<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 20-F

     (Mark One)

[ ]        REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of
                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2003

                                       OR

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

                        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)

                               Electronics Avenue,
                             FTI Industrial Complex,
                     Taguig, Metro Manila 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, 2003, the close of the
                      period covered by the annual report:

Common shares of nominal value PHP 1 2/3 per share....................13,289,525

     Indicate by check mark whether the registrant (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
    1934 during the preceding 12 months (or for such shorter period that the
   registrant was required to file such reports), and (2) has been subject to
                 such filing requirements for the past 90 days.

                 Yes [X]                                No [ ]

      Indicate by check mark which financial statement item the registrant
                             has elected to follow.

              Item 17 [ ]                            Item 18 [X]

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<PAGE>

TABLE OF CONTENTS
                                                                            Page
                                                                            ----
PART I     ....................................................................3

ITEM 1     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS...............3

ITEM 2     OFFER STATISTICS AND EXPECTED TIMETABLE.............................3

ITEM 3     KEY INFORMATION.....................................................3

ITEM 4     INFORMATION ON THE COMPANY.........................................18

ITEM 5     OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................35

ITEM 6     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................56

ITEM 7     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................63

ITEM 8     FINANCIAL INFORMATION..............................................67

ITEM 9     THE OFFER AND LISTING..............................................69

ITEM 10    ADDITIONAL INFORMATION.............................................71

ITEM 11    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........83

ITEM 12    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............83

PART II    ...................................................................84

ITEM 13    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................84

ITEM 14    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
           OF PROCEEDS........................................................84

ITEM 15    CONTROLS AND PROCEDURES............................................84

ITEM 16    RESERVED...........................................................84

ITEM 16A   AUDIT COMMITTEE FINANCIAL EXPERT...................................84

ITEM 16B   CODE OF ETHICS.....................................................84

ITEM 16C   PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................84

ITEM 16D   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.........85

ITEM 16E   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
           AFFILIATED PURCHASERS..............................................85

PART III   ...................................................................86

ITEM 17    CONSOLIDATED FINANCIAL STATEMENTS..................................86

ITEM 18    CONSOLIDATED FINANCIAL STATEMENTS..................................86

INDEX TO FINANCIAL STATEMENTS.................................................86

ITEM 19    EXHIBITS...........................................................87

SIGNATURES....................................................................88

                                       -i-

<PAGE>

          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.

                                      -ii-

<PAGE>

PART I

          Statements contained in this annual report on Form 20-F 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 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:

          .    the state of the semiconductor industry;

          .    demand for end-use applications;

          .    demand for end-use products such as communications equipment and
               personal computers;

          .    demand for the outsourcing of assembly and test services;

          .    trends in customer order, rescheduling and cancellation patterns;

          .    our product mix;

          .    our capacity utilization;

          .    our competition;

          .    pricing pressures;

          .    technological innovation; and

          .    acquisition and installation of new equipment.

          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.

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 and
summary consolidated balance sheet data in the table below as of and for the
years ended December 31, 1999, 2000, 2001, 2002 and 2003, have been derived from
our audited consolidated financial statements. The summary consolidated
statements of operations data and summary consolidated balance sheet data are
qualified in their entirety by reference to our audited consolidated financial
statements and related notes. Our audited consolidated financial statements are
reported in U.S. dollars and have been prepared and presented in conformity with
U.S. GAAP.

                                       3

<PAGE>

<TABLE>
<CAPTION>
                                                            Years ended December 31,
                                                 ----------------------------------------------
                                                  1999       2000      2001     2002      2003
                                                 -------   -------   -------   ------   -------
                                                     (Dollar amounts and number of shares in
                                                        thousands, except per share data)
<S>                                              <C>       <C>       <C>       <C>      <C>
Consolidated Statements of Operations Data:

Revenues......................................    50,333    73,671    53,512   70,537    76,933
Cost of sales.................................    39,836    59,382    51,824   68,535    75,173
                                                 -------   -------   -------   ------   -------
Gross profit..................................    10,497    14,289     1,688    2,002     1,760
                                                 -------   -------   -------   ------   -------
General and administrative....................     3,302     5,178     5,664    6,226     7,086
Special charges...............................        --        --        --       --    12,896
Sales and marketing...........................       869       850       965    1,147       762
Research and development......................        --       948       691    1,253       723
                                                 -------   -------   -------   ------   -------
Income (loss) from operations.................     6,326     7,313    (5,632)  (6,624)  (19,707)
                                                 -------   -------   -------   ------   -------
Interest and bank charges - net...............      (960)      681       101     (400)   (1,215)
Foreign exchange gains (losses) - net.........      (679)      739       797       29      (243)
Early retirement cost ........................        --        --       680       --        --
Gain (loss) on disposal of fixed assets.......        --        --        --       39        (1)
Management fee................................      (194)       --        --       --        --
Equity in net losses of an investee...........        (4)       (3)       --       --        --
                                                 -------   -------   -------   ------   -------
Income (loss) before income tax and
   minority  Interest.........................     4,489     8,730    (5,416)  (6,956)  (21,166)
                                                 -------   -------   -------   ------   -------
Provision for (benefit from) income tax
   Current....................................       607       694        27       --         6
   Deferred...................................       625        54       (30)      10      (179)
                                                 -------   -------   -------   ------   -------
Income (loss) before minority interest........     3,257     7,982    (5,413)  (6,966)  (20,993)
Minority interest.............................        14       120       (95)      48       (11)
                                                 -------   -------   -------   ------   -------

Net income (loss).............................     3,271     8,102    (5,508)  (6,918)  (21,004)
                                                 =======   =======   =======   ======   =======
Weighted average number of common
   shares outstanding (1).....................     8,664    12,451    13,290   13,290    13,290
                                                 =======   =======   =======   ======   =======
Operating income from continuing
   operations per common share................      0.73      0.59     (0.42)   (0.50)    (1.48)
                                                 =======   =======   =======   ======   =======
Basic earnings per common share (2)...........      0.38      0.65     (0.41)   (0.52)    (1.58)
                                                 =======   =======   =======   ======   =======
Other Financial Data:
   EBITDA (3).................................    10,779    16,521     6,423    7,331     8,434
   Depreciation...............................     5,316     8,352    12,035   13,839    15,500
   Capital expenditures.......................    18,764    47,475    21,807   18,354    10,177(a)
   Cash flows from operating activities.......    11,340    18,292     4,444    1,638       983
   Cash flows used in investing activities....   (18,778)  (48,601)  (19,710)  (5,981)   (5,697)
   Cash flows from financing activities.......     7,072    42,075     5,066    4,252     3,950
</TABLE>

(a)  including cost of property and equipment amounting to $4,008 in 2003,
     $10,894 in 2002, and $8,312 in 2001 acquired on account through suppliers'
     credits and equipment acquired from a customer.

<TABLE>
<CAPTION>
                                                                As of December 31,
                                                 -----------------------------------------------
                                                   1999      2000      2001      2002      2003
                                                 -------   -------   -------   -------   -------
                                                              (thousands of dollars)
<S>                                              <C>       <C>       <C>       <C>       <C>
Consolidated Balance Sheet Data:
   Cash and cash equivalents..................       226    11,992     1,792     1,701       936
   Working capital (4)........................   (10,147)   13,423      (362)  (12,669)  (12,110)
   Total assets...............................    49,388   106,248   105,165   113,005    89,592
   Long-term debt (5).........................     4,892        --     3,373     2,824     3,433
   Total stockholders' equity.................    19,763    85,653    80,237    73,477    55,597
</TABLE>

----------
All non-GAAP information in this annual report is reconciled in the tables
below.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                   1999     2000     2001      2002      2003
----------------------------------------------------------------------------------------------
                                                             (thousands of dollars)
<S>                                               <C>      <C>      <C>       <C>      <C>
Net income (loss)                                  3,271    8,102   (5,508)   (6,918)  (21,004)
Add: Interest - net                                  960     (681)    (101)      400     1,215
     Provision for (benefit from)
       income tax                                  1,232      748       (3)       10      (173)
     Depreciation                                  5,316    8,352   12,035    13,839    15,500
     Special charges                                  --       --       --        --    12,896
----------------------------------------------------------------------------------------------
EBITDA                                            10,779   16,521    6,423     7,331     8,434
==============================================================================================
</TABLE>

                                        4

<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                   1999     2000     2001      2002      2003
----------------------------------------------------------------------------------------------
<S>                                              <C>       <C>      <C>      <C>       <C>
Current assets                                    17,210   33,896   21,661    26,575    20,039
Current liabilities                               27,357   20,473   22,023    39,244    32,148
----------------------------------------------------------------------------------------------
Working capital                                  (10,147)  13,423     (362)  (12,669)  (12,110)
==============================================================================================
</TABLE>

(1)  Based on the number of common shares outstanding at the beginning of the
     period, adjusted by the number of common shares repurchased or issued
     during the period and after giving retroactive effect to the reverse stock
     split effected on February 14, 2000, multiplied by a time weighting factor
     equal to the number of days that the specific shares are outstanding as a
     proportion of the total number of days in the period.

(2)  Basic and diluted earnings per share amounts are the same because the
     effect of the assumed exercise of all outstanding stock options and
     conversion of the exchangeable note is anti-dilutive.

(3)  EBITDA is defined as income before income tax, interest, and non-cash items
     like depreciation, amortization and special charges. We present EBITDA
     because we believe EBITDA is a widely accepted indicator of an entity's
     ability to incur and service debt. EBITDA should not be considered by an
     investor as an alternative to net income or income from operations, as an
     indicator of our operating performance or other combined operations or cash
     flow data prepared in conformity with U.S. GAAP, or as an alternative to
     cash flows as a measure of liquidity. Our computation of EBITDA may differ
     from similarly titled computations of other companies.

(4)  Total current assets minus total current liabilities.

(5)  Including current portions of long-term debt, obligations under capital
     lease and other long-term liabilities amounting to $2,864, $0, $684, $2,708
     and $1,766 in 1999, 2000, 2001, 2002, and 2003 respectively.

B.   Capitalization and Indebtedness

The following table summarizes the Company's capital stock and additional
paid-in-capital outstanding as of December 31, 2001, 2002, 2003:

---------------------------------------------------------------------------
                                                 2001      2002       2003
---------------------------------------------------------------------------
                                                  (thousands of dollars)

Capital Stock                                  $   591   $   591    $   591
Additional Paid-in-Capital                     $67,887   $68,085    $71,208
---------------------------------------------------------------------------
Capital Stock and Additional
Paid-in-Capital                                $68,478   $68,676    $71,799
---------------------------------------------------------------------------

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,
before you decide to buy our ADSs. If any of the following risks actually occur,
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 strategy. 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.

          The Company may not have sufficient cash flow from operations or
available lines of credit to pay such liabilities.

                                        5

<PAGE>

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:

               .    Requiring us to dedicate a substantial portion of any cash
                    flows from operations to the payment of interest and
                    principal due to such obligations, which may reduce funds
                    available for other business purposes;

               .    Requiring us to issue additional shares of our common stock
                    or other securities, which could result in a reduction in
                    the percentage of outstanding shares you own in our company;

               .    Placing us at a competitive disadvantage compared to our
                    competitors that have less debt;

               .    Forcing us to sell assets or terminate or suspend some of
                    our planned expansion projects; and

               .    Limiting our ability to borrow additional funds because of
                    financial and other restrictive covenants governing our
                    debt.

          In July 2003, we issued a $4.0 million exchangeable senior
subordinated note to Merrill Lynch Global Emerging Markets Partners, L.P. due in
2008 which bears interest at a rate of 10% per annum. The exchangeable note was
issued to pay for certain liabilities related to our capital expenditures
incurred over the past year which were due by the end of the second and third
quarters of 2003 and were not payable out of current cash flow from
operations or available lines of credit. Over the course of the first and second
quarters, the Company pursued several possible avenues of financing but no such
alternative could be put in place in time to pay for the liabilities. See "Item
7 - Major Shareholders and Related Party Transactions - The Merrill Lynch
Exchangeable Note."

          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 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 is highly cyclical and, at various times, has
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 2003. 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 of
1.3% and expanded by 20.3% in 2003. Nonetheless, a future downturn in the
semiconductor industry could seriously harm our company. In particular, the
combination of a sharp inventory correction in end markets, deterioration in
economic performance, particularly in the United States, and increase in under
utilized capacity in 2004 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

                                        6

<PAGE>

revenue. In addition, the recent economic slowdown in the technology sector has
caused a decrease in demand for electronic devices and semiconductors and, in
turn, our services. These trends could have a negative impact on our business,
operating results and financial condition.

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:

          .    reduce our raw material costs;

          .    improve production efficiency;

          .    increase the number of units assembled and tested; and

          .    shift to higher margin test and assembly services or products.

          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. 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:

          .    the in-house assembly and testing departments of major integrated
               device manufacturers;

          .    other independent companies such as Alphatec Semiconductor
               Packaging Ltd., ChipPAC Incorporated, Carsem, Cirtek Electronics
               Corp., PT Omedata Electronics, Fastech Microassembly & Test,
               Inc., GEM Services and Team Pacific, Inc. that specialize in
               providing assembly and test services for power semiconductors;
               and
          .    a number of large companies, such as Advanced Semiconductor
               Engineering, Amkor Technology, Inc., ASE Test Limited, ASAT,
               Ltd., ChipPAC Incorporated, Siliconware Precision Industries Co.,
               Ltd., ST Assembly and Test Services Pte., Ltd., and Shinko
               Electric Industries Co. Ltd., that focus primarily on non-power
               semiconductor assembly and test services.

          These companies may be able to compete more aggressively over a longer
period of time than we can. 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."

                                       7

<PAGE>

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 56% in 2001, 76% in
2002, and 81% in 2003 of total revenue. Our largest customer accounted for
approximately 17% in 2001, 22% in 2002, and 34% in 2003 of total revenue.
Infineon Technologies continued to be our largest customer in 2002 and 2003.
This is attributable to Infineon's increased practice of outsourcing their power
semiconductor assembly and test requirements to our company. 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.

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

          In 2003, we acquired property, plant and equipment totaling $10.2
million (including $4.0 million acquired through supplier credits) for our
Taguig and Laguna manufacturing facilities, to accommodate the growth of our
business. If we experience delays in fully utilizing our capacity at these
facilities, we may be unable to meet our production goals, revenue objectives
and profitability targets. We cannot assure you that we will succeed in
achieving full utilization of our facilities due to rapid technological change,
evolving industry standards, intense competition, fluctuations in end-user
demand, industry overcapacity, or a future downturn in the semiconductor
industry. Our inability to expand capacity could reduce our ability to meet
customer needs and 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:

          .    our ability to acquire and install new equipment in anticipation
               of future business;
          .    overall industry conditions;
          .    our level of customer orders;
          .    our operating efficiencies;
          .    mechanical failures;
          .    a disruption of operations due to the expansion of operations,
               introduction of new packages or relocation of equipment;
          .    a disruption in supply of utilities such as electricity, water,
               gas, among others;
          .    a disruption in the supply of raw materials;
          .    fire or other natural disasters;
          .    disease or epidemics; and
          .    civil unrest or terrorist events in the Philippines, China or
               other parts of the world.

          We cannot assure you that we will be able to maintain a high capacity
utilization rate. Our inability to maintain capacity utilization rates could
increase our costs relative to the revenue that we generate.

                                       8

<PAGE>

We depend on a limited number of suppliers to provide us with sufficient
quantities of raw materials on a timely basis 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 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 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. 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 certain 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 and silver and other metals
used in our raw materials and manufacturing process. In 2003, the Commodity
Research Bureau's Spot Index (an index that tracks the prices of certain
commodities) increased by 16.1%. Aluminum prices were higher by 18.4%, copper
prices were higher by 51.1%, and nickel prices were higher by 134.5% in 2003 as
compared to 2002.

          The Company attempts to negotiate competitive prices for raw materials
with our suppliers, which helps reduce the impact of any increases in the price
of raw materials linked to commodities. 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. 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 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 our supply of wafers may reduce our ability
to fill our customers' orders and reduce our revenue.

          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,
inferior manufacturing or design flaws. Moreover, disputes as to the
origin of defects and responsibility for defective wafers could strain our
relationships with existing customers. An insufficient supply of wafers,
defective wafers and any disputes relating thereto could reduce our ability to
fulfill our customers' orders and decrease our revenue.

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.

                                       9

<PAGE>

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. 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. Our
failure to increase our revenue 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. 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

                                       10

<PAGE>

trade secrets and other proprietary information will be adequate to protect our
or our customers' proprietary technology.

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 was made against us, we may be required
to:

          .    stop using critical assembly and test processes;
          .    cease manufacturing, using, importing or selling infringing
               packages;
          .    develop non-infringing technologies;
          .    acquire and pay for licenses to use the infringed technology; or
          .    pay substantial damages.

          Although 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, 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. 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.

                                       11

<PAGE>

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

          Our ability to compete successfully will depend on our ability to keep
labor costs low. The Company provides compensation, benefits, and a working
environment in accordance with standards mandated by Philippine law, labor
regulations and codes, which has resulted in a union free workplace. Any
initiative by the workforce to unionize may result in lost productivity and
higher labor costs that could materially harm our business, financial condition
and results of operations.

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:

          .    the continuing depreciation in the value of the Philippine peso
               relative to the U.S. dollar and other foreign currencies;
          .    increased unemployment;
          .    a higher than projected national government budget deficit; and
          .    terrorist events and kidnappings.

          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 $1.6 million in
1998, $1.0 million in 1999, $0.4 million in 2002 and $1.2 million in 2003, 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 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. See Item 7 "Major Shareholders and Related Party Transactions - The
Merrill Lynch Exchangeable Note."

          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.

                                       12

<PAGE>

          We generate a significant portion of our revenues from international
markets, including customers in Southeast Asia and Europe. In addition, all of
the facilities currently used to provide our packaging services are located in
the Philippines. 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.

The Company recently opened a new assembly and test facility in Chengdu, Sichuan
Province, People's Republic of China, and there are numerous risks related to
operating in China.

          We expect that our new Chengdu facility 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:

          .    economic and political uncertainties in China;
          .    changes in, and the arbitrary enforcement of, commercial laws,
               currency controls, import tariffs and duties, customs regulations
               and taxation laws in China;
          .    local infrastructure problems, such as electrical power
               interruptions;
          .    quality problems arising from the start up of new manufacturing
               processes by operators who lack experience with our equipment;
          .    transportation difficulties that may be encountered in receiving
               supplies and/or in shipping finished products; and
          .    an inability to attract and retain sufficient and qualified
               engineering and management talent and resources.

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

          Pre-operating expenses attributable to our China venture start-up
activities will result 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. If the expenses attributable to start-up activities are
higher than anticipated or we experience delays or impediments to the start of
manufacturing operations, or we fail to fully utilize these facilities and
equipment, we may experience a significant increase in operating costs, and may
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 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, start-up activities in China, and capital expenditure 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 and Philippine pesos 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, 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.

                                       13

<PAGE>

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

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

          .    natural disasters such as earthquakes and typhoons;
          .    disease and epidemics;
          .    industrial accidents;
          .    utilities outages, including power, water and industrial gases,
               among others;
          .    equipment failure;
          .    industrial strikes;
          .    terrorist events;
          .    disruptions to our transportation network; or
          .    political assembly/mass actions

could 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, although we experienced considerable production delays
and loss of revenue in 1998 when a supplier failed to deliver equipment
necessary for us to complete customer orders. However, such events may occur in
the future which could have a negative impact on our business. Additionally,
similar disasters and disruptive events could negatively affect our new facility
in Chengdu, Sichuan Province, PRC.

          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. 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 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. Political and economic instability in the Philippines and some regions
of the world may also result and could 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 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 2003 and the first half of 2004, there have been no reports of SARS
in the Philippines.

                                       14

<PAGE>

          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 re-occurrence of
SARS in the Philippines, China, within the region or other parts of the world,
or any other types of epidemics.

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. 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.

          We enjoy fiscal incentives which include income tax holiday for the
manufacture of voltage regulators as well as for test services related to
various semiconductor devices. These incentives extend for four years commencing
in June 1999 and August 1999, respectively. The income tax holiday (ITH)
incentives we received in 2000 reduced our income tax and made available to us
an additional $2,159,788 that we would have paid to the Philippine tax
authorities. The reported net losses would have been higher by $920,626 ($0.07
per share) for the year ended December 31, 2002 and $602,274 ($0.05 per share)
for the year ended December 31, 2001, had we not been entitled to ITH
incentives. No income tax holiday incentives were availed for the year ended
December 31, 2003. 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 RA No. 8748. If we lose our fiscal incentives, we will be required to use
funds earmarked for other business purposes to pay income 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. Acting together, 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 include,
among other things:

                                       15

<PAGE>

          .    the election of directors;
          .    our merger or consolidation with any other entity;
          .    any sale of all or substantially all of our assets; and
          .    the timing and payment of dividends if any.

          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 their 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.

          Under the terms of the exchangeable note issued to Merrill Lynch in
July 2003, 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 Party Transactions - The
Merrill Lynch Exchangeable Note."

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. 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:

          .    quarterly variations in our operating results and our lack of
               profitability;
          .    the amount of our indebtedness;
          .    our ability to access additional financing on economical terms to
               fund capital expenditures;
          .    general market conditions; and
          .    general economic factors unrelated to our performance.

          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 common shares represented by our ADSs. The
4,025,000 common shares represented by 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

                                       16

<PAGE>

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."

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:

          .    the notice of the meeting;
          .    the voting instruction forms; and
          .    a statement explaining how instructions can be given by ADS
               holders.

          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.

                                       17

<PAGE>

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
Electronics Avenue, FTI Complex, Taguig, Metro Manila 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 2003 and the first
half of 2004:

          As part of the Company's ongoing expansion strategy into China:

          .    We entered into two separate non-binding Memoranda of
               Understanding (MOUs) on March 15, 2003 and September 15, 2003
               with Jilin Sino-Microelectronics Co. Ltd. and Tak Cheong
               Electronics (Holdings) Co. Ltd., respectively. These
               relationships in each case, were terminated due to the parties'
               inability to enter into a definitive joint venture agreement.
               After these two attempts, we decided to enter China without a
               joint venture partner. See "Item 3 Key Information - Risk
               Factors"
          .    On December 7, 2003, we signed an Investment Cooperation
               Agreement with the Chengdu Hi-Tech Zone (CDHT) in the People's
               Republic of China, a key step in the establishment of a 100%
               PSi-owned assembly and test facility in the Sichuan Chengdu
               Export Processing Zone, Chengdu City, Sichuan Province, People's
               Republic of China. The Investment Cooperation Agreement specifies
               the location and government support contracted by and provided to
               PSi by the Chengdu Hi-Tech Zone. On January 19, 2004, we signed
               the formal lease agreement with the Sichuan Chengdu Export
               Processing Zone Investment Development Co. Ltd., a corporation of
               the CDHT. See "Item 3 Key Information - Risk Factors".
          .    On January 14, 2004, we signed a long-term supply agreement with
               Philips Semiconductors to provide outsourced power semiconductor
               assembly and test services through our facility in Chengdu,
               Sichuan Province, People's Republic of China. The products to be
               packaged and tested are bipolar power products with consumer
               electronics, white goods, lighting, power supplies and industrial
               end applications. As part of the agreement, Philips will
               progressively transfer its production of bipolar products,
               currently located in Philips' assembly and test facility in
               Cabuyao, Laguna Province, Philippines, to PSi in China. See "Item
               3 Key Information - Risk Factors".

          Other developments not related to China were:

          .    On April 21, 2003, we were granted a new Environmental Clearance
               Certificate (ECC) by the Department of Environment and Natural
               Resources' Environmental Management Bureau (a government agency),
               after having filed an application on January 29, 2003. The new
               ECC supersedes the one granted in March 1989, and expires when
               the Company stops operating or closes its Philippine
               manufacturing facilities.
          .    On July 3, 2003, we issued a $4.0 million exchangeable senior
               subordinated note to Merrill Lynch. The proceeds of the
               exchangeable note were used to pay liabilities related to capital
               expenditures due in the second and third quarters of 2003. See
               "Item 7 - Major Shareholder and Related Party Transactions - The
               Merrill Lynch Exchangeable Note."
          .    On August 27, 2003, we renewed and increased our trade receivable
               and financing facility from $5.0 million to $10.0 million from
               the Singapore Branch of Raiffeisen Zentralbank Osterreich AG
               (RZB-Austria). This will mature by December 31, 2004 with renewal
               options based on mutual agreement of both parties. The total loan
               balance under this credit facility was $6.6 million as of
               December 31, 2003 and $5.0 million as of December 31, 2002.
          .    In the third quarter of 2003 and following a 21.7% sequential
               decline in third quarter revenues, we reviewed and rationalized
               our product and equipment lines in our two facilities in the
               Philippines in light of capacity utilization and demand from our
               customers, which resulted in the incurrence of special charges
               amounting to $12.9 million. These charges consist of provisions
               for impairment losses of

                                       18

<PAGE>

               property and equipment of $11.4 million, provision for inventory
               losses of $0.9 million, write-off of inventories of $0.5 million,
               and write-off of deposit of $0.1 million.
          .    On December 21, 2003, we successfully negotiated with one of our
               customers for deferred payment of a $2.8 million interest free
               equipment loan, which was due originally on December 14, 2003.
               Under the agreement, the Company will pay down the liability on a
               monthly basis at an amount dependent on the production volume of
               that customer, but with a final balloon payment due in June 2005.
          .    On March 18, 2004, James Knapp was appointed Vice President of
               Technology, Package Development and Central Engineering. Mr.
               Knapp is an accomplished technologist with over 30 years and 33
               patents (with 11 pending) of development engineering, package
               development and manufacturing management experience in the
               semiconductor industry at companies such as ON Semiconductor and
               Motorola. Among other initiatives, Mr. Knapp will be leading the
               PowerQFN(TM) Packaging Platform development effort at PSi.
          .    On May 17, 2004, the Philippine Economic Zone Authority
               registered PSi Technologies, Inc., our principal operating
               subsidiary operating in PSi's primary facility in Taguig, as an
               Ecozone Export Enterprise to engage in the manufacture of
               semiconductor devices at the Food Terminal Incorporated Special
               Economic Zone. Under the terms of registration, PSi is entitled
               to incentives granted to non-pioneer projects under Republic Act
               No. 7916, subject to the terms and conditions specified under the
               approval.

          Our principal capital expenditures for fiscal years 2001, 2002 and
2003 consisted mainly of the construction of new facilities and the purchase of
semiconductor equipment. Our capital expenditures amounted to $21.8 million in
2001, $18.3 million in 2002, and $10.2 million in 2003. In 2000, our capital
expenditures were incurred mainly for the acquisition of additional assembly and
testing equipment, the purchase of computer software and the construction of two
facilities in the Philippines. In 2001, our capital expenditures were incurred
mainly to complete certain assembly and test equipment lines that we acquired in
2000. In 2002 and 2003, our capital expenditures were incurred mainly to augment
and build capability in certain high volume product lines for key customers.

          In 2001, we financed our capital expenditures with cash generated from
operations, bank credit facilities, and a long-term equipment acquisition
arrangement with one of our customers. In 2002, we financed our capital
expenditures with cash generated from operations, bank credit facilities, and
short-term credits from suppliers. In 2003, we financed our capital expenditures
with the $4.0 million exchangeable senior subordinated note to Merrill Lynch,
bank credit facilities, and cash generated from operations. A more detailed
discussion of the use of proceeds from our offerings and credit facilities can
be found under "Item 5--Operating and Financial Review and Prospects--Liquidity
and Capital Resources."

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.

                                       19

<PAGE>

          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.

                                    [GRAPHIC]

          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:

          .    Parametric Test. Capable of testing all known discrete parameters
               (diodes, thyristors, bipolar transistors, MOSFETS, IGBTs) and
               analog voltage regulators;

          .    Avalanche Testing or Unclamped Inductive Load Switching Testing
               (UIL/ISB). Tests the capability of the device to handle high
               voltage applications such as motors and power supplies;

          .    Thermal Resistance Test. Tests the devices' thermal response to
               detect potential assembly problems;

          .    Reverse Recovery Time Testing (TRR). Measures the time it takes
               for current to go to zero when switching the flow of electricity
               from forward to reverse. This test measures the time it takes for
               the device to completely turn off;

          .    Q+ Testing. A second DC test;

          .    Integrated Serial Testing. Incorporates various tests into one
               pass or insertion;

          .    Package Isolation Testing. Tests the ability of the package to
               withstand electricity flow from the electrical leads to the
               mounting surface; and

                                       20

<PAGE>

          .    Embossed Carrier Taping. Process of inserting tested units into
               each pocket of the embossed carrier tape for automatic placement
               or mounting into the printed circuit board.

          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/Siliconix 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 94% of revenue in 2003. 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:

                                            Years ended December 31
                                          1999   2000    2001   2002   2003
                                    ---------------------------------------
Power Semiconductors                       74%    84%     83%    89%    94%
Non-power Semiconductors                   26%    16%     17%    11%     6%
                                    =======================================
Total                                     100%   100%    100%   100%   100%

          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,

                                       21


<PAGE>

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.

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

          .    Field Effect Transistors. Depletion type transistor used as an
               input device for low and medium power applications.

          .    Diodes. Single or dual diodes, Schottky or ultra fast rectifiers
               used in power supplies.

          .    Power MOSFETs. Switching and control devices that combine fast
               switching, versatile design and low on-resistance in a cost
               effective design. They serve a large percentage of the need for
               power control devices. We have the capability to build power
               MOSFETs in a variety of packages.

          .    Triacs, silicon controlled rectifiers and thyristors. Commonly
               used as triggering and control switching devices. They are an
               essential element in the use and control of electrical motor
               speed in appliances, heaters and motors.

          .    Voltage regulators. Often used as a voltage protection and power
               control device in electronic systems. We have package offerings
               for a variety of voltage regulators, including DC/DC converters,
               AC/AC converters and inverters.

