly are focusing their efforts and resources on semiconductor design, where they can best differentiate their products from competitors and away from the assembly and test process.

The principal economic rationale behind the semiconductor outsourcing model is that it reduces risk for both IDMs and independent semiconductor assembly and test service providers. For IDMs, outsourcing allows them to focus on their core competency of wafer semiconductor design and fabrication, shifts manufacturing and utilization risk to the independent service providers, reduces their capital expenditure requirements and grants them access to new package technologies. For assembly and test service providers, outsourcing supplies them with a diversified customer base to ensure high equipment utilization rates, reduces dependence on the success of any single semiconductor offering and exposes them to the latest technologies employed by numerous leading IDMs. Additionally, outsourcing benefits both parties by enabling assembly and test service providers to develop a core competency and efficiency beyond that which an IDM could maintain in-house.

Philips has recently decided to outsource its bipolar power package assembly and test requirements by physically transferring its assembly and test production lines in its Cabuyao, Laguna, Philippines facility to PSi’s facility in Chengdu, Sichuan Province, PRC. This trend is consistent with the general trend toward outsourcing in the power semiconductor industry. iSuppli, a research firm, estimates the penetration of outsourced assembly and test will increase to 25% of total assembly and test revenues by 2006, from 15% in 2003. We believe that this trend towards increased outsourcing coupled with the overall market size for power semiconductors creates opportunities for independent power semiconductor assembly and test companies.

Suppliers

We have two primary categories of suppliers: equipment suppliers and raw materials suppliers. We periodically purchase equipment through several suppliers to meet our assembly and testing requirements. We have no binding supply agreements with any of our equipment suppliers and orders are placed on an as needed basis.

The principal raw materials used in our assembly process are leadframes, molding compound and gold/aluminum wire.

The pricing of our raw materials is negotiated on a yearly basis based on our volume demands. We are offered price discounts for volume purchases. The price of the gold wire used for wire bonding changes according to the price of gold in world commodity markets. The price of copper used in lead frames changes according to the price of copper on the London Metal Exchange. The price of other commodities used in our raw materials and manufacturing process also changes according to the price of these commodities in world commodity markets. In 2004, the Reuters/Jefferies CRB Spot Index (an index that tracks the prices of certain commodities) increased by 3.3%. Crude oil prices were higher by 33.6%, gold prices were higher by 6.9%, silver prices were higher by 20.5%, copper prices were higher by 49.0%, and nickel prices were higher by 7.4% in 2004 as compared to 2003. We review and discuss price changes weekly in an internal Cost Review Committee, to develop short and long-term strategies and action plans to manage and lower our raw materials costs.

Deliveries of leadframes are based on notice by the procurement department. We provide suppliers with purchase order coverage according to their leadtimes and also provide them with weekly forecast of demand, which becomes their reference for ordering materials and initiating production. For molding compounds and packaging materials, we now have warehousing agreements with two (2) major suppliers wherein each supplier keeps buffer stocks in the Philippine warehouse according to forecast requirements. We will only require delivery according to dice availability from customer. For spare parts we have six (6) major suppliers, each under a consignment agreement.

We generally purchase raw materials based on the non-binding forecasts provided to us by our customers. Our customers are generally responsible for any unused raw materials that result from a forecast exceeding actual orders. We however may not be successful all the time in enforcing such requirement from our customers. We work closely with our primary raw materials suppliers to insure that materials are available and delivered on time. We are not dependent on any one supplier for our leadframes, aluminum wire or molding compound. We work with several mold manufacturers to produce mold tooling for the plastic packaging.

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Marketing and Sales

Our marketing strategy focuses on the power semiconductor market. Our customer marketing efforts are tailored to the needs of leading manufacturers of power semiconductors. Our strategy is to deepen relationships with our current IDM customers by providing them with base capacity versus our historic business model of providing overflow or flux capacity. By providing our customers with base capacity, our customers reduce or transfer their internal production capacities to the Company, thereby minimizing the volatility of our revenue and volumes. The long-term supply agreement signed with Philips for the transfer of Philips’ internal bipolar power semiconductor assembly and test capacities to our facility in China, illustrates this strategy.

We are in the process of developing a non-traditional market base for our existing assembly and test capabilities and capacities, by identifying and selling to companies without fabrication and/or assembly capabilities. Our current legacy products have been in existence for over two decades. Such packages have not merely lost their upward surge in market, where prices can go at premiums, but due to their maturity, have also become very low margin products. Selling to fabless companies permits us to maintain a better price premium and somewhat cushions us from the volatility of the market. Fabless companies do not have the option of “pulling-in” to fill up internal capacity, and remain relatively loyal to their outsource partners.

We intend to co-develop leading edge packaging and inter-connect technology with our customers to meet their and their end customers’ specific power packaging needs. The Power QFN family of packages is an example of a leading-edge package. Through the intellectual property currently under development for this family of packages, we are co-designing devices with copper clip, gold stud-bumps and solder die attach, with the goal of meeting customer electrical requirements and industry reliability standards.

We offer our customers the opportunity to purchase only the assembly and test services they request without the obligation to purchase other services we offer. Our customers can also take advantage of our services on a back-end turnkey basis which includes assembly, final test and end-order fulfillment. In addition, we can work in conjunction with our customers to design cost effective, reliable packages to accommodate new chip designs.

The small number of existing and potential customers enables our primary market development efforts to be executed through executive-level discussions between potential customers and ourselves. We support our market development efforts with customer and product-specific technical teams assembled to address the specific needs of each customer design and order. We have a U.S. marketing office in Tempe, Arizona to liaise with our U.S. customers. In addition, our marketing initiatives include participation in trade shows, product sampling, technical bulletins and brochures, industry publications and news releases and a web site for general information purposes. As of December 31, 2004, we employed 19 professionals in business development, marketing, sales and customer service.

Competition

The independent semiconductor assembly and test business is very competitive, with competition both from other independent assembly and test businesses and the internal capacity of major IDMs. We believe our primary competition is with the internal assembly and testing departments of many of our largest customers. The outsourcing of internal capacity by large IDMs represents our largest market opportunity. We compete to provide our customers with a lower-cost, turnkey outsourced solution to replace their internal capacity commitment. Our main independent competitors are those assembly and test businesses primarily engaged in the manufacturing of similar packages, including:

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We also compete with Enoch Semiconductors (previously Korea Microsystems), a quasi-independent business based in Korea and focused on the power semiconductor market.