          .    Transient suppressors. Control devices used to provide voltage
               surge protection in non-power semiconductors. This device will
               safely protect sensitive equipment from sudden or abrupt changes
               in voltage supply that can damage the equipment or unit.

          .    High power bipolar transistors. Medium speed switches used for
               power supplies of a wide variety of electronic products ranging
               from computer peripherals to industrial equipment.

          .    Insulated gate bipolar transistors, or IGBTs with built-in
               diodes. Advanced power control switches similar to high power
               bipolar transistors, but with an enhanced power saving feature
               designed so that the control power necessary to switch this
               device is considerably lower than that for a comparable bipolar
               transistor. We can build IGBTs in a number of different packages.

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

<TABLE>
<CAPTION>
Package Type and Lead Count    Product Application                       End Market
----------------------------   ---------------------------------------   -------------------------------------
<S>                            <C>                                       <C>
SOT-23                         voltage regulator                         home appliances, office/industrial
(3 leads)                                                                equipment, personal computers,
                                                                         communications equipment,

SOT-223                        voltage regulator, bipolar, diode         home appliances, office/industrial
(3 leads)                                                                equipment, personal computers,
                                                                         communications equipment,

SOT-89                         voltage regulator                         home appliances, office/industrial
(3 leads)                                                                equipment, personal computers,
                                                                         communications equipment

TO-126/SOT-32                  thyristor, triacs                         home appliances
(3 leads)

TO-92/DO-92                    transient suppressor,                     office/communications equipment
(3 leads/2 leads)              voltage regulator

TO-251/TO-252                  MOSFET, high power bipolar,               home appliances, personal
(IPAK/DPAK)                    voltage regulator, rectifier/diode,       computers, lighting, automotive
(3 leads/2 and 5 leads)        triacs

SOT-82                         thyristor, triacs                         home appliances
(3 leads)
</TABLE>

                                       22

<PAGE>

<TABLE>
<S>                            <C>                                       <C>
PowerFlex(TM)                  voltage regulator                         home appliances, office/industrial
(2, 3, 5,7 leads)                                                       equipment, personal computers,
                                                                         communications equipment

TO-220/DO-220                  voltage regulator, MOSFET,                automotive systems, home appliances,
(2, 3, 5, 6, 7 leads)          thyristor, triacs, rectifier, diode,      office/industrial personal computers,
                               high power bipolar transistor, power TC   consumer electronics

TO-263                         MOSFET, voltage regulator, high           home appliances, personal
(2, 3, 5 leads)                power bipolar                             computers

TO-220 full pack or isolated   MOSFET, IGBT                              home appliances, personal
(3 leads/2 leads)                                                        computers, automotive

SOT-93                         thyristor                                 home appliances
(3 leads)

TO-247                         MOSFET, IGBT, diode                       home appliances, personal
(2 and 3 leads)                                                          computers, automotive

TO-264                         MOSFET, diode                             home appliances, personal
(2 and 3 leads)                                                          computers, lighting, automotive

SOT-227                        MOSFET, diode                             automotive systems, industrial
                                                                         equipment
</TABLE>

          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:

<TABLE>
<CAPTION>
Package Type and Lead Count         Product Application                 End Market
---------------------------------   ---------------------------------   --------------------------------
<S>                                 <C>                                 <C>
PDIP                                digital signal processor, switch,   automotive, industrial,
(8, 14, 16, 24, 48, 54, 64 leads)   amplifier                           communications

SOIC                                amplifier                           industrial
(8 leads)

PLCC                                digital signal processor            communications
(28, 44 leads)

Flatpacks                           diode array                         military/industrial
(10, 14, 16 leads)

Metal cans                          field effect transistor, diode,     military/commercial, automotive,
(2, 3, 4, 6, 7, 8, 10 leads)        amplifier                           communications

Ceramics                            amplifier                           military/industrial
(8, 14, 16, 18, 20 leads)
</TABLE>

          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:

          .    Aluminum wire to copper bonding;

          .    Dual and multi-die packaging;

          .    High power/thermal packages;

          .    Leadless power packages;

          .    Environmentally friendly assembly materials and processes;

          .    Clip bond/attach technology;

          .    Auto-molding; and

          .    Cost effective materials.

          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.

                                       23

<PAGE>

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 and expanded by 18.3% to
$166.4 billion in 2003, but still below 2000 levels, based on SIA data. Although
the semiconductor industry is highly cyclical, it has grown by a compounded
annual growth rate of 15% 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, 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 $15.9 billion in 2002 to $17.8 billion in 2003, a growth of
11.7%. During the downturn in 2001, power semiconductor billings 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.

          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.

                                       24

<PAGE>

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.

                                   [GRAPHIC]

          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.

The Trend Toward Outsourcing

          In the past, most semiconductors were produced internally by
independent device manufacturers (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.

                                       25

<PAGE>

          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.

          A number of major power semiconductor companies, including Infineon
Technologies, Philips Semiconductor, ON Semiconductor, and Texas Instruments,
have indicated in verbal discussions with us their intention to outsource an
increasing percentage of their semiconductor manufacturing needs to independent
manufacturing service providers. For example, 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, People's Republic of
China (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 2003, the Commodity Research Bureau's Spot Index (an index
that tracks the prices of certain commodities) increased by 16.1%. Aluminum
prices were higher by 18.4%, copper prices were higher by 51.1%, and nickel
prices were higher by 134.5% in 2003 as compared to 2002. 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.

          We are now under a consignment agreement with a major European
leadframe supplier that commenced in May 2002. Under this agreement, we keep
between a 3 to 5 week stock level in our warehouse under the ownership of the
supplier and supplier invoices us as materials are withdrawn from the warehouse.
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. We have also increased by almost 50% our in-house Tool & Die Shop
(TDS) capacity to reduce leadtime and cost for TDS spares.

                                       26

<PAGE>

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 customers
by providing our customers 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 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 offices in South San Francisco, California and Tempe, Arizona to liaise
with our U.S. customers. Under the Sales and Marketing Agency agreement with
Tokai Bussan Co. Ltd., we now also have an office and a marketing officer in
Tokyo, Japan to liaise with our prospective customers in that country. In
addition, our marketing initiatives include trade show attendance, product
sampling, technical bulletins and brochures, industry publications and news
releases and a web site for general information purposes. As of December 31,
2003, we employed 23 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:

          .    ChipPAC Incorporated;

          .    Carsem;

          .    Cirtek Electronics Corp.;

          .    PT Omedata Electronics;

          .    Alphatec Semiconductor Packaging, Ltd.;

          .    GEM Services;

          .    Fastech Microassembly & Test, Inc.; and

          .    Team Pacific, Inc.

          We also compete with two quasi-independent businesses focused on the
power semiconductor market, Tesla Sezam, based in the Czech Republic and Enoch
Semiconductors (previously Korea Microsystems), based in Korea.

                                       27

<PAGE>

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

          .    Advanced Semiconductor Engineering, Inc.;

          .    Amkor Technology, Inc.;

          .    ASE Test Limited;

          .    ASAT, Ltd.;

          .    ChipPAC Incorporated;

          .    Siliconware Precision Industries Co., Ltd.;

          .    ST Assembly Test Services Pte., Ltd.; and

          .    Shinko Electric Industries Co. Ltd.

          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 81% of our revenues in 2003:

          .    Infineon Technologies;

          .    Texas Instruments;

          .    Semiconductor Components Industries, Ltd (ON Semiconductor);

          .    Philips Components; and

          .    Fairchild Semiconductor.

          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

                                       28

<PAGE>

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 will also benefit from our location in Chengdu, Sichuan Province,
China starting in the third quarter of 2004. 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, and 81% in 2003 of total revenue. Our largest customer accounted for
approximately 17% in 2001, 22% in 2002, and 34.0% in 2003. The following table
sets forth the Company's top five customers as a percentage of revenue for the
years 2001, 2002 and 2003:

                                                                   Percentage to
                                                                   Total Revenue
--------------------------------------------------------------------------------
2003

     Infineon Technologies, Inc.                                        33.9
     Texas Instruments, Inc.                                            18.6
     Semiconductor Components Industries, Ltd.                          12.7
     Philips Components Philippines, Inc.                                8.6
     Fairchild Semiconductor                                             7.0
--------------------------------------------------------------------------------
2002

     Infineon Technologies, Inc.                                        21.9
     Semiconductor Components Industries, Ltd.                          19.9
     Texas Instruments, Inc.                                            18.5
     Philips Components Philippines, Inc.                                9.0
     Fairchild Semiconductor                                             7.0
--------------------------------------------------------------------------------
2001

     Semiconductor Components Industries, Ltd.                          17.0
     Infineon Technologies, Inc.                                        10.8
     Philips Components Philippines, Inc.                               10.8
     Fairchild Semiconductor                                            10.0
     Power Integrations                                                  7.3

          The table below sets forth our significant power and non-power
customers ranked in terms of our revenues for the year ended December 31, 2003:

<TABLE>
<CAPTION>
Power Services                                 Non-Power Services
--------------------------------------------   -------------------------------------------------------
<S>                                            <C>
Infineon Technologies, Inc.                    Vishay Intertechnology Asia PT
Texas Instruments Inc. (USA)                   Texas Instruments Phils., Inc.
Semiconductor Components Industries, Ltd.      Semiconductor Components Industries, Ltd.
Philips Components Philippines, Inc.           Texas Instruments Inc. (USA)
</TABLE>

                                       29

<PAGE>

<TABLE>
<S>                                            <C>
Fairchild Semiconductor                        Microsemi Corp Integrated Products (formerly Linfinity)
STMicroelectronics                             Semicoa Semiconductors
Power Integrations                             Microsemi USPD
Bourns Ltd. (formerly Power Innovations)       Microsemi Lawrence
International Rectifier Sea Pte. Ltd.          International Rectifier Corp (El Segundo)
Microsemi Corp Integrated Products (formerly   Maxim Integrated Products
Linfinity)
</TABLE>

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

                                                           Percentage of Revenue
--------------------------------------------------------------------------------
Geographic Region                                           2003   2002   2001
--------------------------------------------------------------------------------
United States                                               38.0%  48.2%  53.4%
Europe                                                      51.1%  39.5%  27.1%
Asia                                                        10.9%  12.3%  19.5%

          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.
We have received numerous awards from our customers, including:

          .    Infineon's Commitment & Partnership Award

          .    Motorola's Superior Performance Award;

          .    Texas Instruments' Cycle Time Award;

          .    Linfinity Microelectronics' Best Supplier Award; and

          .    Samsung Electronics' Outstanding Support Award.

          These awards are regularly given by our customers to independent
service providers who achieve outstanding performance in the area of service and
support in a particular year. We have had no material customer dissatisfaction
with our overall performance.

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 and 8D as among our Quality control and monitoring tools. 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, 2003, we employed 443 (378 in the Taguig
facility, 64 in the Laguna facility, and 1 in the Chengdu facility)
professionals, engineers, technicians and other employees dedicated to quality
control.

          Our facilities in Taguig and Laguna are ISO 9001/2000, 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. 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. TS 16949 is the
international version of QS 9000

                                       30

<PAGE>

(manufacturing certification program used mainly by American car manufacturers)
and harmonizes the QS 9000 requirements with other requirements generally used
by European car manufacturers.

          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.

          We are also certified by Infineon, Motorola, Texas Instruments,
Philips and ST through their supplier development programs. Our product has
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.

          Our commitment to quality management helped us earn the Philippine
Quality Award (Level I) for Commitment to Quality in 1999 and 2000. 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. The deregistration
is ongoing.

          Subsequent to the signing of an Investment Cooperation Agreement with
the Chengdu Hi-Tech Zone in the People's Republic of China, the Company's
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 People's Republic of China
registered company, on January 15, 2004. PSi Chengdu is the Company's operating
subsidiary in China.

          The following chart shows our corporate structure immediately after
the completion of the reorganization and the establishment of a holding and
operating company for our China facility.

                                       31

<PAGE>

                                  [FLOW CHART]

D.   Property, Plant 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 assembly operation at our Laguna facility located approximately 30
miles south of Manila. We also have U.S. marketing offices in South San
Francisco, California, and in Tempe, Arizona. In addition, we have a sales and
marketing office in Tokyo, Japan under our arrangement with Tokai Bussan of
Japan. 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 is 6,941.3 square meters, or 74,688 square feet,
dedicated to assembly and test operations. This facility is designed to
accommodate 1,780.2 square meters, or 19,155 square feet, of test space and
5,161.0 square meters, or 55,533 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.
expires on August 15, 2004 and the sub-lease arrangement with Tierra Factors
Corporation expired in 2002, co-terminus with the expiration of Tierra Factors
Corporation's lease with Food Terminal Inc., the owner of the land. We
subsequently entered into a lease arrangement with the Food Terminal Inc. for
the land and buildings that were previously subleased from Tierra Factors
Corporation. This lease arrangement expires in 2004. We are currently in
negotiations with Food Terminal Inc. for the terms and conditions governing the
renewal of the lease. We anticipate closing negotiations and renewing the lease
prior to the expiry of the current lease. 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
3,835.9 square meters, or 41,275 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.

                                       32

<PAGE>

          We have a third facility which we acquired through our affiliate,
Pacsem Realty, Inc. at a site near our existing facility in Laguna where
construction of the building shell was completed in 2001. We have deferred its
activation due to the effects of the downturn of the semiconductor industry and
the recent registration of our Taguig facility under the Philippine Economic
Zone Authority. In light of this and the establishment of a new facility in
China, we will have to consider the competitive option when locating new
business or expansion in the future. In accordance with the impairment review
done in 2003, 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 against the carrying cost of the
third facility. Currently, we are evaluating our options with regard to future
expansion in the site and also the possibility of selling or leasing the third
facility to a third party.

          PSi signed an Investment Cooperation Agreement with the Chengdu
Hi-Tech Zone (CDHT) on December 7, 2003. As part of the agreement, PSi 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 Chengdu Sichuan 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 has an option to purchase within three years, 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 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 and 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. Testers and handlers are used to test the electrical and
thermal characteristics of the product.

                                       33

<PAGE>

          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:

<TABLE>
<CAPTION>
Type of Equipment          Number in Use                             Supplier/Manufacturer
-----------------------    ---------------------------------------   -------------------------
<S>                        <C>                                       <C>
Wire bonders               1 unit triple head (PSi-owned)            Delvo
                           75 units Dual Head (74 units PSi-owned)   Orthodyne
                           177 units Single Head (172 units          ASM
                           PSi-owned)

Die bonders                146 units (145 units PSi-owned)           Esec
                                                                     ASM

Integrated DA-WB           6 units (PSi-owned)                       Shinkawa

Mold systems
   - mold presses          63 units (61 units PSi-owned)             Fusei
                                                                     Fujiwa
   - mold tools            134 units (114 units PSi-owned)           Korea Tooling Engineering
                                                                     CPC
                                                                     Micron
                                                                     Hanmi
   - auto mold system      10 units (8 units PSi-owned)              TOWA
                                                                     Fujiwa

Plating systems            9 units (all PSi-owned)                   MECO
                                                                     CEM

Semi-auto and full-auto    136 units (115 units PSi-owned)           Hamamura
trim/form/singulation                                                Korea Tool Engineering
systems                                                              Samil

Testers                    246 units (176 units PSi-owned)           Tesec
                                                                     Lorlin
                                                                     LTX
                                                                     CATS
                                                                     Statec

Test handlers              190 units (143 units PSi-owned)           Tesec
                                                                     MCT
                                                                     Daymarc
                                                                     Exatron
                                                                     Ismeca
</TABLE>

Environmental Matters

          Our assembly and test operations do not generate significant
pollutants. 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.

          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, the construction of our new wastewater
treatment plant is almost completed and is expected to be fully operational in
the third quarter of 2004.

          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.

          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 wastes management and wastewater
discharges. Our respective license for radioactive materials and the

                                       34

<PAGE>

use of nitric acid are issued by the Philippine Nuclear Research Institute
(PNRI) and the Philippine National Police, both government-implementing bodies.
We are also affiliated with Pollution Control Association of the Philippines,
Inc., Association of Electronics and Semiconductors for Safety and 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, 2003, 2002 and 2001. 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 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 83% in 2001, 89% in 2002, and 94% in 2003.
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. The power semiconductor
market, a subset of the overall semiconductor market, expanded 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, and expanded by 11.7% to $17.8 billion in 2003. 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 that 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, and by 9%
to $76.9 million in 2003.

          The semiconductor industry is highly cyclical. Although the
semiconductor industry has grown overall since 1993, there were downturns in
1996, 1998 and, as disclosed above, in 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

                                       35

<PAGE>

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.

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 22% in 2001,
18.7% in 2002 and 19.1% in 2003. Depreciation as a percentage of cost of sales
increased in 2001 as a result of our increased investment in equipment to expand
our assembly and test capability, decreased in 2002 because of the increase in
sales, and increased in 2003 as a result of our increased investment in
equipment to expand our assembly and test capability in the Philippines.

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. These should 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 two 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.

          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 increased profitability by reducing costs by substituting
raw materials and suppliers for some of our packages and certain raw materials,
improved our manufacturing yields, reduced non-value added functions and
redundant positions to enhance productivity, reduced manufacturing cycle time,
and undertook measures to improve quality.

          For 2004, we are trying to increase profitability by undertaking
measures to lower the variability of customer loadings through new captive
businesses such as the transfer and outsourcing Philips' internal assembly and
test facility to our facility in China, manage customer and package mix towards
higher average selling price and margin packages, reduce our operating costs by
lowering the cost of raw materials and overhead, improving productivity,
manufacturing efficiency and equipment capabilities, rationalize capital
expenditures to a minimum level, 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. In addition, we are in the process
of declining business or negotiating price increases for business with low or
negative margins, consolidating similar lines among our manufacturing facilities
to derive economies of scale and operational efficiencies, consolidating
leadframe purchases to our top 2 or 3 suppliers in order to leverage volume
discounts, qualifying aluminum-to-copper wire bonding and converting from
nickel-plated to bare copper leadframes to achieve up to a 12% reduction in
leadframe costs, and qualifying alternative lower cost suppliers of raw
materials.

Organization and Facilities

                                       36

<PAGE>

          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,
People's Republic of China.

          We continued to defer the activation of our third facility in the
Philippines, in view of the signing of an Investment Agreement with the Chengdu
Hi-Tech Zone for the establishment of an assembly and test facility in China. In
the future, we will allocate and concentrate our production of power packages in
accordance with the competitive position of each facility. Because of this, we
applied an asset impairment charge of $0.9 million against the book value of the
third facility following an impairment review of all our assets.

          Pacsem Technologies, 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;
we also have 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.

          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 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, 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. 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. We expect our China facility to begin commercial operations in the
third quarter of 2004, after passing the required qualification and audit by
Philips.

          We are establishing an assembly and test facility in China for the
following reasons:

     .    Drive profitability and growth by establishing low cost high volume
          manufacturing center as customers accelerate their migration towards
          China based assembly and test solutions and costs;

     .    Integrate our company into the supply chains of our customers, and
          transform our company from a provider of overflow capacity to a
          provider of base capacity. The provision of base capacity lessens the
          volatility of our customer loadings; and

     .    Tap high growth market with large and growing pool of end users as
          customers look towards China to drive revenue growth.

          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, "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, "Emerging markets investment is
driven predominantly by the need to access low cost labor and satisfy growing
local demand."

                                       37

<PAGE>

     A chart of our manufacturing facilities is provided below:

<TABLE>
<CAPTION>
                                               Maufacturing Sites

---------------------------------   ----------------------------------   ---------------------------------------
<S>                                 <C>                                  <C>
       Site 1 (Operational)                Site 2 (Operational)                           Site 4
        Food Terminal Inc.          Site 3 (Construction Discontinued)    Sichuan Chengdu Export Processing Zone
      Special Economic Zone            Carmelrey Industrial Park II                Chengdu Hi-Tech Zone
Taguig, Metro Manila, Philippines   Barangay Tulo, Laguna, Philippines           Chengdu, Sichuan, China

          Operated by:                         Operated by:                           Operated by:
      PSi Technologies, Inc.           PSi Technologies Laguna, Inc.        PSi Technologies(Chengdu) Co., Ltd.
---------------------------------   ----------------------------------   ---------------------------------------
</TABLE>

Currency Considerations

          We use the U.S. dollar as our functional currency because all our
revenue and substantially all our costs are denominated in U.S. dollars.
Accordingly, monetary assets and liabilities denominated in Philippine pesos and
other foreign currencies have been translated into U.S. dollars using the
exchange rates at the relevant balance sheet date. Non-monetary items are
translated at historical rates and translation gains and losses from those
translations are credited or charged to current operations. We also experience
foreign currency exchange gains and losses arising from transactions in
currencies other than our functional currency. For example, labor costs are
denominated in Philippine pesos 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. See discussion below in "Liquidity and Capital Resources --
Special Tax Status."

2003 Highlights

          Highlights for 2003 are:

          . Manufacturing. We focused on improving all aspects of our
manufacturing operations, including the substitution to lower cost raw materials
and suppliers, improvements in productivity resulting in a 1% decline in labor
and overhead expenses despite a 22% increase in sales volumes, and enhancement
in manufacturing systems which resulted in lower cycle times and quality
incidents, and ultimately, in higher customer rankings.

          . Marketing. With the decline in revenues during the third quarter of
2003, we reviewed our package, customer and technology portfolio against our
available production capacities and core competencies. We then adjusted our
marketing strategies to target higher margin and average selling price packages,
and allocated capacities and priorities accordingly. Equipment with low
utilization rates, packages with low margins, and technologies that were not
part of our core competency, were impaired through a $10.5 million special
charge. We decided to concentrate all demand for Philippine based assembly and
test services in our two operational facilities in the Philippines, and defer
activation of our third facility. The deferral resulted in a $0.9 million
impairment charge on the facility.

          More significantly, 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.

          . Financing. We evaluated all available options to pay off or
refinance supplier credits incurred in the capital expenditure program of prior
years and increase bank credit facilities available to us. In July 2003, we
issued a $4.0 million exchangeable senior subordinated note to Merrill Lynch
Global Emerging Markets Partners, L.P. due in 2008 and bearing interest at a
rate of 10% per annum. The exchangeable note was issued to pay for certain
liabilities related to our capital expenditures incurred over the past year
which are due by the end of the second and third quarters of 2003 and could not
be payable out of current cash flow from operations or available lines of credit
at that time. See "Item 7 - Major Shareholders and Related Party Transactions -
The Merrill Lynch Exchangeable Note." On August 27, 2003, we renewed and
increased our trade receivable and financing facility from $5.0 million to $10.0
million from the Singapore Branch of Raiffeisen Zentralbank Osterreich AG
(RZB-Austria).

                                       38

<PAGE>

This will mature by December 31, 2004 with renewal options based on mutual
agreement of both parties. The total loan balance under this credit facility was
$6.6 million as of December 31, 2003 and $5.0 million as of December 31, 2002.
On December 21, 2003, we successfully negotiated with ON Semiconductor for
deferred payment of a $2.8 million interest free equipment loan, which was due
in December 14, 2003. Under the agreement, we will pay down the liability on a
monthly basis at an amount dependent on the production volume of that customer,
but with a final balloon payment due in June 2005.

2004 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 plan on continuing 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 plan on continuing to develop our power semiconductor assembly and
test technology and design services to meet our customers' needs. We coordinate
our development efforts with our customers to ensure that our packages and
services meet their power design specifications and to increase the efficiency
of our research and development efforts. We have hired and will continue to hire
research and development professionals trained in semiconductor manufacturing.
These employees should strengthen our design capability, particularly in thermal

                                       39

<PAGE>

modeling and product applications. We intend to collaborate with our principal
equipment and material suppliers to develop and access technical research.

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

          We will 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, and construction and activation of our third facility in the Philippines
was put on hold until the two existing sites can no longer accommodate growth in
the business and demand for power semiconductor assembly and test services in
the Philippines expands.

..    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. Specifically, we have a sales and
marketing agency agreement with Tokai Bussan of Japan under which Tokai Bussan
Co. Ltd. will introduce us to prospective customers, assist us in negotiating
and closing assembly and test service contracts, and serve as a liaison with our
customers in order to address their needs. 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.

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 generally accepted accounting
principles. The preparation of these 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 are believed to be 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.

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.
We have not made any changes in these policies during the year. However,
business conditions or underlying technology may change in the future, which
could cause a change in asset lives. Any change in lives would cause a
significant change in depreciation and amortization.

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

                                       40

<PAGE>

     on estimated undiscounted future cash flows to be generated by the assets.
We recorded an impairment loss of $146,965 in 2002 representing the write down
of a subsidiary's construction in progress to zero. Such construction has been
discontinued as a result of the downturn in the worldwide electronics industry.
In the third quarter of 2003, we experienced a 21.7% sequential decline in
sales, primarily due to our customer's decision not to compete with the pricing
strategy of China suppliers for certain voltage regulator products. This
resulted in a 43.4% sequential decline in Texas Instruments' (TI) revenues with
us. Since then, the loading of TI has been erratic and inconsistent, leading to
lower fourth quarter revenue growth in 2003. A review was undertaken 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 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. Had we used a discount rate of 10%, we would have incurred special
charges relating to equipment of $10.0 million, instead of $10.5 million. We
continued to defer the activation of our third facility in the Philippines, in
view of the signing of an Investment Agreement with the Chengdu Hi-Tech Zone for
the establishment of an assembly and test facility in China. We realized the
need to locate new business in the most cost competitive area. Based on the
review of long-lived assets, we took an asset impairment charge of $0.9 million
in 2003 against the carrying cost of the third facility. As a result of this
review, we incurred impairment losses on equipment and property, provisions for
inventory losses, and write off of inventories and deposits totaling $12.9
million.

Revenue Recognition

          Revenues from packaging semiconductors and performing test services
are recognized upon shipment or completion of the services. We do not take
ownership of customer-supplied semiconductor raw materials such as wafers. Title
and risk of loss remains 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 US Securities and Exchange Commission's Staff Accounting
Bulletin No. 101, "Revenue Recognition."

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

                                       41

<PAGE>

          For the year ended December 31, 2003, we wrote off deferred tax assets
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, an
adjustment to the 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, an
adjustment to the 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:

                                                For the years ended December 31
                                                -------------------------------
                                                  2000    2001    2002    2003
                                                 -----   -----   -----   -----
Revenue .....................................    100.0%  100.0%  100.0%    100%
Cost of Sales ...............................     80.6    96.8    97.2    97.7
                                                 -----   -----   -----   -----
Gross margin ................................     19.4     3.2     2.8     2.3
Operating expenses
   General and administrative ...............      7.0    10.6     8.8     9.2
   Special charges ..........................       --      --      --    16.8
   Sales and marketing ......................      1.2     1.8     1.6     1.0
   Research and development .................      1.3     1.3     1.8     0.9
                                                 -----   -----   -----   -----
      Total operating expenses...............      9.5    13.7    12.2    27.9
                                                 -----   -----   -----   -----
Income (loss) from operations................      9.9   (10.5)   (9.4)  (25.6)
Other income (expenses)-net
   Interest and bank charges - net...........      0.9     0.2    (0.6)   (1.6)
   Foreign exchange gains (losses)...........      1.0     1.5     0.0    (0.3)
   Gain on disposal of fixed assets..........       --      --     0.1      --
   Early retirement costs....................       --    (1.3)     --      --
                                                 -----   -----   -----   -----
      Total other income (expense)...........      1.9     0.4    (0.5)   (1.9)
                                                 -----   -----   -----   -----
Income (loss) before income tax and
minority interest............................     11.8   (10.1)   (9.9)  (27.5)
Income tax expense (benefit).................     (1.0)   (0.0)   (0.0)   (0.2)
Minority interest ...........................      0.2    (0.2)    0.1     0.0
                                                 -----   -----   -----   -----
Net income (loss) ...........................     11.0%  (10.3%)  (9.8%) (27.3%)
                                                 =====   =====   =====   =====

                                       42

<PAGE>

Year to Year Comparison for Years Ended 2000 to 2003

Revenues and Gross Margins

<TABLE>
<CAPTION>
                                             For the years ended
                                            (Thousands of dollars)
                    ---------------------------------------------------------------------
                                       % change             % change             % change
                     2000     2001    from 2000    2002    from 2001    2003    from 2002
                    ---------------------------------------------------------------------
<S>                 <C>      <C>       <C>        <C>        <C>       <C>       <C>
Revenue..........   73,671   53,512    (27.4%)    70,537     31.8%     76,933      9.1%
Cost of Sales....   59,382   51,824    (12.7%)    68,535     32.2%     75,173      9.7%
                    ------   ------               ------               ------
Gross profit.....   14,289    1,688    (88.2%)     2,002     18.6%      1,760    (12.1%)
Gross margin
percentage.......     19.4%     3.2%                 2.8%                 2.3%
</TABLE>

          2003 versus 2002. Revenues increased 9.1%, from $70.5 million in 2002
to $76.9 million in 2003, primarily due to a 22% increase in volume of sale of
semiconductor packages shipped to existing customers and new customers. On a per
package basis, our average selling price, however, decreased by an average of
10% due to the decline in selling prices to our customers while changing product
mix to certain high volume package lines lowered overall average selling prices
further. The decrease in selling price is a result of continued pressure from
the consumer market to deliver end products at the most competitive prices. We
do not anticipate further declines in average selling prices for the balance of
2004. The volume of power packages shipped increased 31% in 2003 compared to
2002, and accounted for 94% of our net sales in 2003 compared to 89% in 2002.
The increase in sales volume is largely attributed to the increase in demand of
semiconductor industry as a whole combined with increased outsourcing activity
from our customers.

          By geographical market, sales to our customers in the United States
decreased 14% from $34.0 million in 2002 to $29.2 million in 2003 due to a
decrease in sales to Semiconductor Components, more commonly known in the
industry as ON Semiconductor which was brought about by a decrease in demand for
their products. As a percentage of revenue, sales in the United States decreased
from 48% in 2002 to 38% in 2003 due to an increase in sales in Europe. Our sales
to Europe increased 41% from $27.9 million in 2002 to $39.3 million in 2003,
primarily due to an increase in sales to Infineon Technologies, ST
Microelectronics, and Philips. Sales to our customers in Asia decreased 3% from
$8.7 million in 2002 to $8.4 million in 2003 due to a decrease in sales to Texas
Instruments Phils. and National Semiconductor. The reduction in sales in Asia
was partially offset by the increase in sales to Fairchild Semiconductor and
Vishay Intertechnology Asia Pte Ltd. However, the geographical distribution of
our revenue is classified according to the domicile of our customers, and not
according to the actual locations where the end products are finally assembled,
marketed and sold.

          Cost of sales includes raw materials used to assemble our packages,
depreciation of assembly and test equipment, labor and attributed overhead. Cost
of sales increased 9.7% from $68.5 million in 2002 to $75.2 million in 2003,
primarily due to increases in production volume. Raw material costs increased by
17% in 2003 compared with 2002 largely due to the increase in production volume,
while manufacturing expenses (direct labor and overhead) decreased by 1% in 2003
compared with 2002 due to the various cost reduction measures we implemented.
With additional capital investments, depreciation expenses in 2003 increased 12%
from 2002. As a result, gross profit decreased by 12% from $2.0 million in 2002
to $1.8 million in 2003. Our gross margin decreased from 2.8% in 2002 to 2.3% in
2003.

          The increase in copper prices, which is the base material for our
products, did not affect us in 2003. For 2004, we anticipate the increase in
copper prices to increase the cost of our raw materials. Currently, we are
undertaking measures to substitute materials or suppliers for our products as
well as pass such increases in raw material costs to our customers.

          Gross margins, however, are largely affected by the percentage of
depreciation to cost of sales. Depreciation as a percentage of cost of sales is
19.1% in 2003 and 18.7% in 2002. Moreover, the 10% reduction in average selling
price in 2003 pushed our gross margins downwards. Nevertheless, we anticipate
greater economies of scale in both our Taguig and Laguna facility as more
products run in our facilities. We expect depreciation as a percentage of
revenue to go down in 2004 because of higher capacity utilization in both
plants.

                                       43

<PAGE>

          2002 versus 2001. Revenues increased 32%, from $53.5 million in 2001
to $70.5 million in 2002, primarily due to a 62% increase in the volume of sales
of semiconductor packages shipped to existing customers and new customers. We
continued to experience pricing pressure, with average selling prices falling by
6%, due to excess capacity within the industry and limited pricing power. The
volume of power packages shipped increased 81% in 2002 compared to 2001, and
accounted for 89% of our net sales in 2002 compared to 83% in 2001. By
geographical market, sales to our customers in the United States increased 19%
from $28.6 million in 2001 to $34.0 million in 2002 due to an increase in sales
to Texas Instruments, but decreased as a percentage of revenue from 53% in 2001
to 48% in 2002 due to a larger increase in sales in Europe. Our sales to Europe
increased 92% from $14.5 million in 2001 to $27.8 million in 2002, primarily due
to an increase in sales to Infineon Technologies, ST Microelectronics, and
Philips. Sales to our customers in Asia decreased 17% from $10.4 million in 2001
to $8.7 million in 2002 due to the decrease in sales to Power First, Texas
Instruments (Phils), and Fairchild Semiconductor. The reduction in sales in Asia
was partially offset by the increase in sales to National Semiconductor and
Vishay Intertechnology Asia Pte Ltd.

          Cost of sales increased 32% from $51.8 million in 2001 to $68.5
million in 2002, in line with the increase in revenues. However, a change in
product mix resulted in a 38% increase in raw materials and manufacturing
expenses (direct labor and overhead) in 2002 as compared to 2001. Depreciation
expenses increased by 12% in 2002 due to continued investment in manufacturing
equipment. Gross profit increased by a lower 19% from $1.7 million in 2001 to
$2.0 million in 2002. Our gross margin remained at 3% in 2001 and 2002.

          2001 versus 2000. Revenues decreased 27%, from $73.7 million in 2000
to $53.5 million in 2001, due to a decrease in both total volume, and decline in
average selling prices. The 29% drop in power package volumes was the
significant contributor to the overall decline in volumes. Average selling
prices decreased by 6% due to excess capacity and a change in product mix as
lower ASP non-power packages increased to 17% of revenue, from 16% of revenue in
2000. Despite the decline in power package volumes, power packages still
accounted for 83% of our net sales in 2001 compared to 84% in 2000. By
geographical market, sales to our customers in the United States decreased by
only 17% from $34.5 million in 2000 to $28.6 million in 2001 due to an increase
in sales to ON Semiconductor, but increased as a percentage of revenue from 47%
in 2000 to 53% in 2001 due to a larger decrease in sales in Europe and Asia. Our
sales to Europe decreased 34% from $22.0 million in 2000 to $14.5 million in
2001, primarily due to the decrease in sales to ST Microelectronics, Philips
Semiconductor and Power Innovations, which was only partially offset by the
increase in sales to Infineon Technologies. Similarly, sales to our customers in
Asia decreased 39% from $17.1 million in 2000 to $10.4 million in 2001 due to
the decrease in sales to Texas Instruments (Phils), Fairchild Semiconductor and
Agilent Technologies partially offset by the increase in sales to Power First.

          Cost of sales decreased 13% from $59.4 million in 2000 to $51.8
million in 2001, primarily due to decreases in production volume. The reduced
production volume led to both a decrease of 23% in raw materials costs and a
decrease of 32% in labor costs in 2001 as compared to 2000. Depreciation
expenses in 2001 increased 41% from 2000. Gross profit decreased 88% from $14.3
million in 2000 to $1.7 million in 2001. Our gross margin decreased from 19% in
2000 to 3% in 2001, principally due to the drop in sales, an unfavorable sales
mix, and higher depreciation expense resulting from our investments in new
equipment and capacity.

Operating Expenses

<TABLE>
<CAPTION>
                                                        For the years ended
                                                      (Thousands of dollars)
                                 ----------------------------------------------------------------
                                                                         %
                                                                      change
                                                   % change            from              % change
                                  2000     2001   from 2000    2002    2001     2003    from 2002
                                 ----------------------------------------------------------------
<S>                              <C>      <C>      <C>        <C>      <C>     <C>       <C>
General and
Administrative................   5,178    5,664      9.4%     6,226     9.9%    7,086     13.8%
Special charges                     --       --       --         --      --    12,896       --
Sales and Marketing...........     850      965     13.5%     1,147    18.9%      762    (33.6%)
Research and Development......     948      691    (27.1%)    1,253    81.3%      723    (42.3%)
                                 ----------------------------------------------------------------
Total Operating Expenses......   6,976    7,320      4.9%     8,626    17.8%   21,467    148.9%

</TABLE>

                                       44

<PAGE>

<TABLE>
<S>                                <C>      <C>     <C>       <C>      <C>        <C>    <C>
Percentage to Net Sales (%)...     9.5%     13.7%            12.2%                27.9%
</TABLE>

          General and Administrative Expenses

          General and administrative expenses consist of salaries and benefits
for administrative personnel, depreciation of office furniture and equipment,
outside services and professional fees, office utilities, supplies, expenses for
investor relations activities, directors' fees and stock compensation costs
resulting from the grant of employee stock options.

          2003 versus 2002. General and administrative expenses increased 13.8%
from $6.2 million in 2002 to $7.1 million in 2003, principally due to increased
depreciation and amortization, and expenses related to our status as a
publicly-listed company in the United States, in particular insurance,
professional (primarily legal and accounting) and consultancy fees and investor
relations costs. Insurance increased primarily because of the general increase
of the insurance premiums related to Directors & Officers Insurance, and
secondarily due to an increase in property insurance premiums. Professional fees
increased due to the legal and other fees incurred in the IPO litigation and
legal advice pertaining to corporate governance. We anticipate a final
settlement for the IPO litigation in 2004 and expect a decline in legal fees
related to this. For insurance, we expect to incur the same level of insurance
expense.

          In 2003, we incurred $248,740 in legal costs, travel, professional
fees, salaries of employees and other expenses related to our China initiative.
For 2004, we will most likely incur an increase in professional fees due to
China, however, we anticipate our revenues and earnings will cover such fees.

<TABLE>
<CAPTION>
                                                  For the years ended
                                                (Thousands of dollars)
                           ----------------------------------------------------------------
                                          % change            % change             % change
                           2000   2001   from 2000    2002   from 2001     2003   from 2002
                           ----------------------------------------------------------------
<S>                         <C>   <C>      <C>       <C>      <C>         <C>      <C>
Depreciation and
amortization............    364    547      50.2%      723     32.2%      1,112     53.9%
Insurance...............    136    382     180.7%      560     46.4%        668     19.3%
Professional &
Consultancy Fees........    120    331     176.4%      296    (10.4)%       353     19.2%
Investor Relations......     --    206                 184    (10.5)%       133    (28.2)%
China Expenses..........     --     --        --        --       --         249
                            ---------------------------------------------------------------
Total ..................    620   1466     136.5%    1,763     20.3%      2,515     42.6%
                            ---   ----     -----     -----    -----       -----    -----
</TABLE>

          General and administrative expenses as a percentage of revenue
increased from 8.8% in 2002 to 9.2% in 2003, as higher growth in depreciation of
office equipment, outside services, insurance, facilities, and salaries and
benefits outpaced the increase in revenues. These expenses represent 80% of our
total general and administrative expenses in 2003 as compared to 75% in 2002.
Also, in 2003, stock compensation expense increased to $235,110 in 2003 from
$197,331 in 2002. For 2004, we anticipate general and administrative costs to go
down as a percentage of revenue as more revenues are expected to be generated
from our Taguig, Laguna and China facilities.

                                       45

<PAGE>

          2002 versus 2001. General and administrative expenses increased by 10%
from $5.7 million in 2001 to $6.2 million in 2002, principally due to higher
depreciation expense and insurance costs. In 2002, stock compensation expense
decreased from $239,953 in 2001 to $197,331 in 2002 due to forfeitures of 39,500
stock options of resigned employees in 2002. General and administrative expenses
as a percentage of revenue decreased from 11% in 2001 to 9% in 2002, as higher
growth in revenue outpaced the increase in insurance, taxes and licenses, and
depreciation of office equipment. Insurance increased primarily because of the
general increase of the insurance premiums related to Directors & Officers
Insurance. The increase in depreciation was due to an increase in office
equipment and furniture.

          2001 versus 2000. General and administrative expenses increased 9%
from $5.2 million in 2000 to $5.7 million in 2001, principally due to expenses
related to our status as a publicly-listed company in the United States, in
particular insurance, investor relations expenses, professional and consultancy
fees, and stock compensation expenses. In 2001, stock compensation expense of
$239,953 represents the full-year cost of the stock compensation, compared to an
expense of $179,965 incurred for ten months in 2000. Our stock option plan was
approved by our board of directors in February 2000. Insurance increased due to
higher insurance premiums arising from an increase in equipment values insured.
The increase in professional & consultancy fees and investor relations expense
was due to the listing of our ADS in the Nasdaq Stock Exchange. Together, these
led to an increase in general and administrative expenses to 11% of sales in
2001, from 7% in 2000.

Special Charges

          In the third quarter of 2003, we experienced a 21.7% sequential
decline in sales, primarily due to the decision of one of our customers (Texas
Instruments) not to compete with the pricing strategy of suppliers in China for
 certain voltage regulator products. This resulted in a 43.4% sequential decline
in Texas Instruments (TI) related revenues for us. Since then, the loading of TI
has been erratic and inconsistent, leading to lower fourth quarter revenues.
This prompted us to undertake a review to identify equipment with low
utilization rates, packages with low margins, and technologies not consistent
with our core competency, as candidates for impairment. 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 value of the assets exceeds the
fair value of the assets. We estimated the fair value of the applicable assets
using the present value method. 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 our 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. Had we used a discount rate of 10%, we would have incurred special
charges relating to equipment of $10.0 million, instead of $10.5 million. We
continue to defer the activation of our third facility in the Philippines, in
view of the signing of an Investment Agreement with the Chengdu Hi-Tech Zone for
the establishment of assembly and test facility in China. We realized the need
to locate new business in the most cost competitive area. Based on the review of
long-lived assets, we took an asset impairment charge of $0.9 million in 2003
against the carrying cost of the third facility. As a result of this review, we
incurred impairment losses on equipment and property, provisions for inventory
losses, and write off of inventories and deposits totaling $12.9 million. See
"Item 5 Operating and Financial Review and Prospects--Critical Accounting
Policies--Valuation and Impairment".

Special charges in 2003 consist of the following:                       In $'000

Impairment losses on property and equipment                              $10,476
Impairment losses on property (Site 3)                                       892
Provision for inventory losses                                               881
Write-off of inventories                                                     522
Write-off of deposit                                                         125
--------------------------------------------------------------------------------
Total                                                                    $12,896

          We continue to evaluate all options possible with regard to the use or
disposal of these equipment and properties.

Sales and Marketing Expenses

          Sales and marketing expenses consist primarily of salaries and
benefits for sales and marketing personnel, expenses associated with our
overseas marketing offices in California, Arizona and Tokyo, promotion, travel,
and communication costs.

          2003 versus 2002. Sales and marketing expenses decreased 33.6% from
$1.1 million in 2002 to $0.8 million in 2003, due principally to the resignation
of our key marketing executive in North America without replacement. Sales
and marketing expenses, as a percentage of revenues, declined from 1.6% in 2002
to 1% in 2003. We also anticipate marketing expenses to go down as a percentage
of revenue in 2004 as more volume is generated from our facilities.

                                       46

<PAGE>

          2002 versus 2001. Sales and marketing expenses increased 19% from $0.9
million in 2001 to $1.1 million in 2002, principally due to an increase in the
expenses related to our local and foreign marketing offices. Sales and marketing
expenses, as a percentage of revenues, declined slightly from 1.8% in 2001 to
1.6% in 2002.

          2001 versus 2000. Sales and marketing expenses, as a percentage of
revenues, increased from 1% in 2000 to 2% in 2001, due primarily to the 27.4%
drop in revenue and 14% growth in sales and marketing expenses to $1.0 million
in 2001 from $0.9 million in 2000. The increase in sales and marketing expenses
was due to the hiring of a Marketing Director for North America.

Research and Development Expenses

          In 2003, research and development expenses consisted of the salaries
and benefits for process and package engineering personnel and the cost of
materials used in developing and qualifying new packages for our customers,
depreciation on and maintenance of research equipment and allocable portions of
facility costs. A reorganization in 2003 created the Central Engineering
Department (CED) which was given research and development tasks. Consequently,
the research and development expenses for 2003 consisted of the expenses of the
CED and the cost of materials used in developing and qualifying new packages.

          2003 versus 2002. Research and development expenses decreased by 42%
from $1.3 million in 2002 to $0.7 million in 2003 because we have allowed our
marketing department to generate more revenues out of the qualifications and
engineering runs done in prior years before embarking on a huge number of new
products in 2003. For 2004, we anticipate research and development expenses will
increase as a result of the introduction of QFN (Quad Flat Nonleaded Package)
line which we intend to launch in the second semester of 2004. Moreover, we have
hired a new executive who will head the CED by the name of Mr. Jim Knapp who
will be responsible for our product launches as well as new package development.

          2002 versus 2001. Research and development expenses increased by 81%
from $0.7 million in 2001 to $1.3 million in 2002 because higher business
activity in 2002 resulted in added product qualification runs for our customers.

          2001 versus 2000. Research and development expenses decreased 27% from
$0.9 million in 2000 to $0.7 million in 2001 because lower business activity in
2001 resulted in fewer product qualification runs for our customers.

Loss from Operations

<TABLE>
<CAPTION>
                                                       For the years ended December 31
                                                           (thousands of dollars)
                                   ----------------------------------------------------------------------
                                                      % change             % change             % change
                                    2000     2001    from 2000    2002    from 2001     2003    from 2002
                                   ------   -------------------------------------------------------------
<S>                                <C>      <C>       <C>        <C>        <C>       <C>        <C>
Revenue.........................   73,671   53,512     (27.4%)   70,537     31.8%      76,933       9.1%
Cost of Sales...................   59,382   51,824     (12.7%)   68,535     32.2%      75,173       9.7%
Operating Expenses .............    6,976    7,320       4.9%     8,626     17.8%      21,467     148.9%
                                   ------   -------------------------------------------------------------
Income (Loss) from Operations...    7,313   (5,632)   (177.0%)   (6,624)    17.6%     (19,707)    197.5%
</TABLE>

          2003 versus 2002. In absolute terms, loss from operations increased
from $6.6 million in 2002 to $19.7 million in 2003, primarily due to the $12.9
million special charges and higher costs of goods sold. Without the special
charges, loss from operations in 2003 would have been $6.8 million, only 2.8%
higher than the loss from operations of $6.6 million in 2002. As a percentage of
revenue, loss from operations increased from negative 9.4% in 2002 to negative
25.6% in 2003, negative 8.8% without the special charges.

          2002 versus 2001. In absolute terms, loss from operations increased
from $5.6 million in 2001 to $6.6 million in 2002, primarily due to higher costs
of goods sold and operating expenses. As a percentage of revenue,

                                       47

<PAGE>

loss from operations decreased from negative 10.5% in 2001 to negative 9.4% in
2002 primarily due to lower operating expense as a percentage of revenue.

          2001 versus 2000. In absolute terms, income from operations decreased
from $7.3 million in 2000 to a loss from operations of $5.6 million in 2001,
primarily due to decreased sales. As a percentage of revenue, income from
operations decreased from 10% in 2000 to negative 10.5% in 2001 primarily due to
an erosion in gross margin, higher general, administrative, marketing expenses
and early retirement costs and offset by decreased research and development, as
discussed above.

Net Interest and Bank Charges

          2003 versus 2002. Net interest expense amounted to $1.2 million in
2003 compared to $0.4 million in 2002. The increase was primarily due to the
issuance of the $4.0 million exchangeable senior subordinated note to Merrill
Lynch, amortization of discount and deferred financing charges related to the
$4.0 million exchangeable note and the increase in short-term bank loans to pay
capital expenditures due in the second and third quarters of 2003.

          A portion of the direct costs incurred in connection with the issuance
of the exchangeable note is reported as deferred financing costs and are
recognized as additional interest expense over the life of the note using the
effective interest method.

          The $4.0 million exchangeable senior subordinated note is recorded net
of discount in accordance with the provisions of Emerging Issue Task Force 98-5.
Such discount is being amortized over the life of the note using the effective
interest method.

          Interests and bank charges for the years ended December 31, 2003,
2002, 2001, 2000 are as follows:

<TABLE>
<CAPTION>
                                               For the years ended December 31
                                                  (numbers in USD thousands)
                              -----------------------------------------------------------------
                                               % change           % change             % change
                               2000   2001    from 2000   2002   from 2001    2003    from 2002
                              -----   ---------------------------------------------------------
<S>                           <C>     <C>      <C>        <C>    <C>         <C>        <C>
Interest expense, bank
   and financing charges...    (737)  (313)    (57.5%)    (483)     54.0%    (1,347)    178.9%
Interest income............   1,418    414     (70.8%)      82     (80.1%)     (133)     61.4%
Interest and bank
   charges - Net ..........     681    101     (85.2%)    (401)   (497.8%)   (1,214)    203.1%
                              -----   ---------------------------------------------------------
</TABLE>

          2002 versus 2001. Net interest expense amounted to $0.4 million in
2002 compared to a net interest income of $0.1 million in 2001. The change was
due to the decline in money market deposits and increase in liabilities to pay
for investments in additional property, plant and equipment in Taguig and
Laguna.

          2001 versus 2000. Net interest income for 2001 decreased from $0.7
million in 2000 to $0.1 million in 2001, primarily due to retirement of money
market deposits to pay for the investment in additional property, plant and
equipment related to the activation of Laguna Site 2, and expansion in capacity
for Taguig.

Net Foreign Exchange Gains (Losses)

          Net foreign exchange gains or losses result from movements in the
exchange rates of foreign currencies between the date a monetary asset or
liability arises and the balance sheet date or the date of settlement.

          2003 versus 2002. We recognized net foreign exchange gain of $29,253
in 2002 and net foreign exchange loss of $243,218 in 2003, principally due to
the effect of settlement and restatement of yen-denominated transactions

                                       48

<PAGE>

and balances into U.S. dollars. In 2002 and 2003, the peso depreciated vis-a-vis
the U.S. dollar while the Japanese Yen appreciated vis-a-vis the US dollar.

          2002 versus 2001. We recognized net foreign exchange gains of $796,570
in 2001 and $29,253 in 2002, principally due to the effect of settlement and
restatement of peso-denominated and yen-denominated transactions and balances
into U.S. dollars. In 2001 and 2002, the peso and yen depreciated vis-a-vis the
U.S. dollar.

          2001 versus 2000. We recognized net foreign exchange gains of $738,563
in 2000 and $796,570 in 2001, principally due to the effect of settlement and
restatement of peso-denominated and yen-denominated transactions and balances
into U.S. dollars. In 2000 and 2001, the peso and yen depreciated vis-a-vis the
U.S. dollar.

Provision for (Benefit from) Income Tax

<TABLE>
<CAPTION>
                                                   For the years ended
                                                (numbers in USD thousands)
                         -----------------------------------------------------------------------
                                            % change             % change               % change
                          2000    2001     from 2000    2002    from 2001     2003     from 2002
                         -----   ---------------------------------------------------------------
<S>                      <C>     <C>        <C>        <C>        <C>       <C>         <C>
Provision for (benefit
   from) income tax        748       (3)    (100.4%)       10      (442.3)%    (173)    (1,884.9)%
Net income (loss)        8,102   (5,508)    (168.0%)   (6,918)       25.6%  (21,004)       203.6%
                         -----   ------                ------               -------
Net margin (%)            11.0%   (10.3)%                (9.8)%               (27.3)%
                         -----   ------                ------               -------
</TABLE>

          2003 versus 2002. Net benefit from income tax of $172,781 was
recognized in 2003 compared to a net provision for income tax of $9,680
recognized in 2002. In May 2004, the area where our Taguig facilities are
located was declared as an export zone. All of our operations which had been
previously entitled to tax holiday incentives or subjected to 32% income tax on
net income will be taxed at 5% of gross income in lieu of all taxes.
Consequently, certain deferred tax benefits will no longer be deductible items
for us. These deferred tax assets have been reduced to the extent such will not
be of benefit to us.

          The benefit from deferred income tax recognized in 2003 was mainly due
to impairment losses in 2003. Provision for doubtful accounts, stock
compensation costs and net operating loss carryover of our Company shall no
longer be deductible items of our Company starting May 2004.

          2002 versus 2001. Net benefit from income tax of $2,828 was recognized
in 2001 and provision for income tax of $9,680 was recognized in 2002. Deferred
tax assets were set up for the future tax benefits of net operating loss
carryover and minimum corporate income tax which are more likely than not
realizable in the future. Under the Philippine tax laws, tax losses (from
operations subject to regular income tax rate) may be carried forward for three
years.

          2001 versus 2000. Total provision for income tax amounted to $748,136
in 2000 compared to a net benefit from income tax of $2,828 in 2001. In 2000,
our current provision for income tax (income tax due to Philippine tax
authorities) on its operations not entitled to tax incentives amounted to
$693,797, compared to only $27,238 in 2001. In addition, provision for deferred
taxes in 2001 was reduced as a result of the additional valuation allowance
provided in 2001. In 2001, deferred tax assets were set up for the future tax
benefits of a portion of net operating loss carryover and minimum corporate
income tax which are more likely than not realizable in the future. Under the
Philippine tax laws, tax losses (from operations subject to regular income tax
rate) may be carried forward for three years.

B.   Liquidity and Capital Resources

Liquidity

          In 2003, we funded our operations and capital expenditures primarily
through cash from operations consisting of receivable collections, short-term
loans, and proceeds from the issuance of the $4 million exchangeable senior
subordinated note to our major shareholder, Merrill Lynch. As of December 31,
2003, we have $20.0 million in current assets, of which $0.9 million are in the
form of cash, $11.4 million of trade and other receivables and $5.9 million in
inventories. We used funds supplied by our banks to acquire certain inventories,
which are held under a

                                       49

<PAGE>

"trust arrangement" with the banks. These arrangements are evidenced by trust
receipts and we are accountable to our banks until the amounts supplied under
the trust arrangements have been repaid.

Operating Activities

          Net cash from operating activities totaled $1.0 million in 2003
compared to $1.6 million in 2002. The net cash generated in 2002 was primarily
accounted for by the net loss after adjusting non-cash items such as
depreciation, retirement expense, offset by increases in trade and other
receivables and inventories and decrease in trade and other payables. The net
cash generated in 2003 was primarily accounted for by the net loss after
adjusting non-cash items such as depreciation and amortization, impairment
losses, provision for inventory obsolescence, retirement benefit, write-off of
inventories and deposits, and decrease in trade and other receivables as well as
inventories, input taxes and other current assets. In 2003, a huge portion of
cash generated from operations was used to reduce trade and other payables
amounting to $11.2 million, which consist mostly of accounts with equipment
suppliers. Our total accounts payable to equipment suppliers amounted to $4.0
million as of December 31, 2003 as compared with $10.8 million as of December
31, 2002.

Investing Activities

          Net cash used in investing activities totaled $5.7 million in 2003
compared to $6.0 million in 2002. In 2002 and 2003, these investments consisted
mainly of acquisition of additional assembly and test equipment for Taguig and
Laguna. As of December 31, 2003, we had outstanding equipment purchased through
suppliers' credits amounting to $4.0 million.

Financing Activities

          Net cash provided by financing activities totaled $3.9 million in 2003
and $4.3 million in 2002. In 2002, cash from financing activities was primarily
generated from short-term lines of credit and proceeds from trust receipts,
offset by payment of loans, obligations under capital lease, and payments of
long-term liability due to a customer. In 2003, cash from financing activities
was primarily generated from short-term lines of credit and proceeds from the
issuance of $4 million exchangeable senior subordinated note to our major
shareholder Merrill Lynch. These proceeds from financing activities were used
for payment of loans, trust receipts, obligations under capital lease, and
payments on long-term debt due to a customer. As of December 31, 2003, we had
$8.6 million in short-term loans, $2.3 million in trust receipts, and $1.6
million as a current portion of long-term liability related to the ON
Semiconductor-Guadalajara offload program in 2001.

          In light of our need for cash resources to meet our obligations
specifically with regard to the outstanding payables to equipment suppliers due
in the second and third quarters of 2003, management approached its majority
shareholder, Merrill Lynch about a possible capital infusion, after evaluating
and exhausting all other financing options. On June 25, 2003, our shareholders
approved the transaction at a special meeting of our shareholders. The Audit
Committee of our Board of Directors, comprised of three non-management,
independent directors not affiliated with Merrill Lynch, negotiated and approved
the terms of the note. On July 3, 2003, we issued to a Merrill Lynch affiliate a
$4 million exchangeable senior subordinated note. See "Item 7 - Major
Shareholders and Related Party Transactions - Letter of Interest with Merrill
Lynch."

          In addition, we have renewed and increased our Trade Receivable
Financing Facility from $5 million in 2002 to $10 million effective August 27,
2003 from the Singapore Branch of Raiffeisen Zentralbank Osterreich AG
(RZB-Austria). This will mature by December 31, 2004 with renewal options based
on mutual agreement of both parties. The total loan balance under this Credit
Facility amounted to $6.6 million as of December 31, 2003 and $5.0 million as of
December 31, 2002. We are required to comply with certain financial ratios and
covenants, which was calculated based on our consolidated and unconsolidated
financial statements prepared in conformity with accounting principles generally
accepted of the United States of America. As of December 31, 2003, we are in
compliance with the provisions of the Credit Facility, except with respect to
current ratio requirement. We have obtained a one-time waiver of such covenant
from RZB-Austria as of December 31, 2003.

          We have also successfully negotiated with ON Semiconductor to defer
the payment of an interest free equipment loan amounting to $2.8 million as of
December 31, 2003. Under the agreement, we purchased from ON Semiconductor
certain equipment (Equipment) for a total contract price of $3.5 million which
will be paid

                                       50

<PAGE>

over a period of time depending on pre-agreed production volumes from such
equipment with a final balloon payment on December 14, 2003. However, ON was
unable to meet the pre-agreed production volume and consequently, we did not pay
the liability. In December 21, 2003, we entered into an agreement with the ON to
restructure the outstanding liability which allows us to pay down the liability
on a monthly basis at an amount dependent on the production volume by ON,
interest-free and with final payment due in June 2005. Based on the actual and
projected production volume with ON, we expect to fully settle this liability by
June 2005.

          See "Item 5 - Tabular Disclosure of Contractual Obligations".

Capital Expenditures

          We believe that net cash generated from operations, additional debt or
equity financing, together with cash in bank and credit facilities, will be
sufficient to meet our working capital and outstanding obligations to our
equipment suppliers for the next 12 months. We may seek to raise additional
funds through debt or equity financing or from other sources. We cannot assure
you that additional financing will be available when we need it or, if
available, that it will be available on satisfactory terms. Failure to obtain
any such required additional financing could have a material adverse effect on
our company.

Capital Resources

          On September 24, 2002, we had a $5 million US Dollar denominated trade
receivable financing facility from the Singapore Branch of Raiffeisen
Zentralbank Osterreich AG (RZB-Austria). Under the terms of the Credit Facility
Agreement, PSi Technologies and PSi Laguna are required to maintain separate
escrow bank accounts and to ensure that certain trade receivables are capable of
being assigned by PSI Technologies and PSi Laguna to RZB-Austria and that
collections of such trade receivables are remitted directly to the escrow banks
accounts. Such credit facility was renewed in August 27, 2003, and further
increased to $10 million with the similar terms and conditions described. This
facility will mature in December 31, 2004 and can be extended subject to mutual
agreement by both parties. The total loan balance under this Credit Facility
amounted to $6.6 million as of December 31, 2003 and $5.0 million as of December
31, 2002. PSi Technologies is required to comply with certain financial ratios
and covenants, which shall be calculated on its consolidated and parent company
financial statements prepared in conformity with accounting principles generally
accepted in the United States of America. As of December 31, 2003, PSi
Technologies is in compliance with the provisions of the Credit Facility, except
with respect to the current ratio requirement. We have obtained a one-time
waiver of such covenant from RZB-Austria as of December 31, 2003.