We compete indirectly with businesses that focus primarily on non-power integrated circuit semiconductor assembly and test, including:

We believe the principal elements of competition in the overall independent semiconductor assembly market include technical competence, sophistication of design services, quality, time-to-market, array of assembly services, production yields, customer service and price. We believe that we compete favorably as a market leader in these areas within the independent power semiconductor assembly segment.

Our customers typically rely on at least two independent providers of assembly and test services. Independent providers of semiconductor assembly and test services must pass lengthy and rigorous qualification processes that can take up to three to six months for a typical leaded package. In addition, customers incur substantial costs in qualifying each new provider of semiconductor assembly and test services. Due to these factors and the heightened time-to-market demands of semiconductor end-users, semiconductor manufacturers incur significant costs in switching assemblers and are often reluctant to change or add assemblers.

Many of our primary independent competitors have significant assembly capacity, financial resources, research and development operations, marketing and other capabilities, and have been operating for some time. Many of these companies also have established relationships with the same semiconductor companies, which are our current or potential customers.

Government Regulations

No local legislation has been passed which specifically regulates the semiconductor industry in the Philippines. However, we are subject to laws of general application in the Philippines, including the Corporation Code, the Local Government Code, the Tariff and Customs Code, the Securities Regulation Code, the National Internal Revenue Code, laws on environmental matters (see “—Property, Plants and Equipment—Environmental Matters”), the Special Economic Zone Act of 1995 (R.A. No. 7916), rules and regulations issued by the Philippine SEC, the Bangko Sentral ng Pilipinas (Philippine Central Bank), the Board of Investments, the Bureau of Internal Revenue, the Philippine Economic Zone Authority (PEZA), the Department of Environment and Natural Resources, and other government agencies.

Our Approach and Strategy

We are a leading independent provider of power semiconductor assembly and test services to the power semiconductor market. We provide comprehensive assembly and test services to a diverse customer base which includes most of the major power semiconductor manufacturers in the world. Our top five power semiconductor customers represented 79% of our revenues in 2004:

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We provide our customers with a broad array of packages and services designed specifically for power semiconductors. We use our expertise in power assembly and test to benefit our customers and collaborate with them to design new power packages to address their enhanced thermal and electrical product performance requirements. We believe our focused assembly and test expertise in the power semiconductor segment, our broad package offerings and our turnkey service capability makes us a preferred service provider for outsourced assembly and test services in the power semiconductor market.

We benefit from our location in the Philippines. In addition to being a low cost manufacturing center, the Philippines has become a hub for semiconductor assembly and test manufacturing services. Several major semiconductor manufacturers have located assembly and test facilities in the Philippines, including Intel, Fairchild Semiconductor, ON Semiconductor, Philips and Texas Instruments, as well as a number of independent assembly and test companies. We benefit from this concentration of assembly and test business in the Philippines because it has created a pool of professionals trained in assembly and test services and a community of businesses focused on packaging technology.

We also benefit from our location in Chengdu, Sichuan Province, China. Chengdu provides favorable demographics, rapidly modernizing infrastructure, a wealth of educational institutions that develop highly trained individuals, favorable living conditions and a progressive and proactive government.

Our Customers

We provide power and non-power semiconductor assembly and test services to over 30 customers. Our power semiconductor customers include most of the major power semiconductor companies in the world.

Our top five customers accounted for approximately 56% in 2001, 76% in 2002, 81% in 2003, and 81% in 2004 of total revenue. Our largest customer accounted for approximately 17% in 2001, 22% in 2002, 34.0% in 2003, and 30% in 2004. The following table sets forth the Company’s top five customers as a percentage of revenue for the years 2001, 2002, 2003, and 2004:

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The table below sets forth our significant power and non-power customers ranked in terms of our revenues for the year ended December 31, 2004:

The following table sets forth our revenues by geographic region (customer domicile):

Our customers generally do not place their purchase orders far in advance. As a result, we do not typically operate with any significant backlog. Eleven of our customers have placed equipment on consignment with us in our facilities. We are also contractually obligated to make capacity available to selected customers.

Customer Support

We interact very closely with our customers throughout the qualification stage and production process. We assign a customer service professional to coordinate with the account team composed of package development, process engineering, manufacturing and customer service and logistics support. We also provide immediate technical assistance during the development stage, and detailed electronic information of important indices relevant to the performance of our customers’ products once in full production.

Quality Management

We are committed to delivering defect free products and timely services to the utmost satisfaction of our customers with the goal of continuously improving quality, service efficiency, cost and technology, while ensuring product safety and the well being of our employees, customers, users and the environment. We believe quality is the responsibility of each individual employee in the Company. Quality ownership is implemented through Total Control Methodology (TCM), a discipline approach benchmark from Motorola in the early years of PSi. We have implemented and count Advanced Product Quality Planning and Control Plan, Potential Failure Mode and Effect Analysis (FMEA), Poka Yoke, seven Quality Tools, 8D and Smart PSM as among our quality control, monitoring and solving tools and techniques. We believe that our corporate-wide commitment to quality and our total quality management system are key elements of our semiconductor assembly and test operations. As of December 31, 2004, we employed 434 professionals, engineers, technicians and other personnel dedicated solely to quality control (334 in the Taguig facility, 65 in the Laguna facility, and 35 in the Chengdu facility).

Our facilities in Taguig, Laguna and Chengdu are ISO 9001/2000 certified. The Taguig and Laguna sites are also ISO14001 and TS16949 certified. We are the first Philippine company to be given the TS16949 (1999 version) certification in the Philippines. Our Laguna facility is a Bosch-certified site, with a rating of “A”. ISO 9002 is a worldwide manufacturing quality certification program regarding industrial quality systems that is administered by a third party certifying body, in our case TUV Product Service, under the auspices of the Independent Standards Organization. ISO14001 is an Environmental Management System Certification. TS 16949 is the Quality Management System for Automotive devices. It is the international version of QS 9000 (manufacturing certification program used mainly by American car manufacturers) and harmonizes the QS 9000 requirements with other requirements generally used by European car manufacturers.