          We have credit facilities with various banks and financial
institutions located in the Philippines. Such credit facilities are short-term
in nature and can be terminated anytime. We continue to explore various
financing options with various banks and financing institutions. We may not be
successful in negotiating and closing any of this financing option.

Special Tax Status

          We benefited from tax incentives available in the Philippines.
Projects undertaken at our Taguig facility were previously qualified for the
following fiscal incentives granted by the Philippine Board of Investments
(BOI):

          .    an income tax holiday for income attributable to the assembly of
               voltage regulators, a type of power semiconductor, for a
               four-year period beginning June 1999;

          .    an income tax holiday for income attributable to test services
               for various semiconductor devices for a four-year period
               beginning August 1999; and

          .    tax and duty-free importation of materials and spare parts.

          .    During the four-year income tax holiday, income derived from the
               sale of voltage regulators and test services are exempt from
               Philippine corporate income tax. Once the four- year period
               expires, we can apply for an extension of the income tax holiday
               period. The income tax holiday incentive may be extended for an
               extra year for each of the following cases:

                                       51

<PAGE>

          .    The project meets the prescribed ratio of capital equipment to
               number of workers set by the BOI;

          .    Utilization of indigenous raw materials at rates set by the BOI;

          .    The net foreign exchange savings or earnings amount to at least
               $500,000 annually during the first three years of operation.

          Originally, when the income tax holiday period expires, we will be
subject to the higher of the 32% regular corporate income tax or the 2% minimum
corporate income tax. The 2% minimum corporate income tax is based on gross
income defined as gross sales less sales returns, discounts and allowances and
cost of sales. However, as part of our tax planning strategy; our Taguig
facility was registered under R.A. No. 7916, otherwise known as the Special
Economic Zone Act of 1995, which created the Philippine Economic Zone Authority.
Effective May 17, 2004, we will be subject to a special tax rate of 5.0% of
gross income derived from the sale of products produced at that facility, in
lieu of all national and local taxes after the expiration of the income tax
holiday period.

          Our income tax holiday on income derived from the sale of power
packages other than voltage regulators expired on December 31, 1998. As a
result, our income from this activity became subject to the higher of the 2%
minimum corporate income tax and the 32% regular corporate income tax rate.

          Because we export all our products, we are subject to zero percent
value added tax (VAT), in the Philippines. Ordinarily, a 10% VAT is imposed on
the sale of goods and services in the Philippines.

          With respect to our import of machinery and equipment, we are able to
convert the VAT paid on the importation into tax credit certificates. These tax
credit certificates can be used as payment for VAT and occasionally duties
(where so permitted by the Bureau of Customs) on other imports. They can also be
sold for cash to other importers who can make use of them if so permitted by the
Bureau of Customs. As of December 31, 2003, we had input VAT of approximately
$1.1 million arising from payments on importations and tax credit certificates
of $278,163. These amounts are included in other current assets account as of
December 31, 2003.

          In addition, the legislation grants the following fiscal incentives
for new projects of non-pioneering status:

          .    an income tax holiday for remaining incentives under its BOI
               registration;

          .    an income tax holiday for new, expansion or additional projects
               which we may register with PEZA;

          .    tax and duty-free importation of capital equipment, raw materials
               and spare parts. This eliminates VAT and negates the need to
               convert VAT paid on importation into tax credit certificates; and

          Our Laguna facility is also registered under R.A. No. 7916, which
grants the following fiscal incentives:

          .    an income tax holiday for smart alphanumeric displays for four
               years beginning December 1999;

          .    an income tax holiday for rectifier devices for four years
               beginning July 2000;

          .    an income tax holiday for small signal transistors for four years
               beginning December 2000;

          .    tax and duty-free importation of capital equipment, raw materials
               and spare parts; and

          .    a special tax rate of 5% on gross income derived from the sale of
               products produced at that facility, in lieu of all national and
               local taxes after the expiration of the income tax holiday
               period.

                                       52

<PAGE>

          Our Chengdu Facility is entitled to the following fiscal incentives:

          .    a tax incentive period commencing from the time operational
               profit is realized, and 15% income tax rate for the third to
               fifth years with option to extend by another three years subject
               to ratification by PRC tax authorities;

          .    after the tax incentive period is finished, a 15% income tax rate
               is levied if the Company exports over 70% of its yearly products.
               For an exporting company already on a 15% tax rate, the income
               tax to be levied is 10%;

          .    exemption from customs duties and VAT payments for imported
               machinery, equipments, construction materials, moulds, spare
               parts, raw materials, packing materials, components and units;

          .    bonded warehouse facility, including refund of VAT on purchase of
               items produce and made in the People's Republic of China such as
               machinery, equipment, construction materials, raw materials,
               packaging materials, moulds and spare parts;

          .    tax rebate of 13% on the cost of electricity, water and gas
               consumed for the manufacture of products for export;

          .    power subsidy of 10% based on the actual power consumption
               expense for a period of 5 years, and 5% for another 5 years
               thereafter; and

          .    a reduction in social benefit and social securities rates to
               24.6% from 37%;

Recently Issued Accounting Standards

          In May 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." This Statement establishes standards for
classification and measurement by an issuer of certain financial instruments
with characteristics of both liabilities and equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise, is effective at the beginning of the first interim beginning after
June 15, 2003. In November 2003, FASB issued "FASB Staff Position No. FAS No.
150-3," which deferred indefinitely the measurement provisions of SFAS No. 150
for certain mandatorily redeemable noncontrolling interests that were issued
before November 5, 2003. The adoption of SFAS No. 150 did not have a material
effect on the Company's financial position, results of operations, or cash
flows.

          In May 2003, Emerging Issue Task Force (EITF) Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" was finalized.
EITF No. 00-21 provides guidance on accounting for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF No. 00-21 apply to revenue arrangements entered
into fiscal periods beginning after June 15, 2003. In December 2003, the U. S.
SEC issued SAB No. 104, "Revenue Recognition," which codifies and rescinds
certain sections of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with EITF No. 00-21. The adoption of EITF No.
00-21 is not expected to have a material effect on the Company's financial
position, results of operations, or cash flows.

          In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
post retirement plans. The statement does not change the measurement or
recognition of pension plans and other postretirement benefit plans. For
domestic plans, the new disclosures are generally effective for periods ending
after December 15, 2003. For foreign plans, the new disclosures are generally
effective for periods ending after June 15, 2004. The requirements under SFAS
No. 132 (revised 2003) are included in Note 18 to the consolidated financial
statements.

C.   Research and Development, Patents and Licenses

                                       53

<PAGE>

Research and Development

          We are increasing our research and development efforts on developing
packages and assembly platforms that will meet the growing needs of our customer
base. One example is our innovative internally isolated TO220 package that
surpasses the performance of all current packages of this type in both cost and
package performance. In addition to our internally isolated TO220, we expect to
offer by the fourth quarter of 2004 a fully qualified QFN assembly line that
will produce a wide variety of packages ranging from a 3 x 3 to a 10 x 10
package for the power semiconductor market. Our QFN assembly platform is the
most cost affective approach in the industry today. Power QFN packages are the
fastest growing power package in the industry. This packaging platform addresses
our customers' need for shortest time-to-market with a new package.

          We now have in place a Lead (Pb)-free process particularly in package
lead plating and dipping, in keeping with the industry's objective to minimize
and eliminate substances/components in the package harmful to the environment.
We are in the process of identifying appropriate green molding compounds to
replace the existing materials with Antimony (Sb) and Bromine (Br). Another
focus in our materials development activities is the identification of
alternative materials that will improve the cost of our packages.

          As of December 31, 2003, we employed 16 professionals dedicated to
research and development. Our management and other operational personnel are
also involved in research and development activities. We spent a total of
$691,394 in 2001, $1,253,242 in 2002, and $722,857 in 2003 on research and
development.

Patents and Licenses

          We have not previously filed for any patents or similar invention
protections. Renewed focus on package development may result in the filing of
patents in 2004, related to our Research and Development activities. Our focus
on the needs of our customers and the growing demands for innovation in the
industry will enable us to define our role as one of the leaders in the
industry. We depend in part on our ability to develop and protect our
intellectual property and the intellectual property of our customers shared with
us, and our ability to apply that know-how to improve our customers' packaging
design and implementation.

          We believe that our continued success depends in large part on the
technological skills of our employees and their ability to continue to innovate.

D.   Trend Information

          The Philippine economic downturn that began with the Asian Financial
Crisis in 1997 to 1999, US economic downturn that began in 2001, and the
downturn in the semiconductor industry has made it more difficult for us to
access adequate financing for our capital expenditures and to access such
financing on attractive terms.

          According to statistics from the Bangko Sentral ng Pilipinas (Central
Bank of the Philippines), the non-performing loan ratio of the Philippine
banking sector has increased from 2.8% in 1996 to 14.9% in 2002, owing to the
lingering effects of the Asian financial crisis. This has increased the
reluctance of the Philippine Banking sector to extend credit facilities to
corporations in general, and more especially for corporations with recent
history of net losses. Similarly, the US economic and semiconductor industry
downturns that began in 2000 and resulted in the more than 77% decline in the
technology heavy Nasdaq stock market index from its peak in February 2000 to the
index's low of 2002 has limited funding options for companies in the
semiconductor industry.

          Due to the above factors, we have relied principally on supplier
credits extended by our equipment suppliers to fund our capital expenditures
program, and secondarily, to the extent available at the time of such equipment
purchases, on cash generated from operations and other financing activities.

          Please see the discussion of the trends we have identified regarding
our business in Item 5A. through Item 5C. above.

E.   Off-Balance Sheet Arrangements.

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<PAGE>

          We have not entered into any significant transactions, arrangements or
other relationships with unconsolidated, limited purpose entities.

F.   Tabular Disclosure of Contractual Obligations.

          The following table aggregates, as of December 31, 2003, our known
contracted obligations and commitments.

Payments Due by Period
(U.S. dollars)

<TABLE>
<CAPTION>
                                                    Less  than                           More than
Contractual Obligations                   Total       1 Year     1-3 Years   3-5 Years    5 Years
-------------------------------------   ---------   ----------   ---------   ---------   ---------
<S>                                     <C>         <C>           <C>          <C>        <C>
Long-Term Debt Obligations                      -           -           -            -          -
Capital Leases Obligations                155,581     133,354      22,227            -          -
Operating Lease Obligations (1)         2,277,842     532,035     873,292      571,632    300,883
Long-term Liability Due to a
  Customer (2)                          2,800,000   1,824,207     975,793            -          -
Purchase Obligations
Merrill Lynch Exchangeable Note (3)     4,000,000           -           -    4,000,000          -
</TABLE>

----------
          (1) Operating Lease Obligations include the lease of land and building
in Taguig, Laguna and China.

          (2) On December 11, 2001, we entered into an Equipment Purchase
Agreement (Agreement) with one ON Semiconductor. Under the Agreement, we
purchased from ON certain equipment (Equipment) for a total contract price of
$3.5 million. A downpayment of $350,000 was made upon delivery of the Equipment
in 2001 and a series of installment amounts is payable over 24 months beginning
January 2002 based on the pre-agreed production volume from such Equipment. Any
remaining liability after the said installments should be fully settled on
December 14, 2003. However, the Customer was unable to meet the pre-agreed
production volume. Consequently, we did not pay the liability. In 2003, we
entered into an Agreement with the Customer to restructure outstanding
liability. Instead of a final balloon payment in December 2003, the
restructuring allows us to pay down the liability on a monthly basis at an
amount dependent on the production volume by the Customer, interest-free and
with final payment due on July 1, 2005. Based on the actual and projected
production volume with the Customer, we expect to fully settle this liability by
June 2005.

          (3) On July 3, 2003, PSi Technologies, Inc., our principal
operating subsidiary issued to a Merrill Lynch affiliate a $4 million
exchangeable senior subordinated note. The proceeds of the note were used to pay
liabilities related to certain capital expenditures which became due in 2003.
See "Item 7 - Major Shareholders and Related Party Transactions - The Merrill
Lynch Exchangeable Note" for a summary of terms. The note was issued by PSi
Technologies, Inc., our principal operating subsidiary, and matures on June 1,
2008. The exchangeable note accrues interest at a rate of 10% per annum, net of
Philippine withholding tax payable semi-annually in arrears. Interest on the
note is payable in cash or, under certain circumstances, in our common shares,
We are not permitted to prepay the note in whole or in part. The note will be
exchangeable by Merrill Lynch at any time into our common stock at a price of
$1.15 per share. The initial exchange price was $1.47 per share, but was reduced
to $1.15 per share due to the fact that we did not meet certain performance
targets for the third and fourth quarters of 2003 as provided for in the note.
If, at any time after July 3, 2006, our publicly-traded ADS (i) shall have
traded at an average closing price of at least $3.00 per ADS for a
30-consecutive trading day period and (ii) the daily average trading volume of
the ADS, for such period was equal to at least 33.33% of the number of shares
into which the note is exchangeable, then we may notify Merrill Lynch that we
desire to redeem the note. The note will then be redeemed unless Merrill Lynch
exercises its right to exchange or assign the note. The note is unsecured and
subordinated in right of payment to all of our obligations comprising our senior
credit facility, amounts of the then outstanding indebtedness to Semiconductor
Components Industries, LLC and any other permitted indebtedness the terms of
which expressly provide it is senior in right of payment to the note. The note
is presented net of discount of $3.1 million in the consolidated balance sheet.


                                       55

<PAGE>

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.   Directors and Senior Management

          As of December 31, 2003, our directors and executive officers were as
follows:

Name                            Age                  Position
-----------------------------   ---   -------------------------------------

Directors
Arthur J. Young, Jr.             47   Director and Chairman of the Board
Mandakini Puri (1)               44   Director
Brian A. Renaud (1)(2)           40   Director
Joseph R. Madrid (3)             40   Director
William J. Meder (2)(4)(5)       63   Director
Ramon R. del Rosario, Jr. (6)    59   Director
Roberto F. de Ocampo (7)         58   Director
Romeo L. Bernardo (6)            49   Director

Executive officers
Arthur J. Young, Jr.             47   President and Chief Executive Officer
Thelma G. Oribello               38   Chief Financial Officer and Treasurer
Helen G. Tiu                     43   Corporate Secretary

----------
(1)  Member of the Compensation Committee
(2)  Member of the Budget Committee
(3)  Elected June 2002 replacing Carol Lee of Merrill Lynch
(4)  Elected June 2002 replacing Daniel Siazon of Nomura JAFCO
(5)  Member of the Special Committee on the IPO Litigation created on December
     19, 2002
(6)  Member of the Audit Committee
(7)  Chairman of the Audit Committee

          Since the last annual stockholders' meeting and through June 22, 2004,
the board of directors held three (3) meetings. The average attendance by
directors at board of directors' meetings they were scheduled to attend was
83.33%.

          The members of the board of directors listed above were elected to the
board during the annual stockholders' meeting on June 25, 2003.

          All directors are elected annually by our shareholders. Interim
vacancies may be filled by our board of directors. Our executive officers do not
serve fixed terms of office and are appointed by and serve at the discretion of
the board of directors. The following sets out biographical information on our
directors and executive officers.

          Arthur J. Young, Jr.--Mr. Young is Chairman and Chief Executive
Officer of PSi Technologies Holdings, Inc. and PSi Technologies, Inc. He has
been with us since 1988 and was appointed President and Chief Executive Officer
of PSi Technologies Holdings, Inc. on February 4, 2000. Prior to working with
us, Mr. Young founded and managed a diversified transportation business in
Vancouver, Canada. Mr. Young received a bachelors degree in Political Science
from the University of British Columbia in Canada.

          Mandakini Puri--Ms. Puri is a Managing Director in Merrill Lynch's
Global Private Equity Division and has been with Merrill Lynch since 1986. Ms.
Puri has a Bachelor of Arts degree from Delhi University, India and an MBA from
the University of Pennsylvania.

          Brian A. Renaud--Mr. Renaud is a Managing Director in Merrill Lynch's
Global Private Equity Division. He has been with Merrill Lynch since 1990. He
also serves as a director on the board of Wendeng Tianrun Crankshaft Co., Ltd.
Mr. Renaud received a Bachelor of Science degree from Georgetown University and
an MBA from Harvard University.

                                       56

<PAGE>

          Patchara Samalapa - Mr. Samalapa is an Associate in Merrill Lynch's
Global Private Equity Division. He has been with Merrill Lynch since 1996. Mr.
Samalapa was elected to the board on April 21, 2004, pursuant to Philippine law,
by the other directors to fill the vacancy arising from the resignation of Sung
Min Cho from the board on June 30, 2003 Mr. Samalapa received a Bachelor of
Science degree in Industrial Management from Carnegie Mellon University and an
MBA from Massachusetts Institute of Technology.

          Joseph R. Madrid - Mr. Madrid is Executive Director of Philippine
Equity Partners, a leading stockbrokerage house in the Philippines, which he and
his partners established in 2001. Mr. Madrid was Managing Director of Merrill
Lynch equity sales in Singapore, and prior to that, was broking head of Merrill
Lynch's Philippine operations, which he set up in 1997. Mr. Madrid was also
Managing Director of Jardine Fleming Securities, Phils. Inc until March 1997. He
was a member of the Board of Governors of the Philippine Stock Exchange from
2000 to 2001 and 2003 to 2004. Mr. Madrid earned his Bachelor of Arts in
Economics from the University of Chicago.

          William J. Meder - Mr. Meder is the President of Firebird Consulting
Group LLC, and has 40 years experience in electronics manufacturing, technology
and business management. He is currently Chairman of the Board of Leshan Phoenix
(a Chinese joint venture company), director of Leshan Radio Co., and ST Assembly
and Test Services Ltd, and Executive Director of PSi Technologies Chengdu Co.
Ltd. He spent 34 years with Motorola with a focus on international manufacturing
and business operations, prior to his retirement in 1999. He was General Manager
of Motorola Taiwan, Motorola Philippines and Motorola Malaysia. From 1995 to
1998 he was Vice President and Director of Joint Ventures and Investments for
the Semiconductor Components Group of Motorola. He has a Bachelor of Science
degree in Metallurgical Engineering from Oklahoma University, an MS in Materials
Science a D.Sc. in Chemical Engineering from Washington University in St. Louis
and an MBA from Arizona State University.

          Ramon R. del Rosario, Jr.--Mr. del Rosario is President of Philippine
Investment Management (PHINMA) Inc., and Chairman and CEO of AB Capital and
Investment Corporation. He is a director of Ayala Land, Inc., Union Cement
Corporation, Bacnotan Consolidated Industries, Inc., Roxas Holdings, Inc. and
other major publicly-listed and privately-owned companies in the Philippines. He
served as Secretary of Finance of the Republic of the Philippines from 1992 to
1993 and was Executive Vice President and Chief Financial Officer of San Miguel
Corporation from 1986 to 1989. Mr. del Rosario received his bachelors degree in
Accounting and Social Science from De La Salle College in Manila (magna cum
laude) and an MBA from Harvard University.

          Roberto F. de Ocampo, Ph.D.--Dr. de Ocampo is currently President of
the Asian Institute of Management, the leading international graduate school of
business and management based in Manila. He served as Secretary of Finance of
the Republic of the Philippines from 1994 to 1998 during the presidency of Fidel
V. Ramos and was previously President and Chief Executive Officer of the
Development Bank of the Philippines. Dr. de Ocampo graduated from De La Salle
College and Ateneo University in Manila, received an MBA from the University of
Michigan and holds a post-graduate diploma from the London School of Economics,
and has three doctorate degrees (Honoris Causa). He is the recipient of many
international awards including Finance Minister of the Year, Philippine Legion
of Honor, ADFIAP Man of the Year, and Chevalier of the Legion of Honor of
France.

          Romeo L. Bernardo--Mr. Bernardo is President of Lazaro Bernardo Tiu &
Associates, Inc., a consultancy firm. He currently sits as a director of Bank of
Philippine Islands, Globe Telecom, RFM Corporation, and other leading
corporations in the Philippines. Mr. Bernardo was an alternate director of the
Asian Development Bank from 1997 to 1998 and Finance Undersecretary for
International Finance, Privatization & Treasury Operations of the Department of
Finance of the Republic of the Philippines from 1990 to 1996. Mr. Bernardo
received a Bachelor of Science degree in Business Economics from the University
of the Philippines and a masters degree in Development Economics from Williams
College.

          Thelma G. Oribello--Ms. Oribello is our Chief Financial Officer and
Treasurer, and Chief Financial Officer of PSi Technologies, Inc. She joined us
in 1995. Previously, she was an Assistant Vice President and Corporate
Controller at RFM Corporation and an Audit Supervisor at SGV & Co. Ms. Oribello
is a certified public accountant and has a bachelors degree in Business
Administration, major in Accountancy, from the University of the East in Manila
(cum laude) and studied for an MBA at the University of the Philippines.

          Helen G. Tiu--Ms. Tiu is the Corporate Secretary of PSi Technologies
Holdings, Inc. and its subsidiaries and of Aboitiz Transport System (ATSC)
Corporation (formerly William, Gothong & Aboitiz, Inc.). She is a Managing
Director of Lazaro Bernardo Tiu & Associates, Inc., a consultancy firm, and
practices law at H.G. Tiu

                                       57

<PAGE>

Law Offices. Ms. Tiu was a partner at SGV & Co from 1994 to 1996, Head Executive
Assistant at the Office of the Secretary, Department of Energy in the
Philippines from 1993 to 1994, and a director of Petron Corporation from 1993 to
1994 and of Goodyear Corporation in 1994. She is a certified public accountant
and a member of the Philippine Bar. She received a Bachelor of Science in
Business Administration and Accountancy (cum laude), a Bachelor of Laws from the
University of the Philippines and a Master of Laws degree from Harvard
University.

Additional Executive Officers of PSi Technologies, Inc.

          The following sets out biographical information for additional
executive officers of our principal operating subsidiary, PSi Technologies.

          Randall M. Young--Mr. Young serves as the President and a Director of
Pacsem Realty and PSitech Realty Inc. Previously, he was a director at Amon
Securities Inc. and Treasurer at Tisdall Industrial Corporation. Mr. Young
received a bachelors degree in Business Administration from Simon Fraser
University. Mr. Young is the brother of Arthur J. Young, Jr.

          Rizaldy F. Lanon--Mr. Lanon is our Vice President for Business and
Technology Development. He joined us in 1994. Mr. Lanon has 23 years of
experience in the semiconductor industry. Prior to joining us, Mr. Lanon was a
Technical Manager at National Semiconductor Corporation and had primary
responsibility of Process Engineering and Package Technology. Mr. Lanon received
a degree in Electrical Engineering from FEATI University, Manila.

          Ramon C. Magsaysay--Mr. Magsaysay is our Vice President for
Reliability and Quality Assurance. He joined us in 1992. Mr. Magsaysay has 27
years of experience in the semiconductor industry. Previously, he was an
Operations Manager at Motorola and an Assistant Vice President for Quality
Assurance at Uniden Electronics Corporation. Mr. Magsaysay received a degree in
Electronics and Communications Engineering from Don Bosco Institute of
Technology and an MBA from Philippine Christian University in Manila.

          Bryan C. Rigg--Mr. Rigg is our Managing Director for our main facility
in Taguig, Metro Manila, having been appointed Vice President for Operations in
2002. He has 25 years experience in the semiconductor industry. Prior to that,
Mr. Rigg was External Manufacturing IC Assembly & Test Engineering Manager with
ON Semiconductor, and before that, he was Manufacturing Operations Manager of
Motorola Philippines Inc. (Carmona plant) in the Philippines. Mr. Rigg is a Six
Sigma Black Belt awardee from Motorola and holds an Associate of Arts degree in
Electronics Technology Engineering from the United States Air Force.

          Charito C. Montemayor--Ms. Montemayor is our Managing Director of PSi
Technologies Laguna, our second manufacturing facility. She has 23 years
experience in the semiconductor industry. Prior to joining us, she was the Chief
Operating Officer of Fastech Synergy Ltd. Ms. Montemayor received a degree in
Chemical Engineering from the University of Santo Tomas in Manila and was a
second place in the 1977 Professional Regulations Commission Licensure
Examination for Chemical Engineers.

          James H. Knapp - Mr. Knapp is our Vice President for Technology,
Package Development and Central Engineering. He joined us in March 2004. Mr.
Knapp has over 35 years of experience in the semiconductor industry and awarded
33 patents (with 11 pending). Prior to joining our company, he was the Package
Development Manager of Motorola, Inc./ON Semiconductor in Phoenix, Arizona. Mr.
Knapp received his Bachelor of Science degree in Mechanical Engineering from
Arizona State University.

          Michael T. Gholson - Mr. Gholson is our Director for Sales for US. He
joined us in January 2001. Mr. Gholson has over 36 years of experience in the
semiconductor industry. Prior to joining our company, he was the External
Manufacturing Assembly/Test Engineering Manager of Motorola, Inc./ON
Semiconductor in Phoenix Arizona. Mr. Gholson received his BBA degree in
Management from East Texas State University.

          Except as otherwise noted, there is no relationship between any of our
directors or executive officers and any other director or executive officer.

          We have entered into a non-competition agreement with our Chairman and
Chief Executive Officer, Arthur J. Young, Jr., which provides, among others,
that if Mr. Young is no longer employed with us, he will not

                                       58

<PAGE>

render services related to packaging and testing of power semiconductors to
other companies for one or two years from the date of his departure, depending
on the circumstances of his departure.

          See Item 7 - "Major Shareholders and Related Party Transactions -
Shareholders' Agreement and Registration Rights Agreement" regarding the right
of certain of our shareholders to appoint members of our board of directors.

B.   Compensation

          We paid an aggregate amount of $98,500 to members of our board of
directors as reimbursement for costs and expenses incurred in connection with
attending meetings of the board of directors and its committees in 2003. In
addition to such amounts, we paid William J. Meder, one of our directors,
$112,077 in 2003 for his services as a consultant and advisor to our
manufacturing operations and China activities. See "Item 7 - Major Shareholders
and Related Party Transactions - Agreement with William J. Meder."

          We paid an aggregate amount of $880,650 in compensation to our top
nine officers in 2003. We provide daily transportation to and from work to these
executives and housing for our Managing Director in our Taguig facility. We did
not pay any bonus to our executive officers and directors in 2003.

          In December 2003, we hired a Managing Director for our China facility
and are committed in the future to pay such Managing Director a total of
$164,077 in the form of bonuses and allowances plus a share in the profit of
China facility if and when it becomes profitable.

          We issued 135,000 options to purchase shares of our common stock in
February 2, 2004 to 24 of our executives and officers at an exercise price of
$3.25 per share. We are also committed to issue an additional 50,000 shares to
our Managing Director in China if certain performance targets are met. The
vesting period and term of those options are consistent with the terms of our
stock option plan as described in "Item 6 - Share Ownership - PSi Stock Option
Plan."

          Outstanding loans made by the Company to key executives declined by
$37,413 from $42,913 as of the end of December 31, 2002 to $5,500 as of December
31, 2003. These loans were granted prior to July 30, 2002 and have not been
modified or amended since. The terms and conditions of the loans are as follows:

<TABLE>
<CAPTION>
                                                             Largest
                                                Amount       Amount
                                             Outstanding   Outstanding
Name                        Position         31-Dec-2003       2003      Interest    Nature
------------------   ---------------------   -----------   -----------   --------   -------
<S>                  <C>                        <C>           <C>         <C>       <C>
Rizaldy F. Lanon     Vice President for        $5,500         $6,840      12.50%    Housing
                     Business & Technology
                     Development
Ramon C. Magsaysay   Vice President for            --         $  593      12.50%    Housing
                     Reliability & Quality
                     Assurance
</TABLE>

          Non-executive directors receive per diem compensation for their
attendance at each board meeting. Directors are reimbursed for reasonable
expenses incurred for attendance of meetings of the board and its committees.
Directors may also receive additional compensation for serving on board
committees and/or performing additional or special duties at the request of the
Board.

          We have a defined benefit retirement plan that covers all of our
officers and full-time employees in the Philippines. Retirement costs are based
on amounts computed by an independent actuary. As of December 31, 2003, the fair
value of the retirement plan assets amounted to $145,011. In 2003, we did not
offer a voluntary early retirement program.

C.   Board Practices

                                       59

<PAGE>

          The following table sets forth the term of office for the members of
our board of directors as of December 31, 2003.

                            Commencement of   Expiration of
Name                           First Term      Current Term
-------------------------   ---------------   -------------

Arthur J. Young, Jr.         December 1999      June 2004
Mandakini Puri               October 2001       June 2004
Brian A. Renaud              December 1999      June 2004
Joseph R. Madrid             June 2002          June 2004
William J. Meder             June 2002          June 2004
Ramon R. del Rosario, Jr.    February 2000      June 2004
Roberto F. de Ocampo         March 2000         June 2004
Romeo L. Bernardo            February 2000      June 2004

          We do not have directors' service contracts or other agreements that
provide for benefits on termination of employment.

Committees of Our Board of Directors

          Our board of directors has an audit committee, a budget committee and
a compensation committee.

          The audit committee is responsible for (1) selecting and engaging, on
our behalf, independent auditors to audit our annual financial statements, (2)
reviewing and approving the planned scope and results of our annual audit, (3)
approving the non-audit services provided by our independent auditors, and (4)
reviewing our internal controls and financial reporting process. We have three
independent directors on the audit committee. As of December 31, 2003, Messrs.
del Rosario, de Ocampo and Bernardo served on the audit committee, with Mr. de
Ocampo as Chairman.

          In response to the recent corporate governance reforms dictated by the
Sarbanes-Oxley Act of 2002, the audit committee adopted a new audit committee
charter on April 23, 2003. The new audit committee charter sets forth the
enhanced responsibilities of the audit committee relating to oversight of (1)
the integrity of our financial statements, (2) our compliance with legal and
regulatory requirements, (3) the qualifications and independence of our
independent auditors, and (4) the performance of our internal audit function.

          Specifically, the new audit committee charter reflects changes to the
audit committee's responsibilities in terms of, among other things, (1)
pre-approval of audit and non-audit services provided by the independent
accountant, (2) pre-approval of related party transactions, (3) establishing
procedures relating to the anonymous submission of concerns regarding
questionable accounting or auditing matters and internal controls, and (4)
direct responsibility for the hiring, retention, evaluation, and termination of
our independent accountant. The new audit committee charter also provides the
audit committee with the authority and sufficient funding to retain independent
counsel or any other advisors that it determines to be necessary to carry out
its duties.

          The budget committee is responsible for (1) reviewing and recommending
to the board of directors for approval of PSi's operating budget, (2) comparing
the budget to actual performance, (3) reviewing past capital expenditure
decisions relative to expected versus actual performance, and (4) approving
specific capital expenditures projects and requests. As of December 31, 2003,
the members of the budget committee are Messrs. Brian Renaud and
William J. Meder.

          The compensation committee is responsible for establishing
remuneration levels for some of our officers and performs certain functions
under our employee benefit programs. As of December 31, 2003, the members of the
compensation committee are Ms. Mandakini Puri and Mr. Brian Renaud.

D.   Employees

                                       60

<PAGE>

          We actively recruit to attract the highest quality personnel in our
region. Our employees are not covered by any collective bargaining arrangements.
We believe that our relationship with our employees is good. The following table
sets forth the total number of employees as well as a breakdown by region:

Headcount                            Taguig   Laguna   China   US   Total
---------                            ------   ------   -----   --   -----
Operations                            1,695     318                 2,013
Engineering                             405     116                   521
Quality                                 378      64      1            443
Sales/ Marketing/ Customer Service       26       1             1      28
General, Administrative/ Executive
and Non-Operations                      258      48      1      2     309
-------------------------------------------------------------------------
TOTAL                                 2,762     547      2      3   3,314

          In relation to our initiatives to improve the productivity and
efficiency of our manufacturing operations, we reduced headcount by 324
from 2002 to 2003. We do not expect a significant increase in manpower of our
Philippine operations, but expect an increase for our China operations.

E.   Share Ownership

          The following table sets forth the number of shares and options owned
by our directors, officers and members of management. Our Chairman, President
and Chief Executive Officer, Mr. Arthur J. Young, Jr. owns, directly and
indirectly, 164,907 shares or 1.24% of our shares. The following directors and
officers also own shares of the Company or options on such shares as of
December 31, 2003:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                         Percentage     Number of
                                          of Total        Common
                           Number of    Outstanding       Shares
                            Common         Common       Underlying    Exercise   Expiration
Name                     Shares Owned      Shares     Stock Options     Price     Date (2)
-------------------------------------------------------------------------------------------
<S>                         <C>         <C>              <C>           <C>       <C>
Arthur Young Jr. (1)        164,907         1.24%        457,600       $13.30
-------------------------------------------------------------------------------------------
Brian Renaud (1)                  *
-------------------------------------------------------------------------------------------
Mandakini Puri (1)                *
-------------------------------------------------------------------------------------------
Ramon R. del Rosario, Jr.         *
-------------------------------------------------------------------------------------------
Romeo L. Bernardo                 *
-------------------------------------------------------------------------------------------
William J. Meder                  *
-------------------------------------------------------------------------------------------
Roberto F. de Ocampo              *
-------------------------------------------------------------------------------------------
Joseph R. Madrid (1)              *
-------------------------------------------------------------------------------------------
Patchara Samalapa (1)             *
-------------------------------------------------------------------------------------------
Thelma G. Oribello                                        25,000       $13,30
-------------------------------------------------------------------------------------------
Ramon C. Magsaysay                                        15,000       $13.30
-------------------------------------------------------------------------------------------
Randall Young                                             10,500       $13.30
-------------------------------------------------------------------------------------------
Rizaldy Lanon                                             15,000       $13,30
-------------------------------------------------------------------------------------------
</TABLE>

----------
          * These individuals beneficially own less than 1% of the Company's
issued and outstanding shares.
          (1) These individuals are employees and or nominees of Merrill Lynch,
our controlling shareholder. See "Item 7 - Major Shareholder and Related Party
Transactions" regarding Merrill Lynch's share ownership.
          (2) Pursuant to our stock option plan, options expire no later than
three years after they vest and have a maximum term of ten years.

PSi Stock Option Plan

          Pursuant to our stock option plan, options may be granted to certain
of our directors, officers and employees for the purchase of up to an aggregate
of 741,162 common shares. As of December 31, 2003, there were 580,350 options
outstanding, a reduction of 16,000 options from 596,350 options outstanding as
of the end of December 31, 2002. We granted an additional 135,000 options on
February 2, 2004 to 24 of our executives and officers of the Company.

                                       61

<PAGE>

          In general, our stock option plan requires that options vest not more
than ten years from the date of grant and that options expire not more than
three years after the vesting date. The plan is administered by the compensation
committee of our board of directors which determines, in its discretion, the
number of common shares subject to each option granted and the related purchase
price and option period. Upon the voluntary termination of employment by an
option holder or termination of an option holder for cause, any options granted
under our stock option plan to the option holder (whether or not vested) will
terminate, unless otherwise authorized by the compensation committee. If
termination was due to retirement, disability or involuntary separation other
than for cause, the option holder or his successors have the remainder of the
applicable term to exercise the option holder's vested options. If termination
was due to death, vested options may be exercised for the remainder of their
term. Options granted are non-transferable except by will or as otherwise
authorized by the compensation committee.

          Upon the occurrence of any change in our capital structure, including
any merger, liquidation, reorganization or recapitalization, or any other event
affecting our shares, our compensation committee may make adjustments to our
stock option plan and any outstanding grants, as it may deem necessary or
appropriate. Unless terminated earlier by our board, our stock option plan will
terminate on February 4, 2010, the 10-year anniversary of the approval of the
stock option plan by our board and shareholders.

          We recognized share compensation expense for options granted to
employees under our stock option plan. For each reporting period, compensation
cost for shares granted under the scheme to employees was determined using the
intrinsic value method under APB 25. Under the intrinsic value method,
compensation cost is measured for the difference between the price an employee
is required to pay to purchase equity securities of the company and the fair
value and market price of the equity securities acquired at measurement date.
Compensation expense is provided generally over the vesting period on a
systematic basis. See Note 19 to our audited consolidated financial statements.

                                       62

<PAGE>

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   Major Shareholders

          The following table describes the beneficial ownership of our common
shares as of May 1, 2004, based on an aggregate of 13,289,525 common shares
outstanding as of such date, by each person who is the beneficial owner of 5% or
more of our capital stock.

<TABLE>
<CAPTION>
                                                             Number of Common Shares       Percentage
Holders                                                         Beneficially Owned     Beneficially Owned
-------                                                      -----------------------   ------------------
<S>                                                                 <C>                       <C>
Merrill Lynch Global Emerging Markets Partners, L.P.(1)...          7,141,624                 53.7%
NJI No. 2 Investment Fund(2)..............................          1,955,741                 14.7%
Austin W. Marxe and David M. Greenhouse (3)...............          1,669,500                 12.6%
Wasatch Advisors, Inc. (4)................................          1,093,870                  8.2%
</TABLE>

------------
(1)  Merrill Lynch Global Emerging Markets Partners, L.P. is a private
     investment fund.
(2)  NJI No. 2 Investment Fund is a private investment fund.
(3)  Austin W. Marxe and David M. Greenhouse are the controlling principals of
     AWM Investment Company, Inc. ("AWM"), the general partner of and investment
     adviser to Special Situations Cayman Fund, L.P. ("Cayman"). AWM also serves
     as the general partner of MGP Advisers Limited Partnership ("MGP"), the
     general partner of and investment adviser to Special Situations Fund III,
     L.P. ("SSF3"). Cayman owns 408,900 of the Company's ADS while SSF3 owns
     1,260,600 of the Company's ADS. Based on October 8, 2003 Filing US SEC Form
     13G/A Filing.
(4)  Wasatch Advisors, Inc. is an Investment Adviser registered under section
     203 of the Investment Advisers Act of 1940 who owns shares through the
     Company's ADS. Based on February 18, 2004 US SEC Form 13G/A Filing.

          On May 2001, Merrill Lynch increased its ownership in the Company by
acquiring 4,580,910 shares from RFM Corporation, representing approximately 34%
of our stock. Merrill Lynch currently owns 7,141,624 shares representing an
ownership of 53.7%. Pursuant to the terms of the exchangeable senior
subordinated note issued to Merrill Lynch in July 2003, Merrill Lynch's equity
stake in the Company, on an as exchanged basis, would increase to 63.3% or by an
additional 3,478,261 shares. If interest on the exchangeable note is paid in the
form of common shares, Merrill Lynch's equity stake in the Company could further
increase.

          In October 2003, Austin W. Marxe and David M. Greenhouse increased
their ownership in the Company from 1,003,500 shares to 1,669,500 shares. In
February 2003, Wasatch Advisors, Inc. decreased its ownership in the Company
from 1,993,854 shares to 1,828,314 shares, and further decreased its ownership
in October 2003 and February 2004, to 1,113,125 and 1,093,870 shares,
respectively. The above information is based on US SEC Form 13G/A Filings of
Wasatch Advisors, Inc. and Austin W. Marxe and David M. Greenhouse.

          Except as provided for in the Shareholders' Agreement and Merrill
Lynch's Exchangeable Senior Subordinated Note, the Company's major shareholders
do not have different voting rights than the Company's other shareholders. See
"Item 7 - Major Shareholders and Related Party Transactions - Related Party
Transactions" for a discussion of the terms of the Shareholders' Agreement and
Merrill Lynch's Exchangeable Senior Subordinated Note.

          The Company's 9 Filipino shareholders own 2,255 shares of the Company.
Foreign nationals own the balance of 13,287,270 shares.

          The Company is effectively controlled by Merrill Lynch Global Emerging
Markets Partners, L.P. Merrill Lynch owns approximately 53.7% (subject to
increase as discussed herein) of the common shares and controls the same
percentage of the voting power of the Company.

          We are not aware of any arrangement that may at a subsequent date
result in a change of control of us.

B.   Related Party Transactions

Shareholders' Agreement and Registration Rights Agreement

          Shareholders' Agreement. On May 29, 2001, we, our principal operating
subsidiary, PSi Technologies, Inc., Merrill Lynch, JAFCO Investment (Asia
Pacific) Ltd. (which we call JAFCO), acting as Investment Manager

                                       63

<PAGE>

of NJI No. 2 Investment Fund, and Arthur Young, Jr. entered into a Shareholders'
Agreement relating to their ownership, transfer and voting of our common shares.
Under the Shareholders' Agreement, all common shares owned by Merrill Lynch,
JAFCO and Arthur Young, Jr. are subject to resale restrictions. Under certain
circumstances, each of Merrill Lynch and JAFCO has a right of first refusal to
purchase, and a tag-along right to sell, when JAFCO or Merrill Lynch, as the
case may be, elects to transfer its shares.

          As a result of its shareholdings, and in accordance with the
Shareholders' Agreement, Merrill Lynch may appoint and remove a majority of our
board of directors and the board of directors of our principal operating
subsidiary, PSi Technologies, Inc. Our board consists of nine directors. Merrill
Lynch and JAFCO have agreed, subject to certain conditions, that they will vote
to ensure that our board of directors will be comprised of:

..    five directors nominated by Merrill Lynch, if requested (currently Ms.
     Puri, Mr. Renaud, Mr. Madrid, Mr. Meder and Mr. Samalapa serve as the
     Merrill Lynch nominees);

..    one director nominated by JAFCO, if requested (currently JAFCO has no
     nominees serving on the board of directors); and

..    three independent directors as defined under the Nasdaq Rules.

          We and our subsidiaries have agreed to indemnify and
hold harmless each member of our board of directors and each member of our
subsidiaries board of directors to the fullest extent
permitted under applicable law.

          As a result of their shareholdings and related rights to
representation on our board, Merrill Lynch and JAFCO may prevent us from taking
certain actions as set forth in the shareholders' agreement. See "Item
10--Additional Information--Articles of Incorporation and By-laws--Matters
Requiring Shareholder Approval". As of the date of this annual report,
purchasers of our ADSs owned in the aggregate 30.29% of our share capital. You
may not be in a position to exercise any significant control or influence over
the business and affairs of our company or any of our subsidiaries. In addition,
without the consent of Merrill Lynch and JAFCO, acting through directors
nominated by them or through their vote as shareholders, no amendments to any of
our organizational documents or those of our subsidiaries may be made nor may we
sell all or part of our shares or material assets or those of our subsidiaries.

          The Shareholders' Agreement also prohibits us from taking any action
that would cause taxable gain to be recognized by any partner of Merrill Lynch
under Section 367 of the U.S. Internal Revenue Code of 1986, as amended, or the
Code, or under a gain recognition agreement filed by a partner of Merrill Lynch
pursuant to U.S. Treasury Regulation Section 1.367(a)-8. During the five year
period following our 1999 reorganization, the sale, transfer, or disposition of
our shares in, or a substantial portion of the assets of, our principal
operating subsidiary, would cause a partner of Merrill Lynch to recognize gain
under Section 367 of the Code, and under Treasury Regulation 1.367(a)-8, and is
therefore prohibited under the Shareholders' Agreement.

          Registration Rights Agreement. We, Merrill Lynch and JAFCO are party
to an agreement dated May 29, 2001, that grants Merrill Lynch and JAFCO certain
registration rights. Each of Merrill Lynch and JAFCO has an option to cause us
to effect up to three registrations of the shares owned by it, its affiliates
and transferees. If one party exercises its registration rights, the other
parties having registration rights may elect to include their shares in the
registered offering. The registration rights agreement also provides that if we
register any equity securities for a primary or secondary offering, we must
permit each of Merrill Lynch and JAFCO, and anyone to whom they have transferred
shares in a private placement, to include their shares in the offering.

          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."

                                       64

<PAGE>

          Additional Undertakings. We have agreed to comply with other covenants
set forth in the shareholders' agreement and the registration rights agreement.
Among other things, we have agreed to indemnify, hold harmless against and pay
on behalf of or reimburse any losses which Merrill Lynch or JAFCO may suffer or
become subject to as a result of breaches by us of the agreements,
misrepresentations by us, or causes of action arising out of or in connection
with our operations.

The Merrill Lynch Exchangeable Note

          In light of our need for cash resources, management approached its
majority shareholder, Merrill Lynch, about a possible capital infusion. On June
25, 2003, our shareholders approved the transaction at a special meeting of our
shareholders. The audit committee of our board of directors, comprised of three
non-management, independent directors not affiliated with Merrill Lynch,
negotiated and approved the terms of the note. On July 3, 2003, we issued to a
Merrill Lynch affiliate a $4 million exchangeable senior subordinated note.

          The proceeds of the note were used to pay liabilities related to
certain capital expenditures which came due in 2003. The note was issued by PSi
Technologies, Inc., our principal operating subsidiary, and matures on June 1,
2008. The note accrues interest at a rate of 10% per annum, net of Philippine
withholding tax, payable semi-annually in arrears. Interest on the note is
payable in cash or, under certain circumstances, in our common shares.

          We are not permitted to prepay the note in whole or in part. Merrill
Lynch may exchange the note at any time for our common shares at a price of
$1.15 per share, for up to 3,478,261 shares in the Company. The initial exchange
price was $1.47 per share, which was reduced due to the fact that we did not
meet certain performance targets for the third and fourth quarters of 2003 as
provided for in the note. If at any time after July 3, 2006, our publicly-traded
ADSs (i) trade at an average closing price of at least $3.00 per ADS for a
30-consecutive trading day period and (ii) the daily average trading volume of
the ADSs for such period is equal to at least 33.33% of the number of shares
into which the note is exchangeable, then we may notify Merrill Lynch that we
desire to redeem the note.

          The note is unsecured and subordinated in right of payment to our
senior credit facility, amounts of the then outstanding indebtedness to
Semiconductor Components Industries, LLC and any other permitted indebtedness
which, pursuant to its terms, is senior in right of payment to the note.

          Pursuant to the terms of the note, Merrill Lynch's equity stake in the
Company, on an as exchanged basis, increased from approximately 53.7% to 63.3%.
If interest on the exchangeable note is paid in the form of common shares,
Merrill Lynch's equity stake in the Company could further increase.

          Under the term of the note, we may not take certain actions without
the prior written consent of Merrill Lynch, including but not limited to

          .    enter into a merger or business combination with any other person
               or entity, including any joint venture arrangements,

          .    enter into any transaction with any affiliate other than Merrill
               Lynch or its affiliates, except upon fair and reasonable terms,

          .    sell or dispose of any of our or our subsidiaries' material
               assets worth more than 5% of our book value,

          .    declare or pay any dividend or make any distribution on or with
               respect to any of our capital stock,

          .    purchase, redeem, or otherwise acquire any shares of our or our
               subsidiaries' capital stock,

          .    make any voluntary or optional principal payment, or voluntary or
               optional redemption, repurchase or retirement, of certain of our
               indebtedness,

          .    make certain investments,

          .    create, incur or assume certain indebtedness.

          We have also agreed to comply with other covenants set forth in the
note and the related exchange and purchase agreements. Among other things, we
have agreed to indemnify Merrill Lynch and its related parties for losses caused
by any breach of the representations and warranties provided by us, and to
deliver to Merrill Lynch certain financial statements, reports and notices and
any other such information reasonably requested by Merrill Lynch.

Agreement with William J. Meder through Firebird Consulting Group LLC

          On August 9, 1999 we entered into a consulting agreement with William
J. Meder through Firebird Consulting Group LLC, pursuant to which Mr. Meder
acted as a consultant and advisor in connection with providing recommendations
on operations excellence, growth investments particularly related to expansion
into new countries, and conduct site analysis, at a fee equal to the lesser of
(i) one thousand ($1,000) U.S. dollars per day or (ii) two hundred ($200) U.S.
dollars per hour for the performance of responsibilities. The term of the
consulting agreement is for a period of one (1) year, renewable annually by
mutual agreement and may be terminated upon a 30-day prior written notice to the
other party. On June 26, 2002, Mr. Meder was elected to the board of directors,
and his consultancy agreement was concurrently amended, with the Company
agreeing to guarantee Mr. Meder a minimum of three (3) days of consultancy work,
in conjunction with each board meeting, in the following areas, among others: 1)
the company's M&A projects in China or in other overseas locations; 2) the
formulation of our business strategies; 3) the conduct of performance reviews;
and 4) the review of our manufacturing operations and package development
initiatives. We also pay for all of Mr. Meder's travel and hotel expenses while
performing consultancy services. As of January 15, 2004, Mr. Meder is the
Executive Director of PSi Technologies Chengdu Co. Ltd. We paid Mr. Meder a
total of $112,077 for these services in 2003.

                                       65

<PAGE>

C.   Interests of Experts and Counsel

          Not applicable.

                                       66

<PAGE>

ITEM 8 FINANCIAL INFORMATION

A.   Consolidated Statements and Other Financial Information

1.   Please refer to Item 18 for our consolidated financial statements.

2.   Please refer to Item 18 for our comparative financial statements.

3.   Please refer to Item 18 for the independent auditors' reports given by
     SyCip Gorres Velayo & Co.(A Member Practice of Ernst & Young Global) and
     Arthur Andersen & Co.

4.   The last year of audited financial statements are not older than 15 months.

5.   Not applicable.

6.   We do not have any income derived from non-Philippine sources for the year
     ended December 31, 2003.

7.   Legal Proceedings

          IPO Litigation

          In September 2001, two substantially identical class action complaints
alleging violations of the federal securities laws were filed in the United
States District Court for the Southern District of New York naming as
defendants, in the aggregate, PSi Technologies Holdings, Inc., certain of our
current or former officers and directors, and certain underwriters of its IPO.
Similar complaints have been filed against over 300 other issuers that have had
initial public offerings since 1998 and all such actions have been included in a
single coordinated proceeding. A consolidated amended complaint was filed on
April 24, 2002. The amended complaint alleges, among other things, that the
underwriters of our IPO violated the securities laws by failing to disclose
certain alleged compensation arrangements (such as undisclosed commissions or
stock stabilization practices) in the offering's registration statement and by
engaging in manipulative practices to artificially inflate the price of our
stock in the after-market subsequent to the IPO. The Company, together with
certain of its officers and directors, and underwriters of the IPO are named in
the amended complaint pursuant to Section 11 of the Securities Act of 1933, and
Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 on the basis
of an alleged failure to disclose the underwriters' alleged compensation
arrangements and manipulative practices. The complaint seeks unspecified
damages. On July 1, 2002, the underwriter defendants in the consolidated actions
moved to dismiss all of the IPO Allocation Litigations, including the action
involving the Company. On July 15, 2002, the Company, along with other
non-underwriter defendants in the coordinated cases, also moved to dismiss the
litigation. As a result of the judge's decision on February 19, 2003 to grant,
in part, the issuer defendants' motion to dismiss, the Rule 10b-5 claims against
the Company and its officers and directors named as defendants were dismissed,
but Section 11 claims remain.

          In July 2003, a committee of our board of directors conditionally
approved a proposed partial settlement with the plaintiffs in this matter. The
settlement would provide, among other things, a release of the Company and of
the individual defendants for the conduct alleged to be wrongful in the amended
complaint. We would agree to undertake other responsibilities under the partial
settlement, including agreeing to assign away, not assert, or release certain
potential claims we may have against its underwriters. Any direct financial
impact of the proposed settlement is expected to be borne by our insurance
carriers. The committee agreed to approve the settlement subject to a number of
conditions, including the participation of a substantial number of other issuer
defendants in the proposed settlement, the consent of our insurers to the
settlement, and the completion of acceptable final settlement documentation.
Furthermore, the settlement is subject to a hearing on fairness and approval by
the court overseeing the IPO Litigation.

          Manila Electric Company Litigation

                                       67

<PAGE>

          On November 19, 2003, we filed an injunction complaint against Manila
Electric Company (Meralco) to enjoin it from disconnecting its supply of
electric service on account of a billing discrepancy in the amount of PHP21.2
million ($0.4 million) reckoned from April 1, 1998 to July 12, 2002. The billing
discrepancy resulted from a defective meter installation by Meralco. Claiming
negligence on the part of Meralco, we refused to pay the full amount and offered
settlement of PHP2 million ($36,000, translated using the exchange rate of
PHP55.5 to $1). Meralco insisted on full payment, and we subsequently filed the
complaint. On December 17, 2003, the court granted our application for the
issuance of a writ of preliminary injunction and approved the injunction bond.
Meralco has already filed its answer to the complaint. Meralco also filed a
motion for reconsideration from the Order granting the injunction, which has
been submitted for resolution. We do not believe that the ultimate outcome of
these proceedings will have a material adverse effect on our overall financial
position or results of operations.

8.   Dividend Policy

          We have not paid dividends on our common shares for the past five
years. We intend to retain any or all-future earnings for use in our business
and we do not intend to pay dividends on our common shares. The declaration of
payment and amount of dividends, if any, on outstanding common shares will be
subject to the discretion of our board of directors. The declaration of any
stock dividend must also be approved by the vote of shareholders representing at
least two-thirds of our outstanding capital stock at a shareholders meeting
called for that purpose. See "Item 10--Additional Information--Articles of
Incorporation and By-laws--Matters Requiring Shareholder Approval." Cash
dividends, if any, will depend upon our future operations and earnings, set-off
of accumulated losses, financial condition, cash requirements and availability
and other factors as may be deemed relevant by our board of directors.

          Holders of our common shares will be entitled to receive such
dividends as determined by the board of directors according to the number of
common shares held. Dividends may be paid only out of our distributable profits.
See "Item 10--Additional Information--Articles of Incorporation and
By-laws--Dividends." The retained earnings of our principal operating
subsidiary, PSi Technologies, Inc., are reflected as part of our retained
earnings but may be declared as a dividend by us only when declared as a
dividend by PSi Technologies, Inc. to us.

          Holders of our ADSs will be entitled to receive dividends distributed
to the depositary, subject to the terms of the deposit agreement, to the same
extent as holders of our common shares, less the fees and expenses payable under
the deposit agreement, withholding tax and other governmental charges. Cash
dividends will be paid to the depositary bank in Philippine pesos and will be
converted by the depositary bank into U.S. dollars and paid to holders of ADSs.
Stock dividends, if any, will be distributed to the depositary and will be
distributed by the depositary in the form of additional ADSs, to holders of
ADSs.

B.   Significant Changes

          On January 14, 2004, the Company signed a long-term supply agreement
with Philips Semiconductors to provide outsourced power semiconductor assembly
and test services through the Company's facility in Chengdu, Sichuan Province,
People's Republic of China. The products to be packaged and tested are bipolar
power products with consumer electronics, white goods, lighting, power supplies
and industrial end applications. As part of the agreement, Philips will
progressively transfer its production of bipolar products, currently located in
Philips' assembly and test facility in Cabuyao, Laguna Province, Philippines, to
PSi in China. See "Item 3 - Key Information - Risk Factors" for additional
information regarding the China Venture.

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ITEM 9 THE OFFER AND LISTING

A.   Offer and Listing Details

          The following table sets forth, for the period indicated, the high and
low sale prices per ADS since trading on March 16, 2000, as furnished by the
Nasdaq National Market, or Nasdaq. The initial public offering price of our ADSs
was $16.00 per ADS.

          Annual high and low market prices

Year            High (date)                Low (date)
----            -----------                ----------
2000            $25.44 (on March 17)       $4.00 (on December 21)
2001            $10.25 (on May 8)          $3.87 (on September 20)
2002            $9.38 (on January 2)       $0.89 (on October 7)
2003            $3.66 (on November 3)      $0.97 (on April 22)

          Quarterly high and low market prices

Quarter         High (date)                Low (date)
-------         -----------                ----------
Q1 2002         $9.38 (on January 2)       $6.25 (on February 1)
Q2 2002         $8.44 (on April 5)         $5.25 (on May 13)
Q3 2002         $5.50 (on July 1)          $1.20 (on August 12)
Q4 2002         $2.10 (on October 24)      $0.89 (on October 7)

Q1 2003         $1.71 (on February 7)      $1.00 (on March 31)
Q2 2003         $2.44 (on June 9 and 10)   $0.97 (on April 22)
Q3 2003         $2.50 (on July 8)          $1.35 (on August 7)
Q4 2003         $3.66 (on November 3)      $1.62 (on October 1)

Q12004          $5.62 (on March 4)         $1.94 (on January 2)

          Monthly high and low market prices

Month           High (date)                Low (date)
-----           -----------                ----------
December 2003   $2.42 (on December 10)     $1.90 (on December 1)
January 2004    $4.20 (on January 16)      $1.94 (on January 2)
February 2004   $4.10 (on February 3)      $3.01 (on February 19)
March 2004      $5.62 (on March 4)         $3.36 (on March 1)
April 2004      $5.15 (on April 5)         $3.19 (on April 30)
May 2004        $3.69 (on May 28)          $2.99 (on May 11)

B.   Plan of Distribution

          Not applicable.

C.   Markets

          Our shares are listed on the Nasdaq National Market.

D.   Selling Shareholders

          Not applicable.

E.   Dilution

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          Not applicable.

F.   Expenses of the Issue

          Not applicable.

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ITEM 10 ADDITIONAL INFORMATION

A.   Share Capital

          Not applicable.

B.   Articles of Incorporation and By-laws

          The following statements summarize the material provisions of our
articles of incorporation and by-laws and the Corporation Code of the
Philippines, or the Corporation Code, insofar as they relate to the material
terms of our common shares.

          Our primary purpose, as stated in our articles of incorporation, is to
serve as a holding company. The primary purpose of our principal operating
subsidiary is to engage in the business of manufacturing semiconductor products
and components of all kinds and makes. We are not allowed to engage in the
management of fund portfolios or to act as a stockbroker or dealer in
securities.

Capital Structure

          As of May 31, 2004, our authorized share capital consisted of
37,058,100 authorized common shares, with a par value of 1 2/3 Philippine pesos
(PHP) per share. As of December 31, 2003, we had 13,289,525 common shares
outstanding, a total subscribed capital of PHP 22,149,208 and additional paid-in
capital of PHP 2,708,812,169. We have reserved a total of 741,162 common shares
to be issued upon the exercise of options that may be granted pursuant to our
stock option plan. See "Item 6--Directors, Senior Management and
Employees--Share Ownership--PSi Stock Option Plan."

Share Issuance

          Under the Corporation Code of the Philippines, a corporation can issue
shares of stock with such rights, privileges or restrictions as may be provided
for in its articles of incorporation. In the absence of specific restrictions in
the articles of incorporation, common shares have full voting and dividend
rights. A corporation may not issue shares for consideration less than the par
value of such shares as stated in its articles of incorporation. It may,
however, issue shares for a consideration in excess of the par value of such
shares. Where a corporation issues shares at a premium, an amount equal to the
amount by which the subscription price exceeds the par value is credited to an
account designated as paid-in surplus or additional paid-in capital.

          Subject to the approval of the Philippine Securities and Exchange
Commission, or PSEC, a corporation may increase or decrease its authorized
capital stock with the approval of a majority of the board of directors and the
affirmative vote of shareholders representing at least two-thirds of the
outstanding capital stock of the corporation.

          A corporation may repurchase its own shares of stock, provided that it
has unrestricted retained earnings to pay for the shares to be acquired or
purchased, for legitimate corporate purpose or purposes. These purposes include,
but are not limited to the following:

          .    to eliminate fractional shares arising out of stock dividends;

          .    to purchase shares of dissenting shareholders exercising their
               appraisal right; and

          .    to collect or settle an indebtedness arising out of an unpaid
               subscription in a delinquent sale and to purchase delinquent
               shares sold during said sale.