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Our Taguig facility is listed in both Mil-PRF-19500 and Mil-PRF-38535 programs of the United States Defense Supply Center Columbus (US DSCC). Certification through these programs is required in order to supply products for U.S. military defense use. In January 2005, our Taguig facility was awarded the ANSI ESD S2020 Certification, a standard that provides administrative, technical requirements and guidance for establishing, implementing, and maintaining an ESD Control Program to protect electrical or electronic parts, assemblies and equipment susceptible to ESD damage from Human Body Model (HBM) discharges greater than or equal to 100 volts. We are also certified by Infineon, Motorola, Texas Instruments, Philips and ST through their supplier development programs.

Certain of our products have passed the rigorous Moisture Sensitivity Level 1 tests, a standard traceable to JEDEC (formerly known as Joint Electron Device Engineering Council—a semiconductor engineering standardization body of the Electronic Industries Alliance, a trade association that represents all areas of the electronics industry) J-STD-020B requirements, and Underwriters Laboratory for Industrial Safety. The MSL’s are expressed in numbers, with the MSL number increasing with the vulnerability of the package to cracking due to moisture-induced stress. MSL 1 corresponds to packages that are immune to cracking regardless of exposure to moisture.

Our commitment to quality management helped us earn the Philippine Quality Award (Level I) for Commitment to Quality in 1999 and 2000. In September 2004, our Taguig facility was the first Philippine based company awarded the Asia Pacific Quality Award (Best of its Class Distinction). In 2002, we were awarded the Philippine Quality Award (Level II) for Proficiency in Quality Management. The Philippine Quality Award is the Philippine equivalent of the U.S. Malcolm Baldridge Award, which is considered to be one of the most prestigious national awards. We have also earned the 1997 Golden Shell Award for Manufacturing Excellence for being one of the outstanding export companies in the Philippines.

Insurance

We maintain insurance policies covering some types of losses, including losses due to business interruption and losses due to fire, which we consider to be adequate. Our insurance policies cover our buildings, machinery and equipment as well as the machinery and equipment of our customers. Significant damage to our production facilities, whether as a result of fire or other causes, would have a material adverse effect on our business, financial condition and results of operations. We are not insured against the loss of any of our key personnel. In addition, we maintain insurance policies covering directors and officers liability, and entity coverage relating to securities related claims.

C. Organizational Structure

In December 1999, we completed a corporate reorganization to provide us with enough shares to list on Nasdaq as part of our ADS offering in March, 2000. This reorganization entailed two steps: (i) our organization—that is, the organization of PSi Technologies Holdings, Inc.—as a Philippine corporation and (ii) the exchange by the shareholders of PSi Technologies, Inc., our principal operating subsidiary, of their common and preferred shares of PSi Technologies, Inc. for common shares of PSi Technologies Holdings, Inc., with the exception of specific nominee director qualifying shares. See “Item 7—Major Shareholders and Related Party Transactions.”

On November 3, 2003, PSi Technologies, Inc. and PSi Technologies Laguna, Inc. jointly incorporated PSi Technologies China Holdings Co., Limited; a Hong Kong registered company, for the establishment of a Joint Venture Company with Tak Cheong Electronics (Holdings) Co. Ltd. Discussions with Tak Cheong were later terminated due to the parties’ inability to enter into a definitive joint venture agreement. Consequently, the boards of PSi Technologies, Inc. and PSi Technologies Laguna, Inc. authorized the deregistration of PSi Technologies China Holdings Co., Limited, which had never commenced business subsequent to its incorporation, from the Companies Registry of Hong Kong. On April 15, 2005, we were informed by the Companies Registry of Hong Kong that the Company has been deregistered pursuant to Section 291AA(9) of the Companies Ordinance, by notice published on April 15, 2005 under Gazette notice No. 1750.

Subsequent to the signing of an Investment Cooperation Agreement with the Chengdu Hi-Tech Zone in the PRC, our principal operating subsidiary incorporated PSi Technologies China Holdings Co. Ltd., a Mauritius registered company, on December 22, 2003 as a holding company for the China operating company. PSi Technologies China Holdings Co. Ltd., then incorporated PSi Technologies Chengdu Co. Ltd., a PRC registered company, on January 15, 2004. PSi Chengdu is the Company’s operating subsidiary in China.

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The following chart shows our corporate structure as of December 31, 2004.

D. Property, Plants and Equipment

Facilities and Real Property

Our headquarters, administrative offices and principal assembly and operations are located at our Taguig facility in Metro Manila, Philippines. We have a second operational assembly operation at our Laguna facility located approximately 30 miles south of Manila and another assembly operation at our Chengdu facility in Chengdu City, Sichuan Province, PRC. We also have a U.S. marketing office in Tempe, Arizona. Our Philippine-based operations are close to major Asian semiconductor foundries and provide easy air, land and sea access and rapid customs processing and shipment.

We have occupied our Taguig facility since 1988. Our Taguig facility is housed in a series of structures totaling 19,264.1 square meters or 207,282 square feet, on a site consisting of approximately 25,650.1 square meters or 275,995 square feet. There are 6,780.5 square meters, or 72,958 square feet, dedicated to assembly and test operations. This facility is designed to accommodate 1,282.4 square meters, or 13,798 square feet, of test space and 5,498.1 square meters, or 59,159.7 square feet, of assembly space. PSi owns the leasehold improvements. Food Terminal Inc., a wholly owned government entity, leases the land to us. Additional land and buildings were sub-leased to us from Tierra Factors Corporation, an independent third party, which in turn leased the land from Food Terminal Inc. The land lease arrangement with Food Terminal Inc. and sub-lease arrangement with Tierra Factors Corporation, both of which expired in 2004, was consolidated into a single lease arrangement with Food Terminal Inc. in June 2005 and is scheduled to expire in August 2020. In 2001, we also leased an adjacent warehouse that now serves as our second Annex facility in Taguig. This is under a lease agreement with Food Terminal Inc. and will expire in 2015. As of May 17, 2004 and subject to terms and conditions, our Taguig facility is registered under R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995, which created the Philippine Economic Zone Authority (PEZA).

We have occupied our Laguna facility since September 1999. The building is approximately 5,897 square meters, or 63,452 square feet, with 3,832.9 square meters, or 41,242.3 square feet, dedicated to assembly and test operations, and located on 8,612 square meters, or 92,655 square feet, of land. This facility is designed to accommodate 742.4 square meters, or 7,988 square feet, of test space and 3,093.5 square meters, or 33,286 square feet, of assembly space. We lease the land and building under an eight-year lease from RBF Development Corporation, an independent third party. During the term of our lease, we have an option to purchase the building and, subject to foreign ownership restrictions under the Philippine Constitution, we also have an option to purchase the land.