          The shares repurchased by the corporation become treasury shares which
may again be sold for a reasonable price fixed by the board of directors. Shares
do not have voting rights or dividend rights as long as they remain in the
treasury.

          Shares of stock which are offered to the public in the Philippines are
required to be registered with the PSEC. The PSEC may deny registration of
shares and refuse to issue a permit to sell shares if the registration statement
for the shares is incomplete or inaccurate in any material respect or includes
any untrue statement of

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material fact, or omits to state a material fact required to be stated in the
registration statement or necessary to make the statements therein not
misleading. The PSEC may also deny registration for the shares if the issuer
corporation or any of its officers or directors are not qualified under the
standards of the Philippines Revised Securities Act or existing PSEC
regulations.

Foreign Ownership Restrictions

          We are not subject to any foreign equity ownership restrictions
because we are not engaged in any business activity nor in possession of any
asset that would attract the applicability of foreign ownership restrictions
under Philippine law. Our foreign shareholders are not subject to any applicable
limitations on voting their shares.

          However, our affiliates, PSitech Realty Inc. and Pacsem Realty, Inc.,
being landholding companies, are subject to foreign ownership restrictions under
the Philippine Constitution. The maximum foreign ownership percentage allowed
for a landholding company is 40% of the company's capital stock. PSi
Technologies, Inc. currently holds 40% of the capital stock of each of PSitech
Realty, Inc. and Pacsem Realty, Inc. because it is considered to be a
non-Philippine national due to the beneficial ownership of Merrill Lynch Global
Emerging Markets Partners, L.P. and JAFCO Investment (Asia Pacific) Ltd., acting
as investment manager of NJI No. 2 Investment Fund. To qualify as a Philippine
national, a corporation must be organized under Philippine law with at least 60%
of its capital stock outstanding and entitled to vote being owned and held by
citizens of the Philippines.

Pre-emption Rights

          The Corporation Code of the Philippines confers the right of
pre-emption on shareholders of a Philippine corporation which entitles them to
subscribe to all issues or other dispositions of shares by the corporation in
proportion to their respective shareholdings, regardless of whether the shares
proposed to be issued or otherwise disposed of are identical in all respects to
the shares held. The pre-emption right conferred by the Corporation Code does
not, however, apply to the issuance of shares made to ensure compliance with
laws requiring share offerings or minimum share ownership by the public, in
exchange for the acquisition of property required for corporate purposes, or in
payment of a debt previously contracted.

          The Corporation Code allows Philippine corporations to provide for the
exclusion of the right of pre-emption in its articles of incorporation. Our
articles of incorporation provide that, unless the right of pre-emption is
granted from time to time by the board of directors in its discretion, our
shareholders do not have the pre-emptive right to purchase or subscribe to:

          .    any unissued or reissued shares of any class;

          .    any additional shares of any class to be issued by reason of any
               increase in our authorized capital stock; or

          .    any securities convertible into any class of our shares.

General Meeting of Shareholders

          The Corporation Code of the Philippines requires all Philippine
corporations to hold an annual general meeting of shareholders for the principal
purpose of electing directors. Our annual general meeting of shareholders is
required by our by-laws to be held on any day in the month of June each year. To
comply with the requirement to make the U.S. Securities and Exchange Commission
Form 20-F filed by the Company available to its stockholders, the Board approved
last April 21, 2004 the amendment of the Company's By-laws to move the date of
the annual general meeting from "any day in the month of June" to the "third
Wednesday of August" subject to the approval of stockholders' representing at
least a majority of the outstanding capital stock of the Company at a
stockholders' meeting called for this purpose.

Voting

          Each holder of our common shares is entitled to one vote per common
share during shareholders' meetings. However, in the election of directors, each
shareholder is entitled to such number of votes as is equal to the product

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of the number of common shares owned by him and the number of directors to be
elected. The shareholder may accumulate his or her votes in favor of one
candidate or distribute these votes in such proportion and amount between as
many of the candidates as the shareholder wishes. The election of directors may
only be held at a meeting convened for that purpose at which shareholders
representing a majority of our outstanding capital stock are present in person
or by proxy. However, any vacancy on our board, other than by removal or
expiration of term, may be filled by the majority of the remaining directors if
still constituting a quorum.

Management

          Our corporate powers are exercised by our board of directors. The
members of our board of directors are elected for a one year term during the
annual general meeting of our shareholders. The Corporation Code further
requires that each of our directors must own at least one share of our company.

          The Corporation Code incorporates the common law principle that every
director owes his company the duties of obedience, diligence and loyalty. These
duties are illustrated through certain specific provisions of the Corporation
Code, including the following:

..    A contract of the corporation with one or more of its directors is voidable
     at the option of such corporation unless all the following conditions are
     present: (1) that the presence of such director in the board meeting in
     which the contract was approved was not necessary to constitute a quorum
     for such meeting; (2) that the vote of such director was not necessary for
     the approval of the contract; and (3) that the contract is fair and
     reasonable under the circumstances. Where any of the first two conditions
     set forth above is absent, in the case of a contract with a director, such
     contract may be ratified by the vote of shareholders representing at least
     two-thirds of the outstanding capital stock in a meeting called for the
     purpose, provided that full disclosure of the adverse interest of the
     director involved is made at such meeting and provided that the contract is
     fair and reasonable under the circumstances;

..    Where a director, by virtue of his office acquires for himself a business
     opportunity which should belong to the corporation, thereby obtaining
     profits to the prejudice of such corporation, he must account to the latter
     for all such profits by refunding the same even if he risked his own funds
     in the venture, unless his act has been ratified by a vote of shareholders
     owning or representing at least two-thirds of the outstanding capital stock
     of the company; and

..    Directors who willfully and knowingly vote for or assent to patently
     unlawful acts of the corporation, or who are guilty of gross negligence or
     bad faith in directing the affairs of the corporation, or who acquire any
     personal or pecuniary interests in conflict with their duty as such
     directors shall be liable jointly and severally for all damages resulting
     therefrom suffered by the corporation, its shareholders and other persons.
     Where a director attempts to acquire or acquires, in violation of his duty,
     an interest adverse to the corporation in respect of any matter which has
     been entrusted to him, as to which principles of equity imposes a duty to
     refrain from self-dealing, he shall be liable as a trustee for the
     corporation and must account for the profits which otherwise would have
     accrued to the corporation.

          With respect to compensation of directors, our by-laws provide that
directors may be reimbursed for expenses, if any, associated with the attendance
of meetings of our board of directors and may be paid a fixed sum for such
attendance.

Matters Requiring the Approval of Directors Selected by our Principal
Shareholders.

          Our by-laws currently provide that, in respect of the following
matters, no resolution shall be passed by the board of directors of our company
unless approved affirmatively by directors selected by Merrill Lynch Global
Emerging Markets Partners, L.P. and JAFCO Investment (Asia Pacific) Ltd., acting
as investment manager of NJI No. 2 Investment Fund:

          .    the amendment of the articles of incorporation and/or by-laws of
               our company or any of our subsidiaries;

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<PAGE>

          .    the pledge, sale, transfer or disposition, in one or a series of
               transactions, of (1) any shares of our principal operating
               subsidiary, PSi Technologies, Inc. (2) more than 50% of the
               assets of PSi Technologies, Inc. (including, without limitation,
               shares of PSi Technologies, Inc.'s subsidiaries), or (3) any
               shares of our affiliate, PSitech Realty, Inc.;

          .    any action that would cause gains to be recognized under Section
               367 of the U.S. Internal Revenue Code of 1986, as amended, and
               the Treasury Regulations thereunder (including, without
               limitation, under any gain recognition agreement pursuant to
               Treasury Regulation Section 1.367(a)-8) by any partner of Merrill
               Lynch Global Emerging Markets Partners, L.P., upon and after the
               exchange by RFM Corporation, Merrill Lynch Global Emerging
               Markets Partners, L.P. and JAFCO Investment (Asia Pacific) Ltd.,
               acting as investment manager of NJI No. 2 Investment Fund of
               their shares in our company for shares pursuant to the Deed of
               Assignment dated November 19, 1999; and

          .    any action, directly or indirectly, in contemplation of any of
               the foregoing.

Matters Requiring Shareholder Approval

          Some corporate acts may only be effected with the approval of our
shareholders. Any amendment to our by-laws may only be effected with the
approval of our shareholders representing at least a majority of our outstanding
capital stock at a shareholders' meeting convened for that purpose. The approval
of our shareholders representing at least two-thirds of our outstanding capital
stock is required for each of the following corporate actions:

          .    any amendment to our articles of incorporation;

          .    the removal of any director;

          .    the ratification of contracts entered into by a director by
               virtue of his office under which contract the director acquired a
               business opportunity which should have belonged to the
               corporation;

          .    the ratification of corporate contracts entered into by us with
               any of our directors if:

               .    the presence of the director in the board meeting at which
                    the contract was approved was necessary to constitute a
                    quorum for such meeting; or

               .    the vote of the director was necessary for the approval of
                    the contract;

          .    the sale, lease, exchange, mortgage, pledge or other disposition
               of all or substantially all of our assets;

          .    the investment of funds in any other corporation or business or
               for any purpose other than the primary purpose for which we were
               organized. The failure to obtain shareholder approved in these
               instances would render the transaction void;

          .    incurring, creating or increasing our bonded indebtedness;

          .    the extension or shortening of our term of corporate existence,
               which currently expires on December 10, 2049;

          .    the issuance of shares in exchange for property required for
               corporate purposes or in payment of a previously contracted debt;

          .    the declaration of stock dividends;

          .    the approval and amendment of any stock option plan;

          .    the conclusion of management contracts with another corporation
               if/in the event:

               .    the shareholders representing the same interest of both the
                    managing and the managed corporation own or control more
                    than one-third of the total outstanding capital stock
                    entitled to vote of the managing corporation; or

               .    where a majority of our board of directors of the managing
                    corporation also constitutes a majority of the board of
                    directors of the managed corporation;

          .    the delegation to our board of directors of the power to amend or
               repeal the by-laws or to adopt new by-laws;

          .    any plan or agreement of merger or consolidation with any
               corporation, including any amendment thereof; and

          .    our voluntary dissolution.

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Dividends

          We may only pay dividends out of our unrestricted retained earnings.
These represent our net accumulated earnings, with our capital unimpaired, which
are not appropriated for any other purpose. We may pay dividends in cash, by the
distribution of property, or by the issue of shares of stock. Dividends paid in
the form of shares may only be paid with the approval of shareholders
representing at least two thirds of our outstanding capital stock at a
shareholders' meeting called for such purpose. The Philippine Securities and
Exchange Commission, or PSEC, has also ruled that even in the absence of
unrestricted retained earnings, stock dividends may be declared out of
additional paid-in-capital.

          Our board of directors has the discretion to declare cash or property
dividends. The issuance of property dividends must conform with the following
conditions:

          .    the property to be distributed as a dividend must consist of
               property that is no longer intended to be used in the operation
               of our business and practicable to be distributed as dividends;

          .    the issuance of property dividends must not result in an
               inequitable distribution of property to the shareholders in terms
               of the book value and market value, if any, of the property
               distributed;

          .    when the distribution of dividends is made where some
               shareholders will receive cash and the others will receive
               property, the prevailing market value of the property, as agreed
               upon by the shareholders, will be considered in determining the
               equitable distribution of the total dividends; and

          .    the distribution of property dividends must be approved by the
               PSEC.

          Corporations with surplus profits in excess of 100% of their paid-up
capital are required to declare and distribute those profits as dividends,
except:

          .    when retaining the profits is justified by definite corporate
               expansion projects or programs approved by the board of
               directors;

          .    when the consent of creditors is required under any loan
               agreement and the consent has not been secured; or

          .    when it can be clearly shown that retaining the profits is
               necessary under the special circumstances of the corporation, as
               when special reserves are required for probable contingent
               liabilities.

Rights of Minority Shareholders

          The rights of a shareholder to institute proceedings on our behalf in
a derivative suit is recognized in the Philippines. Derivative suits may be
filed if we are unable or unwilling to institute the necessary proceedings to
redress wrongs committed against us or to vindicate corporate rights. Derivative
suits are filed with the courts of general jurisdiction (i.e., the appropriate
Regional Trial Court). Regional Trial Courts are courts of general jurisdiction
and have original and exclusive jurisdiction over intra-corporate disputes.

          A shareholder has a right to dissent and demand payment of the fair
value of his shares in any of the following instances:

          .    any amendment to our articles of incorporation which has the
               effect of changing or restricting rights attached to his shares
               or of authorizing preferences superior to those of outstanding
               shares of any class, or of extending or shortening the term of
               corporate existence;

          .    the sale, lease, mortgage, pledge or other disposition of all or
               substantially all of our assets;

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          .    the investment of corporate funds for purposes other than to
               accomplish our primary purpose or investment in another
               corporation or business except when the investment is reasonably
               necessary to accomplish our primary purpose; and

          .    our merger or consolidation with another corporation.

          The fair value for the shares of a dissenting shareholder sold to us
may be agreed upon by the parties. If parties cannot reach an agreement, fair
value will be determined by an independent committee. Payment for the shares of
a dissenting shareholder may be made only if we have unrestricted retained
earnings to purchase the shares.

          Shareholders have the right to inspect our records at reasonable hours
on business days. These records include minutes of all meetings of the board of
directors and of the shareholders, and records of our business transactions. The
right of inspection may be denied to shareholders seeking to examine our records
if they have improperly used any information obtained through any prior
examination of our records, or did not act in good faith or for a legitimate
purpose in making a demand for inspection.

Accounting and Auditing

          Philippine corporations are required to file copies of their annual
financial statements (on consolidated and parent company bases and for each
subsidiary, as applicable) with the Philippine SEC, which are required to be
stated Philippine currency. Shareholders are entitled to request from the PSEC
or from us copies of our most recent financial statements which must include
balance sheets, statements of income, cash flows and changes in stockholder
equity for the two most recent comparative audited periods.

Transfer Agent

          We have appointed The Bank of New York as the transfer agent and
registrar for the common shares underlying our ADSs.

C.   Material Contracts

          Except as set forth below, we are not currently, and have not been in
the last two years, been party to any material contracts, other than contracts
entered into in the ordinary course of our business:

Contract                    Summary
--------                    -------
Investment Cooperation      Signed on December 7, 2003 between PSi Technologies,
Agreement with the          Inc. and the Chengdu Hi-Tech Zone (CDHT). Following
Chengdu Hi-Tech Zone        are significant terms of the Investment Cooperation
                            Agreement:

                            .    Lease of two 2,592 pre-fabricated factories in
                                 the Sichuan Chengdu Export Processing Zone for
                                 a three year period with an option to purchase
                                 at the end of the lease term;

                            .    Lease of two 17,500 square meter adjacent
                                 parcels of land in the Sichuan Chengdu Export
                                 Processing Zone for a three year period with an
                                 option to purchase at the end of the lease
                                 term;

                            .    Investment and tax incentives provided by the
                                 CDHT and Chengdu government to PSi.

Exchangeable Senior         See Item 7 - Major Shareholders and Related Party
Subordinated Note           Transactions - Related Party Transactions - The
issued to Merrill Lynch     Merrill Lynch Exchangeable Note for a summary of
                            terms.

D.   Exchange Controls

          Under current regulations of the Bangko Sentral ng Pilipinas, an
investment in Philippine securities must be registered with the Bangko Sentral
ng Pilipinas if the foreign exchange needed to service the repatriation of
capital and the remittance of dividends, profits and earnings which accrue
thereon is to be sourced from the banking system.

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          In the case of Philippine securities not listed with the Philippine
Stock Exchange such as our common shares held by the depositary bank, The Bank
of New York, the application for registration must be filed by the investor or
its representative directly with the Bangko Sentral ng Pilipinas. Applications
for registration of such investments must be accompanied by (i) credit advice or
bank certification showing the amount of foreign currency inwardly remitted, and
(ii) sworn certification of the officer of the investee firm concerned attesting
to the number of shares and amount paid for the investment. Upon submission of
the required documents, the Bangko Sentral ng Pilipinas will issue a Bangko
Sentral Registration Document, or BSRD. On October 9, 2000, the Bangko Sentral
ng Pilipinas issued a BSRD in relation to The Bank of New York's investment, as
Depositary Bank, in our shares.

          Proceeds of divestments as well as distributions or dividends derived
from the registered investments are repatriable or remittable immediately and in
full through the Philippine commercial banking system, net of applicable tax,
without the need of Bangko Sentral ng Pilipinas approval. Remittance is allowed
upon presentation of the BSRD at the exchange rate applicable on the date of
actual remittance. Pending registration or reinvestment, divestment proceeds as
well as dividends of registered investments may be lodged temporarily in
interest-bearing deposit accounts. Interest earned thereon, net of taxes, is
also remittable in full. Remittance of divestment proceeds or dividends of
registered investments may be reinvested in the Philippines if the investments
are registered with the Bangko Sentral ng Pilipinas.

          Proceeds of divestments as well as distributions or dividends derived
from investments not registered with the Bangko Sentral ng Pilipinas may be
converted into foreign exchange through non-bank sources of foreign exchange.

          The foregoing is subject to the Bangko Sentral ng Pilipinas' power,
with the approval of the President of the Philippines, to restrict the
availability of foreign exchange (1) during an exchange crisis when the
international reserve of the Bangko Sentral ng Pilipinas falls to levels which
it considers inadequate to meet the prospective net demands on the Bangko
Sentral ng Pilipinas for foreign currencies, (2) whenever the international
reserve appears to be in imminent danger of falling to such a level, or (3)
whenever the international reserve is falling as a result of payments or
remittances abroad which, in the opinion of the Bangko Sentral ng Pilipinas, is
contrary to the national welfare. Furthermore, we cannot assure you that current
Bangko Sentral ng Pilipinas regulations will not be made more restrictive.

E.   Taxation

          The following summary of the material Philippine and U.S. federal
income tax consequences of the purchase, ownership and disposal of the common
shares or ADSs is based upon circumstances, laws and relevant interpretations
thereof in effect as of the date of this annual report, all of which are subject
to change. This summary does not deal with all possible tax consequences
relating to the purchase, ownership and disposal of the common shares or ADSs,
such as the tax consequences under state, local and other tax laws. Accordingly,
each prospective investor and holder, and particularly those prospective
investors and holders subject to special tax rules, such as banks, dealers,
insurance companies and tax exempt entities, should consult their own tax
adviser regarding the tax consequences of an investment in and ownership of the
common shares or ADSs.

Philippine Taxation

          The following is the opinion of H. G. Tiu Law Offices, our Philippine
counsel, on the material Philippine tax consequences resulting from the
purchase, ownership and disposition of ADSs outside the Philippines and of
direct investments in our common shares. This summary does not consider all
possible Philippine tax consequences of the purchase, ownership and disposition
of common shares or ADSs and is not intended to reflect the individual tax
position of any beneficial owner. The summary is based upon our existing
circumstances, the National Internal Revenue Code, as amended, commonly referred
to as the NIRC, its legislative history, existing regulations, revenue
memorandum circulars and revenue audit memorandum orders and published rulings
issued by the Philippine Bureau of Internal Revenue, administrative practice,
income tax conventions or treaties, and judicial decisions, all in effect, as of
the date of this annual report, all of which are subject to change or differing
interpretations, which changes or differing interpretations could apply
retroactively.

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Taxation Regarding the Common Shares

          Issuance and Exchange of ADSs. Our Philippine counsel, H.G. Tiu Law
Offices, has expressed the opinion that no Philippine taxes are payable upon the
issuance of the ADSs by the depositary bank to the holders of ADSs but that
Philippine capital gains and documentary stamp taxes are payable upon the
transfer of common shares to a holder of ADSs.

          Taxation of Capital Gains. The NIRC provides that gain from the sale
of shares in a Philippine corporation will be treated as derived entirely from
sources within the Philippines, regardless of where the shares are sold. The
rate of tax on such gain is 5% for gains not exceeding PHP100,000 and 10% for
gains in excess of that amount. The rate of tax is the same for both
non-resident individuals and non-resident non-Philippine corporations. The NIRC
prohibits a transfer from being recorded in the books of the corporation unless
the Philippine Commissioner of Internal Revenue, through his authorized
representative, certifies that the capital gains and documentary stamp taxes
have been paid or other conditions are met. The NIRC allows non-resident
individuals and non-resident non-Philippine corporations to net capital gains
and losses during a taxable year in determining their total capital gains tax.

          Under the Convention between the Government of the United States of
America and the Government of the Republic of the Philippines with respect to
Taxes on Income, or the US-RP Income Tax Treaty, capital gains derived by a U.S.
resident from the sale of shares of a Philippine corporation will not be subject
to the Philippine Income Tax unless the shares are those of a corporation over
50% of the assets of which consist of real property interest located in the
Philippines or in a Philippine Real Property Corporation. PSi Technologies
Holdings, Inc. is currently not a Philippine Real Property Corporation.

          Our Philippine counsel has expressed the opinion that transfers of
ADSs by persons who are not residents of the Philippines but are residents of
the United States, Japan, Canada, the United Kingdom or France for purposes of
taxation in those jurisdictions are not subject to Philippine capital gains tax
pursuant to the tax treaties that the Philippines has entered into with those
countries. The rules relating to the taxability of transfers of ADSs by
non-resident alien individuals and non-resident non-Philippine corporations and
the extra-territorial applicability of Philippine tax laws are complex.
Prospective purchasers who do not belong to the categories of persons described
above should consult their own tax advisor to determine whether and to what
extent they would be entitled to tax treaty benefits, if any.

          Taxation of Dividends. Under the NIRC, dividends paid by a Philippine
corporation to non-resident alien individuals that are not engaged in trade or
business in the Philippines are subject to withholding tax at the rate of 25%.
Dividends paid to non-resident alien individuals that are engaged in trade or
business in the Philippines are subject to withholding tax at the rate of 20%.
Dividends paid by a Philippine corporation to non-resident non-Philippine
corporations are subject to withholding tax at the rate of 32%. A non-Philippine
corporation is a Philippine resident only if it engages in trade or business in
the Philippines. The 32% rate for dividends paid to a non-resident
non-Philippine corporation may be reduced to a special 15% rate if (1) the
country in which the non-resident non-Philippine corporation is domiciled
imposes no taxes on foreign source dividends (this condition is not satisfied in
the case of corporations domiciled in the United States) or (2) the non-resident
non-Philippine corporation is entitled to a credit against the tax due from such
nonresident non-Philippine corporation for taxes deemed to have been paid in the
Philippines in an amount equivalent to at least 17% of the dividends. This
second condition may be difficult to satisfy in the case of a corporation
domiciled in the United States if the corporation owns less than 10% of our
voting stock.

          In circumstances where our common shares are held directly, a
preferential tax treaty rate may be available under treaties in force between
the Philippines and the country of residence of a non-resident alien or
non-resident non-Philippine corporation that does not engage in a trade or
business in the Philippines. For example, U.S. holders would be eligible for a
treaty rate of 25%. The 20% treaty rate and the special 15% rate described above
are not applicable in the case of non-resident non-Philippine corporations which
are domiciled in the United States and which own less than 10% of our voting
stock.

          Holders of our common shares will be required in all cases to
establish their eligibility before they can take advantage of any treaty or
other reduced rate available under Philippine law. Philippine tax authorities
have prescribed, through an administrative issuance, procedures for seeking tax
treaty relief.

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          Documentary Stamp Taxes. The Philippines imposes a documentary stamp
tax on every original issue of shares by a Philippine corporation at the rate of
PHP 1.00 on each PHP 200.00, or fraction thereof, of the par value of the
shares. The Philippines also imposes a documentary stamp tax on transfers of
shares of Philippine corporations at the rate of PHP 0.75 on each PHP 200.00, or
fraction thereof, of the par value of the shares wherever such transfers are
made.

          The documentary stamp tax is an excise tax that applies to
transactions effected and consummated in the Philippines. Our Philippine counsel
has expressed the opinion that no Philippine documentary stamp tax is payable on
the transfer of ADSs outside the Philippines.

          Estate and Donor's Taxes. The Philippines imposes estate taxes upon
the transfer of the net estate of every decedent holding shares in a Philippine
corporation, whether the decedent is a resident or nonresident of the
Philippines. The schedule of rates of estate taxes ranges from 5% to 20% if the
net estate is over PHP 200,000.

          The Philippines also imposes a donor's tax on the basis of the total
net gifts made during a calendar year. Individual and corporate registered
holders, whether residents or non-residents of the Philippines, who transfer
shares by way of gift or donation will be liable for Philippine donor's tax on
those transfers at a flat rate of 30%. However, net gifts during the year
exceeding PHP 100,000 made by an individual to a brother, sister, spouse,
ancestor, lineal descendant or blood relative not more remote than first
cousins, granduncles, grandaunts, grandnieces or grandnephews are subject to
Philippine donor's tax at progressive rates ranging from 2% to 15%. Net gifts
during the year not exceeding PHP 100,000 made by an individual to the same
persons are not subject to donor's tax.

          Shares of a deceased shareholder or shares that have been donated may
not be transferred on the books of a Philippine corporation without a
certificate from the Commissioner of Internal Revenue or his authorized
representative that the corresponding estate or donor's taxes have been paid. In
the case of ADSs, however, there is no corresponding requirement unless a
transfer of the ADSs would also entail a change in the registration of the
underlying common shares.

          Estate and donor's taxes will not be collected on intangible personal
property if the decedent at the time of his death or the donor at the time of
the donation was a citizen and resident of a foreign country which at the time
of his death or donation did not impose a transfer tax of any character, in
respect of intangible personal property of citizens of the Philippines not
residing in that foreign country. In addition, neither tax will be imposed if
the laws of the foreign country of which the decedent or donor was a citizen and
resident at the time of his death or donation allow a similar exemption from
transfer or death taxes in respect of intangible personal property owned by
citizens of the Philippines not residing in that foreign country.

U.S. Federal Income Taxation

          The following is a summary by Akin Gump Strauss Hauer & Feld LLP, our
United States counsel, of the material U.S. federal income tax consequences
resulting from the purchase, ownership and disposition of the ADSs by a U.S.
holder, as defined below. This summary does not purport to consider all the
possible U.S. federal tax consequences of the purchase, ownership and
disposition of the ADSs and is not intended to reflect the individual tax
position of any specific beneficial owner. The summary is based upon the
Internal Revenue Code of 1986, as amended, or the Code, its legislative history,
existing and proposed U.S. Treasury regulations promulgated thereunder,
published rulings by the U.S. Internal Revenue Service, or the IRS, and court
decisions, all in effect as of the date hereof, all of which authorities are
subject to change or differing interpretations, which changes or differing
interpretations could apply retroactively.

          This summary is limited to investors who hold the ADSs as capital
assets within the meaning of Section 1221 of the Code (generally, property held
for investment), and does not purport to deal with investors in special tax
situations, such as:

          .    financial institutions;

          .    tax exempt organizations;

          .    insurance companies;

          .    regulated investment companies;

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          .    dealers in securities or currencies;

          .    persons holding ADSs as a hedge against currency risks or as a
               position in a straddle, conversion transaction, or constructive
               sale transaction for tax purposes;

          .    persons that own (directly or by attribution) 10% or more of any
               class of our stock, or persons that own (directly or by
               attribution) interests in persons that own (directly or by
               attribution) 10% or more of any class of our stock; or

          .    persons whose functional currency, as defined in Section 985 of
               the Code, is not the U.S. dollar.

          The summary does not include any description of the tax laws of any
state, local or foreign governments that may be applicable to the ADSs. Persons
who are holders of ADSs for U.S. federal income tax purposes will be treated as
the owners of the common shares represented by those ADSs.

          As used in this section, the term U.S. holder means a beneficial owner
of ADSs who or which is:

          .    an individual who is a citizen or resident of the United States
               for U.S. federal income tax purposes;

          .    a corporation (or entity treated as a corporation for U.S.
               federal income tax purposes) created or organized in or under the
               laws of the United States or of any state, including the District
               of Columbia;

          .    an estate the income of which is subject to U.S. federal income
               taxation regardless of its source; or

          .    a trust if a court within the United States is able to exercise
               primary jurisdiction over its administration and one or more U.S.
               persons (as defined in the Code) have the authority to control
               all of its substantial decisions or a trust that has made a valid
               election under U.S. Treasury Regulations to be treated as a
               domestic trust.

          As used in this section, the term non-U.S. holder means a beneficial
owner of ADSs that is not a U.S. holder. In the case of a beneficial owner of
ADSs that is a partnership for United States tax purposes, each partner will
take into account its allocable share of income or loss from the ADSs, and will
take the income or loss into account under the rules of taxation applicable to
the partner, taking into account the activities of the partnership and the
partner.

          Distributions. Distributions on ADSs, including the amount of any
Philippine taxes withheld from the distributions to U.S. holders, are included
by the U.S. holders in gross income as a taxable dividend to the extent the
distribution is paid from our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our
current or accumulated earnings and profits will first be treated, for U.S.
federal income tax purposes, as a nontaxable return on capital to the extent of
the U.S. holder's basis in the ADSs and then as gain from the sale or exchange
of a capital asset. Dividends received by individual U.S. holders will qualify
for a preferential 15% U.S. federal income tax rate. Dividends paid by us will
not be eligible for the corporate dividends received deduction that is
applicable in certain cases to U.S. corporations. Dividends paid in Philippine
pesos, including the amount of any Philippine taxes withheld from the dividends,
will be included in the income of a U.S. holder in the U.S. dollar amount based
on the exchange rate at the time of the receipt by the depositary, whether or
not the dividends have been converted into U.S. dollars. Any gain or loss from a
subsequent exchange of Philippine pesos will be ordinary income or loss from
sources within the United States.