We had a third facility which we acquired through our subsidiary, Pacsem Realty, Inc. at a site near our existing facility in Laguna where construction of the building shell was completed in 2001. We deferred its activation due to the effects of the downturn of the semiconductor industry and the recent registration of our Taguig facility under the PEZA. In light of this and the establishment of a new facility in China, we entered into a contract on January 28, 2005 to sell our unutilized third site in Laguna to an unrelated Philippine corporation in the business of commercial and industrial property development and leasing, for $2.5 million, with $1.0 million payable upon signing and the balance payable every 6 months in 6 equal payments through January 2008. In accordance with the impairment review done in 2003 and 2004, which includes a company-wide evaluation of underutilized and/or unutilized assets, a detailed update of operating and cash flow projections, and appraisal of the real properties located in the third facility, we took an asset impairment charge of $0.9 million in 2003 and $1.3 million in 2004 against the carrying cost of the third facility.

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PSi Technologies, Inc. signed an Investment Cooperation Agreement with the Chengdu Hi-Tech Zone (CDHT) on December 7, 2003. As part of the agreement, PSi Technologies, Inc. will lease for a period of three years with option to purchase within the three years, two (2) pre-fabricated buildings for the purpose of providing assembly and test services in the Sichuan Chengdu Export Processing Zone, Chengdu City, Sichuan Province, People’s Republic of China. Each building has a covered area of approximately 2,592 square meters sited on approximately 4,117.5 square meters of land. PSi Technologies, Inc. has an option to purchase within three years, the use rights of two (2) adjacent parcels of land each measuring 17,500 square meters. A formal lease agreement was signed with the Sichuan Chengdu Export Processing Zone Investment Development Co. Ltd., a corporation of the CDHT, on January 19, 2004.

Equipment

We depend on a limited number of manufacturers for the assembly and test equipment we use in our assembly and testing process. In periods of high demand, the lead times from order to delivery of our assembly and test equipment can be as long as four to six months. We work closely with our major equipment suppliers to ensure that equipment is delivered on time and such equipment meets our performance specifications.

The primary equipment used in providing our assembly and test services includes wire bonders, mold systems, plating and singulation systems, marking systems, testers and handlers. Wire bonders are used to attach the silicon-based chip to the leadframes using gold or aluminum wire. The majority of our wire bonders are designed for aluminum wire used specifically in power semiconductor assembly. The mold systems are used to encapsulate each semiconductor using a molding compound. Plating systems are used to cover the leads and heat-sink with solder alloy materials to provide good soldering. Singulation systems are used to segregate encapsulated and plated semiconductors attached in strips into individual units. Marking systems are used to imprint an alphanumeric identifier on the package. Testers and handlers are used to test the electrical and thermal characteristics of the product.

The following table lists the major assembly and test equipment by type, number in use and the principal supplier or manufacturer of the equipment we use:

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Environmental Matters

Our operations are subject to regulatory requirements and potential liabilities arising under Philippine laws and regulations governing among other things, air emissions, wastewater discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials and wastes. We are also compliant to international agreements covering environmental issues like the Geneva Convention, Basel Convention, Kyoto Protocol and the requirements of the European Union on banned and regulated substances.

In July 2004, we received Ex-Parte Order No. PH-04-09-166 from the Laguna Lake Development Authority for failure to conform to the Effluent Standard for Class C Waters in terms of pH, TSS, BOD, and Lead for our Taguig facility. This requires PSi to pay a penalty of PHP1,000 per day from July 2004 to present until we have successfully complied with their requirements. As of June 2005, we have not paid the penalty pending compliance and calculation of penalty payable to the Laguna Lake Development Authority. We also received a Notice of Violation from Laguna Lake Development Authority for failure to conform to the Effluent Standard for Class C Waters in terms of lead for our Laguna facility. The case was dismissed on May 5, 2005 and the Company has been required to submit a position paper why the Company’s Laguna facility should not be subjected to penalty for delayed compliance.

We have programs on waste minimization, toxic and hazardous waste management, and air and water management. To ensure that we are meeting government wastewater standards, we are constructing a new wastewater treatment plant, which is now partially operational. Due to technical and contractor issues, the new wastewater treatment plant is expected to be fully operational by the end of the third quarter of 2005.

Expenditures on environmental compliance currently represent a significant portion of our operating expenses. Both our plant in Taguig and Laguna are ISO14001 certified and have been given the Certificate of Green Partnership by Sony Corporation.

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Respective permits on pollution control or emission source installation and wastewater effluent discharge from the Environmental Management Bureau of the National Capital Region (EMB-NCR, a government agency) and the Laguna Lake Development Authority (LLDA) cover our compliance with Philippine government regulations. EMB and LLDA are government-implementing and regulating bodies that oversee air emissions, hazardous waste management and wastewater discharges. The Philippine Nuclear Research Institute (PNRI) and the Philippine National Police—both government-implementing bodies, provide our respective licenses for radioactive materials and use of nitric acid. We are also affiliated with Association of Electronics and Semiconductor for Safety & Environmental Protection and Water Environment Association of the Philippines.

ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Executive Overview

The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the fiscal years ended December 31, 2004, 2003 and 2002. This discussion should be read in conjunction with our consolidated financial statements and related notes included in Item 18 of this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in “Item 3—Key Information—Risk Factors” as well as those discussed below and elsewhere in this annual report. Our audited consolidated financial statements are reported in U.S. dollars and prepared in conformity with U.S. GAAP.

We are a leading independent provider of assembly and test services to the power semiconductor market. We provide comprehensive package design, assembly and test services for power semiconductors used in telecommunications and networking systems, computers and computer peripherals, consumer electronics, electronic office equipment, automotive systems and industrial products. We provide these assembly and test services to vertically-integrated semiconductor device manufacturers and semiconductor companies which do not have their own assembly and test facilities. Our customer base includes the majority of the major power semiconductor manufacturers in the world. We also provide assembly and test services for specialized non-power semiconductor packages used for industrial, automotive, military and computer peripheral applications. We generate all of our revenue through the power and non-power semiconductor assembly and test services we provide to our customers.

As a percentage of our revenue, revenue from power-related assembly and test services was approximately 89% in 2002, 94% in 2003, and 95% in 2004. We intend to continue focusing on power-related services in the future as this distinguishes us from our competitors, as we provide one of the broadest arrays of power packages within the industry and gain specialized expertise in the assembly and test of power semiconductors. For these reasons, we believe our focus will improve our product mix and lead to increased revenue in this area.

Semiconductor Industry Impact

Market conditions in the semiconductor industry as a whole and, increasingly, the power semiconductor market segment substantially affect our business. According to various reports of the Semiconductor Industry Association (SIA), the worldwide semiconductor market expanded by 36.8% to $204.4 billion in 2000, fell by 32.0% to $139 billion in 2001, grew by 1.3% to $140.7 billion in 2002, and expanded by 20.3% to $169.3 billion in 2003 and by 28.0% to $213.0 billion in 2004. The power semiconductor market, a subset of the overall semiconductor market, grew by 34.5% to $20.7 billion in 2000, fell by 27.2% to $15.1 billion in 2001, grew by 5.4% to $15.9 billion in 2002, grew by 11.7% to $17.8 billion in 2003 and by 19.3% to $21.2 billion in 2004. Based on available research data from iSuppli, a research firm, the assembly and test market segment represents approximately 21% of total power semiconductor billings, or $3.7 billion in 2003 and our addressable market is approximately 15% of the power assembly and test market. The addressable market, approximately $571 million, is the portion outsourced to third party assembly and test providers such as our company. Our net revenues expanded by 46.4% to $73.7 million in 2000, fell by 27.4% to $53.5 million in 2001, and with the recovery in underlying markets grew by 32% to $70.5 million in 2002, by 9% to $76.9 million in 2003 and by 2.9% to $79.1 million in 2004.

The semiconductor industry is highly cyclical. Although the semiconductor industry has grown overall since 1993, there were downturns in 1996, 1998 and 2001, which continued through 2002 due to significant pricing pressure. The 32% decline in 2001 is considered by industry experts as the worst downturn in the industry’s history and, according to industry experts, is largely attributable to overcapacity, reduced product demand, excessive inventory stockpiles, increased competition and lower pricing. We, however, managed this pricing erosion by implementing cost reduction measures in our production lines starting in 2001 and by focusing on the power semiconductor market, which, historically, has experienced longer product life cycles, and less average selling price erosion than the market for non-power integrated circuit semiconductors.

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Capacity Utilization

Our results of operations are affected by the capital-intensive nature of our business. A significant portion of our costs, principally relating to assembly and test equipment, are fixed. Increases or decreases in capacity utilization rates can have a significant effect on our gross margin and profitability since the unit cost of our services generally decreases as fixed costs, such as equipment depreciation expense, are spread over a larger number of units. Depreciation expense as a percentage of cost of sales was 18.6% in 2002, 19.1% in 2003 and 20.1% in 2004. Depreciation as a percentage of cost of sales decreased in 2002 because of the increase in sales, increased in 2003 as a result of our increased investment in equipment to expand our assembly and test capability in the Philippines. In 2004, we recognized an additional $1.4 million depreciation expense, as a result of the change in estimated useful lives for equipment with low utilization rates, packages with low margins or are not part of our core competencies, and the fixed assets related to our business with Fairchild Korea which was terminated on June 30, 2005.

Pricing

Our results of operations also are affected by decreases in the average selling price of our semiconductor device packages. The erosion of the average selling price generally has been less severe in the power semiconductor market than the non-power integrated circuit semiconductor market. We attempt to offset these decreases in average selling price by developing and marketing larger and higher-priced packages and services, taking advantage of economies of scale and higher productivity resulting from higher volumes, and developing and implementing other cost reduction strategies. We believe these strategies will allow us to obtain higher margins on our device packages, which should, in turn, help to mitigate selling price erosion. In the past, we have successfully negotiated volume discounts on raw materials as our production volumes have increased. We also operate captive assembly and test lines for three of our customers using equipment consigned to us by those customers. These arrangements tend to reduce our fixed costs and provide us with improved margins and profitability as a result of lower equipment depreciation expenses since the customer owns the equipment lines. The increase in raw materials costs has allowed us to negotiate and pass selective increases in average selling prices to some of our customers in the first half of 2005.

We do not charge a standard or uniform fee per semiconductor assembled and tested. The selling price of our semiconductor device packages is determined by the materials used and the complexity of the device in terms of assembly and test operations. As the prices of different device packages vary, the mix of packages produced and the contractual arrangements with the customers also affect revenue and profitability.

Increased Profitability

In 2003, we undertook the following measures to maintain the gross profit percentage at the same level as 2002: (i) reduction of cost by substituting raw materials with qualified lower costing raw materials and by using alternative sources of materials; (ii) elimination of non-value added functions and redundant positions to enhance productivity and better cycle time; and (iii) improvement of manufacturing yields and quality.

In 2004, we increased profitability by reducing costs of raw materials through supplier and material substitution, improved productivity, manufacturing efficiency and equipment capabilities, reduce overheads, and lowering capital expenditures to a minimum level. This was offset by the $2.4 million net loss incurred by our Chengdu facility in 2004.

For 2005, we are trying to increase profitability by undertaking measures to enable our Philippine business to consistently make profits at lower run-rates and mitigate the impact of sudden and unanticipated decline in revenues as had occurred in the fourth quarter of 2004, through the reduction our operating costs by lowering the cost of raw materials and overhead, improved productivity, manufacturing efficiency and equipment capabilities, and rationalize capital expenditures to a minimum level. Additionally, we intend to manage customer and package mix towards higher average selling price and margin packages, sell capacity to non-IDM customers, implement selective increases in average selling prices, and allocate the majority to new and higher margin packages, e.g. QFN Package, develop and enter into partnerships with suppliers and customers for access to and use of intellectual property, production equipment and materials at beneficial terms and conditions, and dispose of impaired assets to recover value.

Organization and Facilities

We conduct our operations almost exclusively in the Philippines through several subsidiaries. PSi Technologies, Inc. is our principal operating subsidiary and operates our main assembly and test facility located in Taguig, Metro Manila. We commenced commercial operations at our Taguig facility in 1988. PSi Technologies Laguna, Inc., our other operating subsidiary and a wholly owned subsidiary of PSi Technologies, Inc., operates our second assembly and test facility located in Calamba, Laguna. We commenced commercial operations at our Laguna facility in late 1999, and expanded its capacity during 2000. PSi Technologies Chengdu Co. Ltd., our other operating subsidiary and a wholly owned subsidiary of PSi Technologies China Holdings Co. Ltd. (a Mauritius company), operates our assembly and test facility located in Chengdu, Sichuan Province, PRC.