          Foreign Tax Credit. Any dividends paid by us to a U.S. holder of our
ADSs generally will be treated as foreign source income for U.S. foreign tax
credit purposes. Subject to the limitations set out in the Code, a U.S. holder
may elect to claim a foreign tax credit against its U.S. federal income tax
liability for Philippine income tax withheld from dividends received in respect
of ADSs. U.S. holders who do not elect to claim a foreign tax credit may instead
claim a deduction for Philippine income tax withheld, but only for a year in
which the U.S. holder elects to claim the deduction, instead of claiming the
credit, which election must be made with respect to all foreign income taxes.
Generally, a foreign tax credit may not be claimed if it is derived from
withholding taxes imposed on short-term or hedged positions in securities or on
arrangements where a U.S. holder's expected economic profit, after non-U.S.
taxes is insubstantial. The rules relating to the determination of the foreign
tax credit are complex, and each prospective purchaser who would be a U.S.
holder should consult its own tax advisor to determine whether and to what
extent such purchaser would be entitled to a foreign tax credit.

          For purposes of calculating a U.S. holder's foreign tax credit
limitation, dividends paid by us generally will be treated as passive income or
financial services income.

          Dispositions of ADSs. Gain or loss realized by a U.S. holder on the
sale or other disposition of the ADSs generally will be subject to U.S. federal
income tax as capital gain or loss in an amount equal to the difference

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between the U.S. holder's basis in the ADSs and the amount realized on the
disposition. The capital gain or loss will generally be long-term capital gain
or loss if the U.S. holder has held the ADSs for more than one year at the time
of the sale or exchange. In the case of an individual U.S. holder, long-term
capital gain will be subject to U.S. federal income tax at a maximum rate of
15%. Gain or loss realized by a U.S. holder generally will be treated as U.S.
source gain or loss for U.S. foreign tax credit purposes.

          Transfer Reporting Requirements. A U.S. holder, including a tax exempt
entity, that purchases any ADS for cash will be required to file an IRS Form 926
or similar form with the IRS if (1) the U.S. holder owned, directly or by
attribution, immediately after the transfer at least 10% by vote or value of us
or (2) the purchase, when aggregated with all purchases made by the U.S. holder,
or any related person thereto, within the preceding 12-month period, exceeds
$100,000. If a U.S. holder fails to file the required form, the U.S. holder
could be required to pay a penalty equal to 10% of the gross amount paid for the
ADSs, subject to a maximum penalty of $100,000 or a higher amount in cases
involving intentional disregard. U.S. holders should consult their tax advisors
for advice regarding this or any other reporting requirement which may apply to
their acquisition of the ADSs.

          Information Reporting and Backup Withholding. Payments that relate to
the ADSs that are made in the United States or by a U.S.-related financial
intermediary will be subject to information reporting. Information reporting
will require each paying agent making payments, which relate to an ADS, to
provide the IRS with information, including the beneficial owner's name,
address, taxpayer identification number, and the aggregate amount of dividends
paid to such beneficial owner during the calendar year. These reporting
requirements, however, do not apply to all beneficial owners. Specifically,
corporations, securities broker-dealers, other financial institutions,
tax-exempt organizations, qualified pension and profit sharing trusts and
individual retirement accounts are all excluded from reporting requirements.

          The depositary participant or indirect participant holding ADSs on
behalf of a beneficial owner, or paying agent making payments for an ADS, may be
required to backup withhold a tax equal to 28% of each payment of dividends on
the ADSs and gross proceeds from a sale of ADSs unless the beneficial owner of
the ADSs (1) is a corporation or other exempt recipient and, when required,
establishes its exemption, or (2) provides its correct taxpayer identification
number, certifies that it is not currently subject to backup withholding and
otherwise complies with the applicable requirements of the backup withholding
rules.

          This backup withholding tax is not an additional tax and may be
credited against the beneficial owner's U.S. federal income tax liability if the
required information is furnished to the IRS. Non-U.S. holders generally are not
subject to information reporting or backup withholding, but may be required to
provide certification of their non-U.S. status in connection with payments
received within the United States or through U.S.-related financial
intermediaries. Prospective investors are advised to consult their own tax
advisors as to the applicability of the backup withholding rules to their
acquisition, ownership and disposition of the ADSs.

F.   Dividends and Paying Agents

          Not applicable.

G.   Statements by Experts

          Not applicable.

H.   Documents on Display

          We have filed our Form F-1 registration statement with the U.S.
Securities and Exchange Commission, or the Commission. This annual report does
not contain all of the information included in the registration statement. You
should refer to our registration statement and its exhibits if you would like to
find out more about us, our ADSs and our common shares.

          We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, or the Exchange Act,
applicable to foreign private issuers. Under the Exchange Act, we are required
to file reports and other information with the Commission. Specifically, we are
required to file this annual report on Form 20-F within six months after the
close of our fiscal year which is December 31st. You may inspect copies of

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our registration statement, its accompanying exhibits, and any other document we
file with the Commission, without charge. You also may copy or obtain any of
these documents at prescribed rates at the public reference facilities
maintained by the Commission at the following locations:

          .    Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;

          .    The Woolworth Building, 233 Broadway, New York, New York 10279;
               and

          .    Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
               Illinois 60661.

          You may obtain information on the operation of the Commission Public
Reference Room by calling the Commission at 1-800-SEC-0330. As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and our officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act.

          We will furnish The Bank of New York, as our depositary bank, and our
shareholders with annual reports. These reports will include a review of
operations and annual audited combined financial statements prepared in
conformity with U.S. GAAP. We also will furnish our depositary and our
shareholders with unaudited financial information prepared in conformity with
U.S. GAAP for the first six months of each fiscal year as soon as practicable
following the end of each such period. When our depositary bank receives any
reports from us, it will, upon our request, promptly mail the reports to our ADS
holders of record.

I.   Subsidiary Information

          For more information on our subsidiaries, see "Item 4--Information on
Our Company-Organizational Structure".

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ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

          Our exposure to financial market risks derives primarily from the
changes in interest rates and foreign exchange rates. To mitigate these risks,
in the past our company has utilized derivative financial instruments, the
application of which was primarily for hedging purposes and not for speculative
purposes. The Company does not currently have any interest in any derivative
financial instruments or hedging transactions.

Interest Rate Risk

          Our exposure to market risk associated with changes in interest rates
relates primarily to debt obligations which we may incur in the future. For the
year ended December 31, 2002, our interest-bearing debt obligations are made up
primarily of short-term loans and trust receipts payable. The imputed interest
in our long-term liability to a customer is fixed. For the year ended December
31, 2003, our interest-bearing debt obligations are made up primarily of the
Merrill Lynch exchangeable note, short-term loans and trust receipts payable.
The imputed interest in our long-term liability to a customer is fixed. The
interest on the Merrill Lynch exchangeable note is fixed. Our policy is to
manage interest rate risk by borrowing a combination of fixed and floating rate
obligations based upon market conditions. In 2003, we did not engage in any
freestanding derivative transactions nor did we have any outstanding derivative
contracts.

Foreign Currency Risk

          Our foreign currency exposure gives rise to market risks associated
with exchange rate movements against the Philippine peso, the Japanese yen, the
European Euro and the U.S. dollar, our functional currency. For the year ended
December 31, 2002, all of our revenue were denominated in U.S. dollars, as a
result, we had less foreign currency exchange risk. For the year ended December
31, 2002, approximately 30% of our cost of sales was incurred in Philippine
pesos, with the remaining 70% incurred in U.S. dollars. For the year ended
December 31, 2003, up to 99.99% of our revenue was denominated in U.S. dollars,
and as a result, we had less foreign currency exchange risk. For the year ended
December 31, 2003, approximately 24% of our cost of sales was incurred in
Philippine pesos, with 64% incurred in U.S. dollars, and the balance in Japanese
Yen and Euro. Based on our overall currency rate exposure at December 31, 2003,
a near-term 5% appreciation or depreciation in the value of the U.S. dollar
would not have a significant effect on our financial position, results of
operations and cash flows over the next fiscal year. There can be no assurance,
however, that there will not be a material impact further in the future.

          We minimize our currency risk by purchasing most of our raw materials
and equipment in U.S. dollars and borrowing in U.S. dollars. In the past, we
have entered into foreign currency forward contracts to mitigate the effects on
us of exchange rate fluctuations between the U.S. dollar and the Philippine peso
related to our peso denominated expenditures. Our last outstanding currency
forward contract amounted to $50,000 and matured on December 22, 1999.
Currently, we have no outstanding currency forward contracts.

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

          Not applicable.

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          PART II

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

          Not applicable.

ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
     PROCEEDS

A.   Not applicable.

B.   Not applicable.

C.   Not applicable.

D.   Not applicable.

ITEM 15 CONTROLS AND PROCEDURES

          Based on their evaluation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act), our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are adequate and effective for purposes of timely alerting them
of material information relating to us required to be included in our filings
with the Commission under the Exchange Act.

          There were no significant changes in our internal controls that have
materially affected or could materially affect internal controls or financial
reporting subsequent to the date of their most recent evaluation.

ITEM 16 RESERVED

ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT

          Our Board of Directors has determined that Mr. Ramon R. del Rosario,
Jr. qualifies as an audit committee financial expert serving on our audit
committee.

ITEM 16B CODE OF ETHICS

          In April 2004, the Company adopted a Code of Ethics that applies to
the company's principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar
functions. A copy of this code of ethics is available on the Company's web site
at www.psitechnologies.com/psi2/codeofethics.pdf.

ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

          SyCip Gorres Velayo & Co. (which we refer to as SGV), a member
practice of Ernst &Young Global, has served as our independent public
accountants for the years ended December 31, 2002 and December 31, 2003. The
following table summarizes the aggregate fees for professional audit services
and other services rendered by SGV and Ernst & Young in the past two years.

                                 2002       2003
                               --------   --------
Audit Fees                     $150,000   $150,000
Out-of-Pocket Expenses            5,605      5,000
Tax                               1,375     39,520
All Other Fees                   46,325         --
                               --------   --------
Total                          $203,305   $194,520

Audit Fees. Audit fees includes fees for professional services rendered in
connection with the audit of our annual financial statements set forth in our
Annual Report on Form 20-F and services provided by the independent auditors

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in connection with statutory and regulatory filings or engagements. This
category also includes comfort letters, consents and assistance with and review
of documents filed with the SEC.

Out-of-Pocket Expenses. Audit-related fees are generally fees billed for
services that are closely related to the performance of the audit or review of
financial statements. Out-of-pocket expenses for 2003 is an estimate.

Tax Fees. Tax fees are fees for professional services rendered by the principal
independent auditors related to international and domestic tax compliance, tax
advice and tax planning for our China initiative.

All Other Fees. All other fees consist primarily of fees for internal audit
services. This service was terminated upon the ratification of the
Sarbanes-Oxley Act.

Audit Committee Pre-Approval Policy

The Company's audit committee is required to pre-approve all audit and non-audit
services rendered by and approve the engagement fees and other compensation to
be paid to the independent accountant and its affiliates. When deciding whether
to approve these items, our audit committee will take into account whether the
provision of any non-audit service is compatible with the independence standards
under the guidelines of the SEC and of the Independence Standards Board. To
assist in this undertaking, the audit committee shall require the independent
accountant to submit a report describing all relationships the independent
accountant has with the Company and relevant third parties to determine the
independent accountant's independence.

The audit committee shall recommend to the Board the delegation to one or more
designated members of the audit committee the authority to grant pre-approvals
for audit and non-audit services. The decision of any member to whom the
authority is delegated must be presented to the full audit committee.

The audit committee has approved all engagements listed above.

All of the hours spent on the audit were done by SGV and Ernst & Young.

ITEM 16D EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

          Not applicable.

ITEM 16E PURCHASE OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS.

          Not applicable.

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          PART III

ITEM 17 CONSOLIDATED FINANCIAL STATEMENTS

          Please see Item 18.

ITEM 18 CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Report of independent auditors...........................................     1

Consolidated balance sheets as of December 31, 2003 and 2002.............     2

Consolidated statements of operations for the years ended December 31,
2003, 2002 and 2001......................................................     3

Consolidated statements of changes in stockholders' equity for the years
ended December 31, 2003, 2002 and 2001...................................     4

Consolidated statements of cash flows for the years ended December 31,
2003, 2002 and 2001......................................................     5

Notes to consolidated financial statements...............................     8

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ITEM 19 EXHIBITS

Exhibit Number   Description
--------------   -----------
      1.1        Articles of incorporation of our company (incorporated herein
                 by reference to Exhibits 3.1 and 3.2 to our registration
                 statement on Form F-1, as amended (Registration Statement No.
                 333-9110)).

      2.1        Registration rights agreement dated May 29, 2001 (incorporated
                 herein by reference to Exhibit 3 to our filing on Schedule 13D
                 dated May 29, 2001).

      3.1        Shareholders' agreement dated May 29, 2001 (incorporated herein
                 by reference to Exhibit 2 to our filing on Schedule 13D dated
                 May 29, 2001).

      4.1        Share purchase agreement dated May 29, 2001 (incorporated
                 herein by reference to Exhibit 1 to our filing on Schedule 13D
                 dated May 29, 2001).

      4.2        Purchase Agreement by and between PSi Technologies, Inc. and
                 Merrill Lynch Global Emerging Markets Partners, L.P. dated July
                 3, 2003

      4.3        Investment Cooperation Agreement with the Chengdu Hi-Tech Zone,
                 dated December 7, 2003.

      4.4        Lease Contract with the Sichuan Chengdu Export Processing Zone
                 Investment Development Co. Ltd., dated January 19, 2004

      4.5        Non-compete Agreement with Arthur J. Young, Jr., dated November
                 4, 1997

      4.6        Lease dated February 1, 2003 between PSi Technologies, Inc. and
                 Food Terminal Incorporated.

      4.7        Supplemental Agreement dated November 1999 between PSi
                 Technologies, Laguna, Inc. and RBF Development Corporation.

      4.8        Consulting Agreement dated August 9, 1999 between PSi
                 Technologies Holdings, Inc. and Firebird Consulting Group LLC

      4.9        Letter of Appointment of William J. Meder dated June 26, 2002

      8.1        Significant subsidiaries (please see "Item 4--Information on
                 Our Company--Organizational Structure" of this Form 20-F).

      12.1       Certification of Chief Executive Officer Pursuant to Section
                 302 of the Sarbanes-Oxley Act of 2002

      12.2       Certification of Chief Financial Officer Pursuant to Section
                 302 of the Sarbanes-Oxley Act of 2002

      13.1       Certification of Chief Executive Officer Pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002

      13.2       Certification of Chief Financial Officer Pursuant of Section
                 906 of the Sarbanes-Oxley Act of 2002

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                                    SIGNATURE

          The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

                                     PSi Technologies Holdings, Inc.


                                     /S/ Arthur J. Young, Jr.
                                     -------------------------------------------
                                     Name: Arthur J. Young, Jr.
                                     Title: President & Chief Executive Officer

Date: June 30, 2004

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                                      -1-

Report of Independent Auditors

The Stockholders and the Board of Directors
PSi Technologies Holdings, Inc.

We have audited the accompanying consolidated balance sheets of PSi Technologies
Holdings, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended, expressed in U.S. dollars. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated balance sheet of PSi
Technologies Holdings, Inc. and Subsidiaries for the year ended December 31,
2001 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 2001 were
audited by other auditors who have ceased operations and whose report dated
February 26, 2002 (except with respect to the matter discussed in Note 25a, as
to which the date is April 24, 2002), expressed an unqualified opinion on those
statements.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PSi
Technologies Holdings, Inc. and Subsidiaries as of December 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with U.S. generally accepted accounting
principles.

/s/ SyCip Gorres Velayo & Co
A member practice of Ernst & Young Global

June 15, 2004
Makati City, Philippines


The following is a copy of the audit report previously issued by Arthur Andersen
& Co. in connection with PSi Technologies Holdings, Inc. and Subsidiaries'
filing of its annual report on Form 20-F for the year ended December 31, 2001.
This audit report has not been reissued by Arthur Andersen & Co. in connection
with this filing of the Company's annual report on Form 20-F. The consolidated
balance sheet as of December 31, 2000, and the consolidated statements of
income, changes in stockholders' equity and cash flows for the year ended
December 31, 1999 have not been included in the accompanying financial
statements.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Stockholders and the Board of Directors
PSi Technologies Holdings, Inc.

We have audited the accompanying consolidated balance sheets of PSi Technologies
Holdings, Inc. and Subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2001,
expressed in U.S. dollars. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PSi
Technologies Holdings, Inc. and Subsidiaries as of December 31, 2000 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.


Arthur Andersen & Co.

February 26, 2002, except with respect to the matter discussed in Note 25a, as
to which the date is April 24, 2002
Hong Kong

<PAGE>

                                      -2-

PSi TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
                                                                          2003           2002
-------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>
ASSETS

Current Assets
Cash (Notes 3, 4, 6, 10 and 22)                                       $    935,792   $  1,700,572
Trade and other receivables - net (Notes 4 and 10)                      11,449,012     13,883,652
Advances to officers (Note 20)                                               5,500         42,913
Inventories - net (Notes 5 and 6)                                        5,868,621      8,471,056
Other current assets  net (Notes 4, 6, 10 and 17)                        1,779,705      2,476,996
-------------------------------------------------------------------------------------------------
      Total Current Assets                                              20,038,630     26,575,189
-------------------------------------------------------------------------------------------------
Noncurrent Assets
Investment and advances (Note 7)                                           143,343        143,301
Property, plant and equipment - net (Notes 8, 9, 12 and 13)             68,408,783     85,155,392
Other noncurrent assets - net (Notes 9 and 17)                           1,000,993      1,131,559
-------------------------------------------------------------------------------------------------
      Total Noncurrent Assets                                           69,553,119     86,430,252
-------------------------------------------------------------------------------------------------
                                                                      $ 89,591,749   $113,005,441
=================================================================================================

-------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Loans payable (Notes 10 and 22)                                       $  8,600,000   $  6,500,000
Trade and other payables (Notes 11 and 18)                              19,427,382     26,366,862
Trust receipts payable (Notes 5 and 22)                                  2,348,943      3,668,734
Current portion of obligations under capital lease  (Notes 8 and 12)       135,403        135,701
Current portion of long-term liability due to a customer
   (Notes 13 and 22)                                                     1,630,604      2,572,397
Income tax payable                                                           5,859             --
-------------------------------------------------------------------------------------------------
      Total Current Liabilities                                         32,148,191     39,243,694
-------------------------------------------------------------------------------------------------
Noncurrent Liabilities
Obligations under capital lease - net of current portion
   (Notes 8 and 12)                                                         17,163        115,935
Long-term liability due to a customer - net of current portion
   (Notes 13 and 22)                                                       741,793             --
Exchangeable note (Notes 14 and 22)                                        908,092             --
Contingent liabilities (Note 26)
-------------------------------------------------------------------------------------------------
      Total Noncurrent Liabilities                                       1,667,048        115,935
-------------------------------------------------------------------------------------------------
Minority Interest                                                          179,493        168,653
-------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 1, 14 and 15)
   Capital stock - Philippine peso 1-2/3 par value
   Authorized - 37,058,100 shares
   Issued and outstanding - 13,289,525 shares                              590,818        590,818
Additional paid-in capital                                              71,208,152     68,084,772
Retained earnings (deficit)                                            (16,201,953)     4,801,569
-------------------------------------------------------------------------------------------------
      Total Stockholders' Equity                                        55,597,017     73,477,159
-------------------------------------------------------------------------------------------------
                                                                      $ 89,591,749   $113,005,441
=================================================================================================
</TABLE>

--------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.

<PAGE>

                                      -3-

PSi TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(With Comparative Figures for 2001)

<TABLE>
<CAPTION>
                                                           2003           2002           2001
-------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>            <C>
REVENUES (Notes 1 and 23)                             $  76,932,587   $ 70,537,046   $ 53,511,576

COST OF SALES (Notes 8, 18, 19 and 21)                   75,172,428     68,534,705     51,823,912
-------------------------------------------------------------------------------------------------
GROSS PROFIT                                              1,760,159      2,002,341      1,687,664
-------------------------------------------------------------------------------------------------
OPERATING EXPENSES
General and administrative (Notes 8, 18, 19 and 21)       7,086,307      6,225,935      5,663,733
Special charges (Notes 5, 8 and 16)                      12,895,769             --             --
Selling and marketing                                       762,071      1,146,760        965,403
Research and development                                    722,857      1,253,242        691,394
-------------------------------------------------------------------------------------------------
      Total Operating Expenses                           21,467,004      8,625,937      7,320,530
-------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS                                    (19,706,845)    (6,623,596)    (5,632,866)
-------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Interest and bank charges (Notes 10, 12, 13 and 14)      (1,346,692)      (482,837)      (313,545)
Foreign exchange gains (losses) - net                      (243,218)        29,253        796,570
Interest income                                             132,886         82,319        414,226
Gain (loss) on disposal of property and equipment            (1,482)        38,741             --
Equity in net losses of an investee (Note 7)                   (112)           (87)          (425)
Early retirement costs (Note 18)                                 --             --       (679,884)
-------------------------------------------------------------------------------------------------
      Total Other Income (Expenses)                      (1,458,618)      (332,611)       216,942
-------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX                                  (21,165,463)    (6,956,207)    (5,415,924)
-------------------------------------------------------------------------------------------------
PROVISION FOR (BENEFIT FROM)
   INCOME TAX (Note 17)
Current                                                       5,859             --         27,238
Deferred                                                   (178,640)         9,680        (30,066)
-------------------------------------------------------------------------------------------------
      Total Provision for (Benefit from) Income Tax        (172,781)         9,680         (2,828)
-------------------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST                           (20,992,682)    (6,965,887)    (5,413,096)

MINORITY INTEREST                                           (10,840)        47,805        (94,781)
-------------------------------------------------------------------------------------------------
NET LOSS (Note 25)                                     ($21,003,522)   ($6,918,082)   ($5,507,877)
=================================================================================================
Weighted Average Number of Common Shares
   Outstanding (Note 25)                                 13,289,525     13,289,525     13,289,525
=================================================================================================
Basic and Diluted Earnings Per Common Share
   (Note 25)                                                 ($1.58)        ($0.52)        ($0.41)
=================================================================================================
</TABLE>

--------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.

<PAGE>

                                      -4-

PSi TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(With Comparative Figures for 2001)

<TABLE>
<CAPTION>
                                                                 2003           2002           2001
-------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>            <C>
CAPITAL STOCK (Notes 1 and 14)
Common shares - Philippine peso 1-2/3 par value
Authorized - 37,058,100 common shares
Issued and outstanding - 13,289,525 common shares           $     590,818   $    590,818   $    590,818
-------------------------------------------------------------------------------------------------------

ADDITIONAL PAID-IN CAPITAL (Notes 1, 14 and 19)
Balance, beginning of year                                     68,084,772     67,887,441     67,834,894
Beneficial conversion option                                    2,888,270             --             --
Stock compensation costs                                          235,110        197,331        239,953
Additional initial public offering-related stock issuance
   costs                                                               --             --       (187,406)
-------------------------------------------------------------------------------------------------------
Balance, end of year                                           71,208,152     68,084,772     67,887,441
-------------------------------------------------------------------------------------------------------

OTHER COMPREHENSIVE INCOME (Note 18)
Balance, beginning of year                                             --         38,931             --
Minimum pension liability adjustment                                   --        (38,931)        38,931
-------------------------------------------------------------------------------------------------------
Balance, end of year                                                   --             --         38,931
-------------------------------------------------------------------------------------------------------

RETAINED EARNINGS (Note 15)
Balance, beginning of year                                      4,801,569     11,719,651     17,227,528
Net loss                                                      (21,003,522)    (6,918,082)    (5,507,877)
-------------------------------------------------------------------------------------------------------
Balance, end of year                                          (16,201,953)     4,801,569     11,719,651
-------------------------------------------------------------------------------------------------------
Total Stockholders' Equity                                  $  55,597,017   $ 73,477,159   $ 80,236,841
=======================================================================================================

COMPREHENSIVE LOSS
Net loss                                                     ($21,003,522)   ($6,918,082)   ($5,507,877)
Minimum pension liability adjustment                                   --        (38,931)        38,931
-------------------------------------------------------------------------------------------------------
Total Comprehensive Loss                                     ($21,003,522)   ($6,957,013)   ($5,468,946)
=======================================================================================================
</TABLE>

--------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.

<PAGE>

                                      -5-

PSi TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(With Comparative Figures for 2001)
<TABLE>
<CAPTION>
                                                              2003           2002           2001
-----------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                  ($21,003,522)   ($ 6,918,082)   ($5,507,877)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
   Depreciation                                             15,500,325      13,839,161     12,034,970
   Impairment losses                                        11,367,649         146,965             --
   Stock compensation costs                                    235,110         197,331        239,953
   Amortization of debt issuance costs and discount            158,265              --             --
   Loss (gain) on disposal of property and equipment             1,482         (38,741)            --
   Provisions for (benefit from):
      Inventory obsolescence                                   881,236              --             --
      Retirement expense                                       327,346         203,124             --
      Deferred income tax                                     (178,640)          9,680        (30,066)
      Doubtful accounts                                          6,325              --             --
      Unrecoverable input taxes                                     --         108,000             --
   Write-off of inventories and deposit                        646,884
   Write-off of unrecoverable input taxes                        6,376          21,871             --
   Minority interest                                            10,840         (47,805)        94,781
   Equity in net losses of an investee                             112              87            425
   Changes in operating assets and liabilities:
      Decrease (increase) in:                                       --
         Trade and other receivables                         2,428,315      (3,770,280)      (764,770)
         Advances to officers                                   37,413         130,251         46,429
         Inventories                                         1,199,315      (1,170,674)     2,209,242
         Other current assets                                  585,970        (372,278)       535,112
      Decrease in trade and other payables                 (11,233,828)       (700,987)    (4,414,437)
      Increase in income tax payable                             5,859              --             --
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities                      982,832       1,637,623      4,443,762
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property, plant and equipment               (6,169,586)     (7,459,864)   (18,406,979)
Proceeds from sale of property and equipment                    54,633         214,595             --
Decrease (increase) in other noncurrent assets                 417,794       1,264,035     (1,327,299)
Decrease (increase) in investment and advances                    (154)             --         24,242
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities                       (5,697,313)     (5,981,234)   (19,710,036)
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
   Loans payable                                             4,400,000       5,476,653      4,200,000
   Exchangeable note                                         4,000,000              --             --
Net proceeds from (payments of) trust receipts payable      (1,319,791)      2,588,519      1,080,215
Payments of:
   Loans payable                                            (2,300,000)     (3,176,653)            --
   Exchangeable note issuance costs                           (490,546)             --             --
   Liability due to a customer                                (200,000)       (534,111)            --
   Obligations under capital lease                            (139,962)       (102,246)       (26,843)
   Stock issuance costs                                             --              --       (187,406)
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities                    3,949,701       4,252,162      5,065,966
-----------------------------------------------------------------------------------------------------
NET DECREASE IN CASH                                          (764,780)        (91,449)   (10,200,308)
</TABLE>

<PAGE>

                                      -6-

<TABLE>
<S>                                                      <C>             <C>             <C>
CASH AT BEGINNING OF YEAR                                    1,700,572       1,792,021     11,992,329
-----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR                                      $     935,792   $   1,700,572   $  1,792,021
=====================================================================================================
</TABLE>

<PAGE>

                                      -7-

<TABLE>
<CAPTION>
                                                           2003          2002          2001
---------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>           <C>
SUPPLEMENTAL INFORMATION
   ON NONCASH FINANCING
   AND INVESTING ACTIVITIES
Property and equipment acquired on account under        $3,967,002   $10,806,346   $4,912,116
   accounts payable
Equipment acquired under capital lease arrangement          40,892        87,547      293,178
Machinery, equipment and accessories acquired under
   long-term liability arrangement with a customer              --            --    3,106,508
=============================================================================================

SUPPLEMENTAL DISCLOSURES OF
   CASH FLOW INFORMATION
Cash paid during the year for:
   Interest                                             $  552,870   $   353,236   $  126,465
   Income tax                                                   --            --       88,184
=============================================================================================
</TABLE>

--------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.

<PAGE>

                                      -8-

PSi TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless Otherwise Indicated Reference to $ Refers to U. S. Dollars)
(With Comparative Figures for 2001)

--------------------------------------------------------------------------------
1.   Corporate Information

     Nature of Business

     PSi Technologies Holdings, Inc. (PSi Holdings) is the holding company of
     the following entities: PSi Technologies, Inc. (PSi Technologies), PSi
     Technologies Laguna, Inc. (PSi Laguna) and Pacsem Technologies (Pacsem),
     all wholly-owned subsidiaries, and Pacsem Realty, Inc. (Pacsem Realty, see
     Note 2), collectively herein referred to as "the Company" or "the PSi
     Companies." Through PSi Technologies and PSi Laguna, PSi Holdings provides
     semiconductor assembly and test services primarily for power applications.
     It is also engaged in semiconductor packaging and test services for
     non-power applications, including plastics and hermetics. Approximately
     94%, 89% and 83% of the Company's consolidated revenue in 2003, 2002 and
     2001, respectively, relate to power packages.

     The PSi Companies are interdependent companies involved in related
     businesses. PSi Holdings was incorporated in the Philippines and registered
     with the Philippine Securities and Exchange Commission (SEC) on December
     10, 1999 as part of a reorganization to facilitate its equity offering. On
     November 19, 1999, to organize PSi Holdings, the then principal
     shareholders of PSi Technologies transferred to PSi Holdings all their PSi
     Technologies common and preferred shares (except for nominee director
     qualifying shares) in exchange for 15,440,876 PSi Holdings common shares.
     The proportionate ownership amongst shareholders remained identical. The
     creation of PSi Holdings and the issuance of shares to the existing
     shareholders of PSi Technologies are collectively referred to as the
     "Reorganization."