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We entered into a contract on January 28, 2005 to sell our unutilized third site in Laguna to an unrelated Philippine corporation in the business of commercial and industrial property development and leasing, for $2.5 million, with $1.0 million payable upon signing and the balance payable every six months in six equal payments through January 2008. In accordance with the impairment review done in 2003 and 2004, which includes a company-wide evaluation of underutilized and/or unutilized assets, a detailed update of operating and cash flow projections, and appraisal of the real properties located in the third facility, and given the subsequent sale of the property on January 28, 2005 we took an asset impairment charge of $0.9 million in 2003 and $1.3 million in 2004 against the carrying cost of the third facility. In the future, we will allocate and concentrate our production of power packages in accordance with the competitive position of each facility.

Pacsem Technologies, Inc., a wholly owned subsidiary of PSi Technologies, Inc., is a California-based corporation that conducts our marketing activities in the United States. In addition, we have a marketing office in Tempe, Arizona; and a sales and marketing office in Tokyo, Japan under a sales and marketing agreement dated September 18, 2001 with Tokai Bussan Co. Ltd. of Japan. The sales and marketing agreement was terminated on April 1, 2005. Tokai Bussan Co. Ltd. of Japan currently serves as our agent for selected Japanese customers.

As part of our strategy to provide assembly and test services in China, PSi Technologies, Inc., signed an agreement with the Chengdu Hi-Tech Zone (CDHT) to lease for a period of three years with an option to purchase within three years, two (2) pre-fabricated buildings for the purpose of providing assembly and test services in the Chengdu Sichuan Export Processing Zone, Chengdu City, Sichuan Province, PRC. Each building has a covered area of approximately 2,592 square meters sited on approximately 4,117.5 square meters of land. Further, we have the option to purchase within 3 years, two (2) adjacent parcels of land each measuring 17,500 square meters. We signed a lease agreement with the Sichuan Chengdu Export Processing Zone Investment Development Co. Ltd., a corporation of the CDHT, on January 19, 2004. On January 14, 2004, we signed a long-term supply agreement with Philips to provide outsourced power semiconductor assembly and test services through our facility in Chengdu, Sichuan Province, Peoples’ Republic of China. The products to be packaged and tested for Philips are bipolar power products ranging from epitaxial diodes, deflection transistors, damper diodes, triacs and thyristors. The end applications for these products are consumer electronic devices, white goods, lighting, power supplies and industrials for the international and China markets. As part of the agreement, we expect Philips to progressively transfer its production of bipolar products, currently located in Philips’ assembly and test facility in Cabuyao, Laguna Province, Philippines, to PSi in China. The transfer commenced in the first quarter of 2004 is expected to extend to 2005. We currently provide assembly and test services to Philips in the Philippines, augmenting Philips’ internal capacity to meet market demand for its products and packages. After passing the required qualification and audit by Philips, our Chengdu facility began limited commercial operations during the third quarter of 2004.

We established an assembly and test facility in China in order to:

According to an International Finance Corporation (IFC) commissioned Booz Allen Hamilton study, “Emerging market production will grow by $60 billion during the next 3 years, 77% of new growth will be in China. As a result, China’s share of global electronics production will nearly double from 8.1% to 14.3% by 2005—passing Western Europe.” Further, according to the study, “China will hold commanding positions in key value chain elements, for example, more than 50% of final assembly will be in China by 2005.” Finally, according to the study, “Emerging markets investment is driven predominantly by the need to access low cost labor and satisfy growing local demand.”

A chart of our manufacturing facilities is provided below:

Manufacturing Sites

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Currency Considerations

We use the U.S. dollar as our functional currency because all our revenue and a large proportion of our costs are denominated in U.S. dollars. Accordingly, monetary assets and liabilities denominated in Philippine pesos, Chinese Renminbi and other foreign currencies have been re-measured into U.S. dollars using the exchange rates at the relevant balance sheet date. Non-monetary items are translated at historical rates. We also experience foreign currency exchange gains and losses arising from transactions in currencies other than our functional currency. For example, some of our labor costs are denominated in Philippine pesos and Chinese Renminbi and a small amount of our equipment and raw material costs are denominated in Japanese yen. Gains and losses from those foreign currency transactions are also credited or charged to current operations. In addition, we benefit from a number of tax incentives available in the Philippines and China. See “Liquidity and Capital Resources—Special Tax Status.”

2004 Highlights

Highlights for 2004 are:

• Manufacturing. We continue to focus on improving all aspects of our manufacturing operations, including the substitution of lower cost raw materials and supplies, reduction in packaging costs through strategic and China sourcing and improvements to production processes. Our consolidated cost of goods sold increased by 6.1% from $75.4 million in 2003 to $80.0 million in 2004. This increase was primarily due to increases in depreciation and raw material costs. As a result, we incurred a gross loss of $0.9 million in 2004 compared the gross profit of $1.5 million in 2003. Gross margins in 2004 were largely affected by the percentage of depreciation and raw materials to cost of sales and the gross loss incurred by the Chengdu facility which started operations in 2004. Depreciation increased by 10.5% from $14.4 million in 2003 to $15.9 million in 2004 primarily due to the $1.4 million additional depreciation resulting from the shortening of the lives of certain fixed assets. Depreciation as a percentage of sales was 18.7% in 2003 and 20.1% in 2004. The Chengdu facility incurred a gross loss of $1.2 million in 2004.

• Marketing. With the decline in revenues during the third quarter of 2003, we continued to conduct a package portfolio review to determine additional measures to improve the profitability of loss-making and marginal packages, against our available production capacities and core competencies in 2004. We then adjusted our marketing strategies to target higher margin and average selling price packages and non-IDM customers, and allocated capacities and priorities accordingly. We initiated discussions with our customers to institute selective increases in average selling prices, to offset the increase in raw materials expenses arising from higher commodity prices. These discussions continued through to the end of 2004, and resulted in price increases during the first semester of 2005. We decided to concentrate all demand for Philippine based assembly and test services in our two operational facilities in the Philippines, and decided to sell our third facility, which resulted in a $1.3 million impairment charge on the facility.

We endeavored to lower the volatility of our customers’ loadings with us, through captive line arrangements wherein our customers offload through a sale or consignment agreement, their internal assembly and test capacities to us. We estimate that a significant proportion of our loadings are under an overflow or excess capacity arrangement.

More significantly, we saw the need to reorganize our sales and marketing organization as a means to diversify our customer base and manage business relationships for consistent profitability and market share growth. As a result, we appointed Roque Felipe M. Granada, as Senior Vice President for Sales, Marketing and Customer Service on January, 2005.

• Research & Development. We appointed James H. Knapp as our Vice President of Technology, Package Development and Central Engineering. His title was later changed to Vice President and Chief Technology Officer. Mr. Knapp led our development initiatives for the introduction of the Power QFN Packaging Platform and other new packages.

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• Financing. We incurred $15.0 million in capital expenditures of which $3.1 million was allocated for our Chengdu facility and the balance for our Philippine operations. Of the total, $6.7 million was acquired on account through suppliers’ credits and under capital lease arrangements. We financed such capital expenditure from funds generated from operations, suppliers’ credits and from the increased trade payable and financing facility from the Singapore Branch of Raiffeisen Zentralbank Osterreich AG (RZB-Austria). This facility was increased from $5.0 million to $10.0 million on August 27, 2003. On December 27, 2004, RZB-Austria extended the maturity of the facility to December 31, 2005 and waived all financial covenant breaches based on the June 30, 2004 US GAAP unaudited consolidated financial statements subject to the condition that we are required to remedy the loan covenant breaches as of December 31, 2004 and that if breaches are still continuing, RZB-Austria will without prejudice to any of its rights under the Facility and Supplemental Agreements require our shareholders to infuse such additional capital into the company to cure the breaches. On July 13, 2005, RZB-Austria waived all the breaches based on the U.S. GAAP unaudited consolidated financial statements as of December 31, 2004 and confirmed that the next test of covenants will be based on the next U.S. GAAP audited consolidated financial statements of PSi Holdings as of and for the year ending December 31, 2005. The total loan balance under this credit facility was $9.8 million as of December 31, 2004 and $6.6 million as of December 31, 2003. On June 2, 2005, we issued a $7.0 million exchangeable senior subordinated note to an affiliate of Merrill Lynch Global Emerging Markets Partners, L.P., our majority shareholder.

2005 Outlook

We intend to strengthen our position as a leading global provider of assembly and test services targeted specifically at the power semiconductor market in the following ways:

• Focus on the Power Semiconductor Market and Capitalize on the Trend Toward Outsourcing

We intend to continue to focus our expertise on the power semiconductor market, which is expected to grow by 8.4% compounded annually from 2001 to 2006, according to SIA Statistics. We intend to further expand our business by capitalizing on the accelerating trend toward outsourcing in that market. The power semiconductor manufacturing services market is large and under-penetrated by independent assembly and test service providers. The trend toward outsourcing is expected to increase from a penetration rate of 15% in 2003 to 25% in 2006, as an increasing number of IDMs take advantage of the cost savings and strategic advantages of outsourcing. A number of our current customers already have indicated their intention to outsource an increasing portion of their semiconductor manufacturing needs to independent manufacturing service providers. We believe that our established, strategic customer relationships provide us with a competitive advantage in capturing these outsourcing opportunities.

• Strengthen and Expand Our Strategic Customer Relationships

We intend to strengthen our existing relationships with our key strategic customers to win an increasing percentage of their back-end production business, as we transform our business model from a provider of overflow capacity to a provider of base capacity. Our major IDM customers’ in-house assembly and test capacity represents both our largest competition and our best opportunity for incremental growth. We intend to capture our key customers’ outsourced assembly and test business by working closely with them to meet their product performance requirements, offering them the broadest array of power packages and services in the industry, and aggressively managing our supplier relationships and the manufacturing process to reduce costs. In addition, as a result of the industry downturn in 2001, it appears that some of our customers intend to consign or sell their manufacturing assets to a third party assembly and test provider as a strategy for reducing their cost structures and capital costs, without reducing assembly and test capacities; and focus on wafer semiconductor manufacturing while outsourcing their assembly and test requirements to independent third-party providers to reduce capital expenditures. For our customers in this situation, we are able to offer a structured off-load program whereby we would either acquire their assembly and test equipment or setup a separate facility to accommodate, manage and operate our customers’ equipment, as well as the volume of products that they package in these same lines. Under these arrangements, we would either purchase the equipment with payment spread over a number of years under a deferred payment plan that is based on the volume of business they outsource to us, or enter into a consignment agreement wherein the customer retains legal ownership of the equipment.

Some of the key transfers and offload programs undertaken include the ON Semiconductor Guadalajara offload program in 2001 and the ongoing transfer of Philips’ production equipment to our facility in China.

• Enhance Our Power Assembly and Test Technology and Design Services

We intend to continue to develop our power semiconductor assembly and test technology and design services to meet our customers’ needs. The Power QFN family of packages is an example of a leading-edge package. We coordinate our development efforts with our customers to ensure that our packages and services meet their power design specifications and increase the efficiency of our research and development efforts. Intellectual Property currently under development for the Power QFN family of packages include co-designing devices with copper clip, gold stud-bumps and solder die attach. We believe these advanced interconnect technologies and materials can be used to improve the capability and performance of legacy packages. We have hired and will continue to hire research and development professionals trained in semiconductor manufacturing. We expect that these employees will strengthen our design capability, particularly in thermal modeling and product applications. We intend to collaborate with our principal equipment and material suppliers to develop and access technical research.

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• Build Additional Assembly and Test Capacity to Serve Growing Customer Demand

We intend to respond to the growth in power semiconductor demand, and the increasing requirements of our customers, by expanding our assembly and test capacity and rationalizing our manufacturing sites to derive greater economies of scale. We have expanded in China to integrate our company further into the supply chains of our customer, tap high growth markets, and provide cost competitive services. Conversely, growth in the Philippines was channeled towards the two existing operational facilities to derive greater economies of scale, while we sold our third facility in the Philippines in January 2005.

• Expand into New Geographic Markets and Maintain Diversified Global Customer Base

We are in the process of expanding into new geographic markets while maintaining a diversified customer base. We believe the Japanese market complements our existing customer base and represents a significant outsourcing opportunity for power semiconductor assembly and testing services. Of the top ten power semiconductor makers in the world, three are Japanese companies. Our efforts in Japan will complement our efforts in Europe, the United States and elsewhere in Asia where we have built a balanced customer list of top-tier power semiconductor manufacturing companies.

We also believe that our new facility in China will be a significant driver of future revenue growth. The facility will support our customers’ rapidly growing activities in China by providing low cost assembly and test services in proximity to our customers’ manufacturing facilities and end markets.

We are in the process of developing and continuing to develop a non-traditional market base for our existing assembly and test capabilities and capacities, by identifying and selling to fabless or assembly-less companies. Our current legacy products have been in existence for over two decades. Such packages have not merely lost their upward surge market, where prices can go at premiums, but due to their maturity, have become very low margin products. Selling to fabless companies permits us to maintain a better price premium and somewhat cushions us from the volatility of the market. Fabless companies do not have the option of “pulling-in” to fill up internal capacity, and remain relatively loyal to their outsource partners.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with United States GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to depreciation, impairment, bad debts, inventories, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of its consolidated financial statements.

Principles of Consolidation

The consolidated financial statements of PSi Holdings include the accounts of its controlled subsidiaries, where PSi Holdings owns, directly or indirectly, more than one-half of the outstanding voting shares, as follows:

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The consolidated financial statements of PSi Holdings also include the accounts of Psitech Realty, a variable interest entity for which PSi Holdings is the primary beneficiary, PSi Holdings has, through PSi Technologies, a 40% equity interest in Psitech Realty, in the form of preferred stock. PSitech Realty has outstanding cash advances payable to PSi Technologies amounting to $3,716 and $3,247 as of December 31, 2004 and 2003.

The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated.

Depreciation and Amortization

We use our business judgment when determining expected useful lives of fixed assets. Asset useful lives of three to eight years, depending on the nature of the assets, are based on historical experience and future expectations. No depreciation is recorded with respect to property, plant and equipment under construction or awaiting qualification or technical completion; however, an impairment analysis is performed annually. We routinely review the remaining estimated lives of the equipment and machinery to determine if such lives should be adjusted due to the likelihood of technological obsolescence arising from changes in production techniques or in market demand for the use of its equipment and machinery. However, due to the nature of the testing operations, which may include sudden changes in demand in the end markets, and due to the fact that certain equipment is dedicated to specific customers, we may not be able to accurately anticipate declines in the utility of our machinery and equipment.

We recognized an additional $1.4 million depreciation expense as a result of the change in estimated useful lives for certain equipment associated with packages with very low or negative margin and whose estimated useful life could be lower than the original remaining life of the assets. In addition, we reduced the estimated useful life of the equipment related to our business with Fairchild Korea as this business was terminated on June 30, 2005.

Valuation and Impairment

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We determine whether or not the assets are recoverable based on estimated undiscounted future cash flows to be generated by the assets. We undertook a review in 2004 to identify equipment with low utilization rates, packages with low margins, and technologies that were not part of our core competency, as candidates for impairment, given the existence of events or changes in circumstances that indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment loss to be recognized, if any, is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We estimated the fair value of such assets using the present value method. The cash flow was discounted at a nominal rate of 15% on a pre-tax basis. The nominal discount rate was determined using the rate of our most recent long-term financing activity, the exchangeable senior subordinated note, which carried an interest rate of 10% plus 2.5% in withholding taxes payable by us to Philippine tax authorities plus 2.5% risk premium. Based on discussions with Philippine financial institutions, financing of this nature typically carry interest rates of 10 to 15%, depending on the financial condition of the borrowing company. The undiscounted future net cash flows and fair value of assets are subject to change depending on the actual sales, margins, and salvage value of the impaired assets that may be realized by us in the future. In 2004, we decided to sell our third facility in the Philippines, and entered into a contract to sell the property on January 28, 2005. Based on the review of long-lived assets, we took an asset impairment charge of $1.3 million in 2004 against the carrying cost of the third facility.

Revenue Recognition

The Company has three primary revenue streams related to the assembly and test of semiconductor products used for power conversion or power management applications: assembly-only, testing-only, and assembly and testing. Revenue from assembly only and test-only services is recognized upon the completion of the related service which coincides with the shipment of packaged semiconductors to the customers. For arrangements involving both assembly and test services, revenue is recognized upon the completion of test services which coincides with the shipment of the packaged semiconductors to the customers. We do not take ownership of customer-supplied semiconductor raw materials. Title and risk of loss remain with the customers for these materials at all times. Accordingly, the cost of the customer-supplied materials is not included in the consolidated financial statements. Such policies are consistent with the provisions of the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in Financial Statements,” which supersedes SAB No. 101. SAB No. 104 requires that the following four criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.

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Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts at a level that management considers adequate to provide for potential uncollectibility of receivables. Management, on the basis of factors that affect the collectibility of the accounts, evaluates the level of this allowance. A review of the age and status of the receivables, designed to identify accounts to be provided with allowance, is made by management on a continuing basis. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt expenses may be incurred.

Inventory Valuation

We write down inventory for estimated obsolescence or non-moving inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions less costs to dispose. If actual market conditions are less favorable than those projected by management, additional inventory allowances may be required.

Valuation Allowance for Deferred Tax Assets

We provide valuation allowance on deferred tax assets equivalent to an amount we believe is realizable in the future. While we have considered future taxable income, income tax holiday incentives and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, decrease in the valuation allowance on deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, increase to the valuation allowance on deferred tax asset would be charged to income in the period such determination was made.

In May 2004, the area where the facilities of PSi Technologies are located was declared as an export zone. All of its operations which have previously been entitled to tax holiday incentives or taxed at 32% based on net income shall be taxed at 5% of gross income in lieu of all taxes. Gross income is defined as net sales less cost of sales. Consequently, certain deferred tax benefits shall no longer be deductible items of PSi Technologies. The deferred tax assets have been reduced to the extent that such will not be of benefit to PSi Technologies.

Contingencies

We are subject to certain legal proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgment or outcome related to these matters, as well as potential ranges of probable losses. Our determination of the amount of reserves required, if any, for these contingencies is based on a careful analysis of each individual issue, often with the assistance of outside legal counsel. We record provisions in our consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated.

A. Results of Operations

The following table presents selected operating data as a percentage of revenue for the periods indicated:

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Year to Year Comparison for Years Ended 2001 to 2004

Revenues and Gross Margins