     The Reorganization described in the foregoing paragraph was accounted for
     at historical cost in a manner similar to a pooling of interests as it
     represents an exchange of equity interests between companies under common
     control. The Reorganization was reflected in the Company's books as if the
     Reorganization occurred at the beginning of calendar year 1999.

     The Reorganization entailed the following:

     .    Exchange by the principal shareholders of PSi Technologies of all
          their existing common and preferred shares in PSi Technologies for
          original common shares of PSi Holdings pursuant to a deed of
          assignment (with the exception of nominee director qualifying shares)
          executed among the parties on November 19,1999 at a ratio of one PSi
          Holdings share for every 25 diluted PSi Technologies shares held; and,

     .    Recognition of the difference between the par value of PSi Holdings
          shares issued and the net assets of PSi Technologies at the date of
          exchange as additional paid-in capital.

     On March 15, 2000, PSi Holdings offered to the public 4,025,000 American
     Depositary Shares (ADSs) at $16 per ADS representing its 4,025,000 common
     shares. The ADSs have been approved for quotation on the Nasdaq National
     Market.

<PAGE>

                                      -9-

     On December 7, 2003, PSi Technologies entered into an Investment Agreement
     with the Management Committee of the Chengdu Hi-Tech Zone (CHTZ), a
     government entity of Chengdu City, Sichuan Province, People's Republic of
     China. The Investment Agreement specifies the location and government
     support contracted by and provided to the Company. Such Investment
     Agreement is one of the primary and key steps towards fulfilling the legal
     and regulatory requirements necessary for PSi Technologies to organize a
     100% owned assembly and test facility in Chengdu City, Sichuan Province,
     People's Republic of China. On December 22, 2003, the Company incorporated
     PSi Technologies China Holdings, Co., Limited (PSi Mauritius) in the
     Republic of Mauritius as a wholly owned subsidiary of PSi Technologies. On
     January 15, 2004, PSi Mauritius incorporated PSi Technologies Chengdu Co.
     Ltd., a company registered in People's Republic of China, to service the
     proposed Supply Agreement with a customer (see Note 27). As of June 15,
     2004, the China facility has not commenced commercial operations.

     The terms of the Investment Agreement include leases for a period of three
     years with option to purchase two pre-fabricated buildings for the purpose
     of providing assembly and test services in the Chengdu Sichuan Export
     Processing Zone, Chengdu City, Sichuan Province, People's Republic of China
     and two adjacent parcels of land each measuring 17,500 square meters. Each
     building has a covered area of approximately 2,592 square meters sited on
     approximately 4,117 square meters of land.

     On November 3, 2003, PSi Technologies and PSi Laguna 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 (Tak Cheong). Discussions with Tak Cheong
     were later terminated due to the parties' inability to enter into a
     definitive joint venture agreement. In January 2004, the Boards of
     Directors of PSi Technologies and PSi Technologies Laguna 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.

     PSi Holdings is 54% owned by Merrill Lynch Global Emerging Markets
     Partners, L. P. (Merrill Lynch), a U. S. based entity.

     Significant Customers

     The Company's customers are located in the United States of America, Europe
     and Asia. The Company's top five customers collectively accounted for 80%,
     76% and 56% of its revenue in 2003, 2002 and 2001, respectively. The
     Company anticipates that significant customer concentration will continue
     for the foreseeable future but the companies which constitute the Company's
     largest customers may change.

     Risks and Uncertainties

     The Company's future results of operations involve a number of risks and
     uncertainties. Factors that could affect the Company's future operating
     results include, but are not limited to, dependence on the highly cyclical
     nature of the semiconductor industry, competitive pricing and declines in
     average selling prices, risks associated with reliance on a group of
     principal customers, timing and volume of orders relative to the Company's
     production capacity, availability of manufacturing capacity and
     fluctuations in manufacturing yields, availability of financing,
     competition, dependence on raw materials and equipment suppliers, exchange
     rate

<PAGE>

                                      -10-

     fluctuations, dependence on key personnel, difficulties of managing growth,
     and enforcement of intellectual property rights and environmental
     regulations.

     The accompanying financial statements have been prepared assuming that the
     Company will continue as a going concern. Since 2001, the Company has
     incurred losses. In 2003, the Company recognized provision for impairment
     losses on certain property and equipment amounting to $11.4 million. This
     resulted in a retained earnings deficit of $16.2 million as of December 31,
     2003. Further, the Company has negative working capital of $12.1 million as
     of December 31, 2003. Provisions for impairment losses were recognized
     primarily due to declining business prospects of certain power packages as
     a result of the discontinuance of production of certain existing power
     packages with erratic or lower sales volume. As of December 31, 2003, the
     Company has not complied with the current ratio covenant of a credit
     facility from the Singapore Branch of Raiffeisen Zentralbank Oesterreich AG
     (RZB-Austria). However, it has obtained a one-time waiver covering such
     non-compliance as of December 31, 2003.

     The foregoing conditions, risks and uncertainties could affect the
     Company's ability to develop advanced technology and expanded services,
     compete against companies with greater operating capacity and financial
     resources, increase production capacity and obtain assembly and test
     equipment to meet the demand for the Company's products and services,
     obtain favorable terms from suppliers, and repay and obtain additional bank
     credit facilities. The Company's continued operations as a going concern is
     dependent upon its ability to generate sufficient cash flows to meet its
     maturing obligations on a timely basis and to comply with the provisions of
     the financing agreements.

     To address the foregoing conditions, the Company is undertaking measures to
     lower the variability of customer loadings through new captive businesses
     such as the transfer and outsource by Electronics Devices Limited-Philips
     Semiconductors (Philips) of its internal assembly and test facility to the
     Company's facility in China; manage customer and package mix toward higher
     average selling price and margin packages; reduce operating costs by
     sourcing lower cost raw materials and overheads; improve productivity,
     manufacturing efficiency and equipment capabilities; rationalize capital
     expenditures to minimum level, 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 impaired assets to recover value. The Company has plans of raising
     medium or long-term financing. In 2004, a portion of the FTI Complex where
     PSi Technologies' facilities are located was proclaimed a Philippine
     Economic Zone Area (PEZA) with PSi Technologies registering as a PEZA
     enterprise as part of the Company's tax planning strategies. Under the
     terms of its registration, PSi Technologies shall 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, with respect to its
     existing operations which had availed of income tax holiday incentives as a
     Philippine Board of Investments (BOI)-registered enterprise, and enjoy
     certain other tax benefits. Also, industry conditions have improved,
     according to data from the Semiconductor Industry Association. Global
     semiconductor revenues were higher by 18.3% and 1.3% in 2003 and 2002,
     respectively, and forecasted to grow by 28.6% in 2004. Global power
     semiconductor revenues were higher by 11.75% and 5.4% in 2003 and 2002,
     respectively, and forecasted to grow by 23.2% in 2004.

--------------------------------------------------------------------------------
2.   Summary of Significant Accounting Policies

<PAGE>

                                      -11-

     Accounting Principles

     The consolidated financial statements are prepared in conformity with U. S.
     generally accepted accounting principles (U.S. GAAP) consistently applied
     for all years.

     Principles of Consolidation

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

     .    PSi Technologies, a Philippine corporation engaged in the design,
          assembly and test of power semiconductor devices, and packaging and
          test services for non-power applications, including plastics and
          hermetics;

     .    PSi Laguna (wholly owned through PSi Technologies), a PEZA-registered
          enterprise, engaged in the manufacture, assembly and test of power
          semiconductor devices;

     .    Pacsem (wholly owned through PSi Technologies), a U.S. corporation
          engaged exclusively in marketing activities on behalf of PSi
          Technologies and PSi Laguna outside the Philippines; and,

     .    Pacsem Realty [40%-owned through PSi Technologies and 24%-owned
          through PSi Technologies' investee, PSitech Realty, Inc. (PSitech
          Realty)], a Philippine corporation organized to hold real estate
          properties, which is controlled by PSi Holdings.

     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.

     Foreign Currency Translations and Transactions

     The Company uses the U.S. dollar as its functional currency because all of
     its revenues and substantially all of its costs are denominated in U.S.
     dollars. Accordingly, monetary assets and liabilities denominated in
     Philippine pesos and other foreign currencies have been remeasured into
     U.S. dollars using the exchange rate at balance sheet date. Nonmonetary
     items are remeasured at historical rates. Gains and losses from such
     remeasurement are credited or charged to current operations. Likewise,
     gains and losses from foreign currency transactions are credited or charged
     to current operations.

     Dividends are declared in Philippine pesos, the currency of the country in
     which the Company is incorporated except with respect to Pacsem, which is a
     U.S. corporation. These are translated in the U.S. dollar financial
     statements at historical rates. The U.S. dollar proceeds of the peso
     dividends will be based on the prevailing Philippine peso to U.S. dollar
     exchange rate at the time of payment.

<PAGE>

                                      -12-

     Inventories

     Inventories are stated at the lower of cost (using moving average method)
     or market, after provision for obsolete items. Work in process includes all
     direct materials, direct labor, depreciation and other overhead costs
     relating to the assembly and testing process at the Company's premises.

     Property, Plant and Equipment

     Property, plant and equipment, including equipment under capital lease
     presented under office, furniture, fixtures and equipment, are carried at
     cost less accumulated depreciation and any impairment in value.
     Depreciation is computed using the straight-line method over the estimated
     useful lives of the assets, as follows:

<TABLE>
<S>                                             <C>
     Machinery, equipment and accessories       4-8 years
     Leasehold improvements                     5 years or the term of the lease agreement,
                                                    whichever is shorter
     Office furniture, fixtures and equipment   3-5 years
     Transportation equipment                   5 years
</TABLE>

     The useful lives and depreciation method are reviewed periodically to
     ensure that the periods and method of depreciation are consistent with the
     expected pattern of economic benefits from items of property, plant and
     equipment.

     The initial cost of property, plant and equipment comprises its purchase
     price, including import duties, taxes and any directly attributable costs
     of bringing the asset to its working condition and location for its
     intended use. Expenditures which are not material in amount, incurred after
     the fixed assets have been put into operation, such as repairs and
     maintenance, are charged to current operations. In situations where it can
     be clearly demonstrated that the expenditures have resulted in an increase
     in the future economic benefits expected to be obtained from the use of an
     item of property, plant and equipment beyond its originally assessed
     standard of performance, the expenditures are capitalized as additional
     costs of property, plant and equipment.

     No depreciation is provided on property, plant and equipment under
     construction or awaiting qualification or technical completion.

     When assets are retired or otherwise disposed of, the cost and the related
     accumulated depreciation and any impairment loss are removed from the
     accounts and any resulting gain or loss is credited or charged to current
     operations.

     Investment in Shares of Stock

     The Company carries its 40% ownership in shares of stock of PSitech Realty
     using the equity method. Under this method, the investment is increased or
     decreased by the Company's equity in net earnings or losses of the investee
     and reduced by any dividend received since the date of acquisition.
     Unrealized intercompany profits and losses are eliminated to the extent of
     the Company's proportionate share thereof.

<PAGE>

                                      -13-

     Income Tax

          The Company accounts for income tax in accordance with the provisions
     of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
     for Income Taxes," which require the use of the liability method. The
     Company calculates its deferred income tax by comparing the U.S. GAAP book
     basis (excluding any effects of indexing for inflation) to the Philippine
     tax basis (excluding any effects of changes in exchange rates), applying
     the appropriate tax rate to any temporary difference and translating such
     deferred tax at the balance sheet exchange rate.

          The Company reports certain income and expense items for income tax
     purposes on a basis different from that reflected in the accompanying
     consolidated financial statements. The principal differences relate to: (i)
     provisions for inventory obsolescence and doubtful accounts, recognition of
     accrued retirement benefit costs, and provision for impairment losses which
     are not deductible until actually incurred or realized; (ii) stock
     compensation costs; and (iii) use of the amortization method for
     preoperating expenses for income tax reporting purposes while these are
     charged off in the U. S. GAAP consolidated financial statements. The
     applicable tax effects of: (a) recognition of net operating loss
     carryforward (NOLCO) benefit and (b) carryforward benefit of minimum
     corporate income tax (MCIT) were also calculated and included among
     deferred tax asset items.

          A valuation allowance is provided if it is more likely than not that
     some portion or all of the deferred tax assets will not be realized in the
     future. As discussed in Notes 1 and 27, as a result of its registration
     with PEZA, PSi Technologies shall be subject to tax at 5% of gross income
     in lieu of all taxes. Consequently, any unapplied NOLCO and MCIT as of May
     1, 2004 shall be written off.

     Earnings Per Share

          Basic earnings per share is computed using the weighted average number
     of common shares outstanding during the year, while diluted earnings per
     share is computed assuming conversion of all dilutive securities, such as
     stock options and exchangeable note. Outstanding stock options will have a
     dilutive effect under the treasury stock method only when the average
     market price of the underlying common share during the period exceeds the
     exercise price of the option. Where the effect of the assumed exercise of
     all outstanding stock options and conversion of the exchangeable note is
     anti-dilutive, basic and diluted earnings per share amounts are the same.

     Revenue Recognition

          Revenues from assembly and test services are recognized upon shipment
     of packaged semiconductors to the customers. The Company does not take
     ownership of customer-supplied 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. The U.S. Securities and Exchange Commission's Staff
     Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance
     on the application of generally accepted accounting principles to selected
     revenue recognition issues. The Company's revenue recognition policy is
     appropriate and in conformity with U.S. GAAP and SAB No. 101.

     Research and Development Costs

          Research and development expenses include costs directly attributable
     to the conduct of research and development programs primarily related to
     the development of new package designs. Such costs include salaries,
     payroll taxes, employee benefit costs, materials, supplies, depreciation
     and maintenance of research equipment, services provided by outside
     contractors, and the

<PAGE>

                                      -14-

     allocable portions of facility costs such as rent, utilities, insurance,
     repairs and maintenance, depreciation and general support services. All
     costs associated with research and development are expensed as incurred.

     Software Development Costs

          External direct costs of materials and services, and payroll and
     payroll related costs of employees directly associated with the development
     of computer software incurred during the development stage of computer
     software for internal use (included under "Other noncurrent assets - net"
     account in the consolidated balance sheets) are capitalized in accordance
     with the Statement of Position 98-1, "Accounting for the Costs of Computer
     Software Developed or Obtained for Internal Use." Software development
     costs are classified under "Property, Plant and Equipment" account in the
     consolidated balance sheets when the computer software is ready for its
     intended use and amortized over five years thereafter.

     Allowance for Doubtful Accounts

          The Company maintains an allowance for doubtful accounts at a level
     considered adequate to provide for potential uncollectibility of its
     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 receivables, designed to identify accounts
     to be provided with an allowance, is made by the Company on a continuing
     basis.

     Allowance for Unrecoverable Input Taxes

          Input value added tax (VAT) claimed from the Philippine Bureau of
     Internal Revenue (BIR) and Bureau of Customs (BOC) are received in the form
     of Tax Credit Certificates (TCCs). The Company maintains an allowance for
     unrecoverable net input VAT claims at a level considered adequate to
     provide for potential uncollectibility of these claims in the form of TCCs
     from the BIR and BOC. Management, on the basis of factors that affect the
     collectibility of the claims, evaluates the level of this allowance. A
     review of the status of the claims, designed to identify claims to be
     provided with allowance, is made by the Company on a continuing basis. When
     such claims are collected from the BIR/BOC, the net amount received is
     recorded as TCCs and the unrecovered portion is recorded as a reduction of
     the related allowance.

     Pension Plan

          The Company has a trusteed, noncontributory defined benefit pension
     plan covering substantially all of its regular employees in the
     Philippines. The annual expense is determined in accordance with the
     provisions of SFAS No. 87, "Employers' Accounting for Pension" and is
     charged to current operations. Any additional pension liability adjustment
     not yet recognized as net periodic pension cost is reported as other
     comprehensive income in the statements of changes in stockholders' equity.

     Impairment of Long-lived Assets

          The Company reviews long-lived assets for impairment whenever events
     or changes in circumstances indicate that 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

<PAGE>

                                      -15-

     the amount by which the carrying amount of the assets exceeds the fair
     value of the assets. The assets are then carried at a new cost basis.

     Operating Leases

          Rental payments under operating leases are charged to operations on a
     straight-line basis over the periods of the respective leases.

     Capital Lease

          Leases which meet any one of the following criteria: (a) provisions
     for bargain purchase option, (b) transfer of ownership at the end of the
     lease terms, (c) lease term is equal to 75% or more of the estimated
     economic life of the leased property, and (d) present value at the
     beginning of the lease term of the minimum lease payments approximate the
     fair market value of the property, are capitalized. The capitalized asset
     is recognized at the lower of the fair value of the leased asset or the
     present value of the minimum lease payments at the inception of the lease,
     under "Property, Plant and Equipment" account and the related obligations
     recognized as liabilities, under "Obligations under capital lease" account
     in the consolidated balance sheets. The related depreciation for equipment
     under capital lease is computed on the basis of the Company's depreciation
     policy for owned assets.

     Shipping and Handling Costs

          Costs incurred in preparing the finished products for shipment and
     physically moving the finished products from the Company's place of
     business to the customer's designated location are included in the selling
     and marketing expenses and, presented under "Operating Expenses" in the
     consolidated statements of operations.

     Employee Stock Options

          The Company uses the intrinsic value method to account for employee
     stock options in accordance with the provisions of Accounting Principles
     Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
     Under the intrinsic value method, compensation cost is measured as the
     difference between the price an employee is required to pay to purchase
     equity securities of the Company and the fair value or market price of the
     equity securities acquired at measurement date.

     Had compensation cost for the Company's Stock Option (SO) Plan been
     determined based on the fair value at the grant date consistent with the
     method of SFAS No. 123, "Accounting for Stock-based Compensation," the
     Company's net loss and earnings per share would have been stated at the
     following pro forma amounts:

<TABLE>
<CAPTION>
                                              2003           2002          2001
     ----------------------------------------------------------------------------------
     <S>                                       <C>            <C>           <C>
     Net loss as reported                      ($21,003,522)  ($6,918,082)  ($5,507,877)
     Total stock-based employee compensation
        expense determined using APB Opinion
        No. 25, net of related tax effects          235,110       197,331       239,953
     Total stock-based employee compensation
        expense determined under fair value
        based method for all awards, net of
        related tax effects                        (934,577)   (1,433,198)   (2,588,463)
     ----------------------------------------------------------------------------------
     Pro forma net loss                        ($21,702,989)  ($8,153,949)  ($7,856,387)
     ==================================================================================
</TABLE>


<PAGE>

                                      -16-

<TABLE>
<S>                                                  <C>           <C>           <C>
     ==================================================================================
     Earnings per share - as reported                ($1.58)       ($0.52)       ($0.41)
     Earnings per share - proforma                    (1.63)        (0.61)        (0.59)
     ==================================================================================
</TABLE>

     Equity and Debt Issuance Expenses

           Direct costs incurred relative to PSi Holding's initial public
     offering (IPO) of ADSs (representing common shares) and the beneficial
     conversion feature of the Exchangeable Note were charged against the
     corresponding additional paid-in capital arising therefrom. The difference
     between the reported estimated amount pertaining to legal fees in 2000 and
     the actual legal fees related to the IPO paid in 2001 was charged against
     the corresponding additional paid-in capital in 2001.

           Direct costs incurred in connection with the issuance of debt
     securities are reported as deferred financing costs (included under "Other
     noncurrent assets - net" account in the 2003 consolidated balance sheet).
     Debt issuance costs are recognized as additional interest expense over the
     life of the debt instrument under the effective interest method. Upon
     redemption or conversion of the Note prior to June 1, 2008, any remaining
     unamortized discount will be charged to operations on the year of
     redemption or conversion. The embedded beneficial conversion feature
     recognized as additional paid-in capital amounted to $2.8 million as of
     December 31, 2003.

     Recently Issued Accounting Standards

           In May 2003, the Financial Accounting Standards Board (FASB) issued
     SFAS No. 150, "Accounting for Certain Financial Instruments with
     Characteristics of both Liabilities and Equity." This Statement establishes
     standards for the classification and measurement by an issuer of certain
     financial instruments with characteristics of both liabilities and equity.
     This statement is effective for financial instruments entered into or
     modified after May 31, 2003, and otherwise, is effective at the beginning
     of the first interim beginning after June 15, 2003. In November 2003, FASB
     issued "FASB Staff Position No. FAS No. 150-3," which deferred indefinitely
     the measurement provisions of SFAS No. 150 for certain mandatorily
     redeemable noncontrolling interests that were issued before November 5,
     2003. The adoption of SFAS No. 150 did not have a material effect on the
     Company's financial position, results of operations, or cash flows.

           In May 2003, Emerging Issue Task Force (EITF) Issue No. 00-21,
     "Accounting for Revenue Arrangements with Multiple Deliverables" was
     finalized. EITF No. 00-21 provides guidance on accounting for arrangements
     that involve the delivery or performance of multiple products, services
     and/or rights to use assets. The provisions of EITF No. 00-21 apply to
     revenue arrangements entered into in fiscal periods beginning after June
     15, 2003. In December 2003, the U. S. SEC issued SAB No. 104, "Revenue
     Recognition," which codifies and rescinds certain sections of SAB No. 101,
     "Revenue Recognition," in order to make this interpretive guidance
     consistent with EITF No. 00-21. The adoption of EITF No. 00-21 is not
     expected to have a material effect on the Company's financial position,
     results of operations, or cash flows.

           In December 2003, the FASB issued SFAS No. 132 (revised 2003),
     "Employers' Disclosures about Pensions and Other Postretirement Benefits."
     This statement requires additional disclosures about the assets,
     obligations, cash flows, and net periodic benefit cost of defined benefit
     pension plans and other post retirement plans. The statement does not
     change the measurement or recognition of pension plans and other
     postretirement benefit plans. For domestic plans, the new disclosures are
     generally effective for periods ending after December 15,

<PAGE>

                                      -17-

     2003. For foreign plans, the new disclosures are generally effective for
     periods ending after June 15, 2004. The requirements under SFAS No. 132
     (revised 2003) are included in Note 18 to the consolidated financial
     statements.

     Use of Estimates in the Preparation of Consolidated Financial Statements

           The preparation of the consolidated financial statements in
     conformity with U.S. GAAP requires the Company's management to make
     estimates and assumptions that affect the reported amounts of assets and
     liabilities at the date of the financial statements and the reported
     amounts of revenues and expenses during the reporting period. The more
     significant estimates with regard to these consolidated financial
     statements relate to impairment losses, allowance for inventory
     obsolescence, allowance for doubtful accounts, valuation allowance for
     deferred tax assets, assumptions used in pension, contingencies,
     depreciation and other accruals. Actual results could differ from these
     estimates.

--------------------------------------------------------------------------------
3.   Cash

     Cash in banks includes cash held in escrow bank accounts maintained by the
     Company with its creditor bank amounting to $0.78 million as of December
     31, 2003. Such cash held in escrow bank accounts is available to the
     Company for withdrawal subject to the adequacy of assigned outstanding
     trade receivables to cover the Company's debt obligations (See Notes 4, 6
     and 10).

--------------------------------------------------------------------------------
4.   Trade and Other Receivables

     Trade and other receivables consist of:

                                                           2003          2002
     ---------------------------------------------------------------------------
     Trade                                             $11,158,486   $13,683,085
     Others                                                517,178       420,894
     ---------------------------------------------------------------------------
                                                        11,675,664    14,103,979
     Less allowance for doubtful accounts                  226,652       220,327
     ---------------------------------------------------------------------------
                                                       $11,449,012   $13,883,652
     ===========================================================================

     As of December 31, 2003 and 2002, trade receivables include certain
     customer accounts with total carrying amount of $7.5 million and $6.6
     million, respectively, the proceeds from collections of which will be
     remitted directly into the escrow bank accounts. As of December 31, 2003,
     the assigned trade receivables sufficiently cover the outstanding loans
     payable to the RZB-Austria (see Note 10).

<PAGE>

                                      -18-

--------------------------------------------------------------------------------
5.   Inventories

     Inventories consist of the following work in process, raw materials and
     purchased components used in the semiconductor packaging process:

<TABLE>
<CAPTION>
                                                               2003         2002
     ------------------------------------------------------------------------------
<S>                                                         <C>          <C>
     Work in process                                        $  809,657   $1,652,902
     Materials, spare parts and supplies net of allowance
        for inventory obsolescence of $1,348,800 in
        2003 and $467,564 in 2002                            5,058,964    6,818,154
     ------------------------------------------------------------------------------
                                                            $5,868,621   $8,471,056
     ==============================================================================
</TABLE>

     Included in the inventories are raw materials and supplies, and spare parts
     totaling $2.3 million in 2003 and $3.7 million in 2002 purchased under
     trust receipt arrangements with its banks. The Company holds these
     inventories under a "trust arrangement" with the banks, evidenced by trust
     receipts. The Company is accountable to the banks for the items entrusted
     or the proceeds generated from any sale of such inventories until such time
     as the amounts supplied by the banks had been paid. The corresponding trust
     receipts payable to the banks are reported under current liabilities in the
     consolidated balance sheets and bear weighted average annual interest rate
     of 5.55% in 2003 and 3.70% in 2002.

     The movement in allowance for inventory obsolescence amounting to $881,236
     pertains to provision for inventory obsolescence in 2003.

--------------------------------------------------------------------------------
6.   Other Current Assets

     Other current assets consist of:
<TABLE>
<CAPTION>
                                                               2003         2002
        ---------------------------------------------------------------------------
<S>                                                         <C>          <C>
        Input tax - net of allowance for unrecoverable      $1,149,884   $1,043,847
           input tax of $108,000 in 2002
        TCCs                                                   278,163      468,042
        Deposits                                               107,564      268,737
        Deferred tax assets (see Note 17)                       60,166      167,965
        Cash held in escrow bank account                            --      209,764
           (see Notes 3, 4 and 10)
        Prepayments and others                                183,928      318,641
        ---------------------------------------------------------------------------
                                                            $1,779,705   $2,476,996
        =======================================================================-===
</TABLE>

     Input tax represents the balance of unapplied input VAT paid on purchases,
     for which claims for refund from the BIR and BOC have not yet been filed.

     TCCs were issued by the BIR and BOC, which may be used for payment of all
     internal revenue taxes except withholding taxes and BOC duties,
     respectively.

<PAGE>

                                      -19-

     Deposits include advance payments to suppliers for the acquisition of raw
     materials.

--------------------------------------------------------------------------------
7.   Investment and Advances

     The details of investment and advances follow:

                                                              2003        2002
     ---------------------------------------------------------------------------
     Investment in shares of stock of PSitech Realty
        Acquisition cost                                    $146,933   $146,933
     ---------------------------------------------------------------------------
        Accumulated equity in net losses:
           Balance at beginning of year                       (8,074)    (7,987)
           Equity in net losses of an investee                  (112)       (87)
     ---------------------------------------------------------------------------
           Balance at end of year                             (8,186)    (8,074)
     ---------------------------------------------------------------------------
                                                             138,747    138,859
     Advances                                                  4,596      4,442
     ---------------------------------------------------------------------------
                                                            $143,343   $143,301
     ===========================================================================

--------------------------------------------------------------------------------
8.   Property, Plant and Equipment


     Property, plant and equipment consist of:

                                                          2003           2002
     ---------------------------------------------------------------------------
     Land                                            $  3,146,370   $  3,146,370
     Machinery, equipment and accessories             114,469,551    122,255,617
     Leasehold improvements                             5,294,148      5,011,735
     Office furniture, fixtures and equipment           4,406,858      4,255,564
     Transportation equipment                             774,612        762,930
     ---------------------------------------------------------------------------
                                                      128,091,539    135,432,216
     Less accumulated depreciation                     62,190,566     53,586,243
     ---------------------------------------------------------------------------
                                                       65,900,973     81,845,973
     Construction in progress                           2,507,810      3,309,419
     ---------------------------------------------------------------------------
                                                     $ 68,408,783   $ 85,155,392
     ===========================================================================

     Office furniture, fixtures and equipment include computer equipment
     acquired in 2003 and 2002 under capital lease arrangements (see Note 12).
     The related depreciation of the leased equipment, amounting to $69,597 in
     2003 and $106,206 in 2002, was computed on the basis of the Company's
     depreciation policy for owned assets.

     Office furniture, fixtures and equipment include software costs with net
     carrying amount of $526,617 in 2003 and $590,288 in 2002.

     The total depreciation of property, plant and equipment amounted to
     $15,500,325, $13,839,161 and $12,034,970 in 2003, 2002 and 2001,
     respectively.

<PAGE>

                                      -20-

     Although there was a noted recovery in most of the Company's power and
     non-power package assembly and test services during the first two quarters
     of 2003, the assets related to certain power packages remained at low
     utilization rates relative to the Company's projections and are no longer
     expected to reach previously anticipated utilization levels. Operating
     margins on such products were negative. These events triggered an
     impairment review which included a company-wide evaluation of underutilized
     and/or unutilized assets and a detailed update of operating and cash flow
     projections. As a result of such analysis, management decided to exit
     certain power package products. Further, management decided that the
     construction of a third facility will no longer be continued until
     additional assembly and test facilities in the Philippines are necessary,
     which is largely dependent on the demand of the global electronics market.
     The Company took an asset impairment charge of $10.5 million in 2003 based
     on forecast discounted cash flows from continued use of these assets. The
     cash flows were discounted at a nominal rate of 15% on a pre-tax basis. The
     provision for impairment losses on property and equipment in 2003 is
     included as part of "Special charges" in the 2003 consolidated statement of
     operations.

     In 2003, an independent firm of appraisers was engaged to assist in the
     determination of the fair value of the construction in progress owned by
     PSi Laguna. The determination of fair value was based on the use of cost
     approach. Under this approach, an estimate is made of the current cost of
     reproduction, new buildings and other land improvements in accordance with
     the prevailing market prices for materials, labor and contractors overhead,
     profit and fees. Adjustments are then made to reflect depreciation
     resulting from physical deterioration, functional and economic obsolescence
     based on personal inspection of the buildings and other land improvements
     and in comparison with similar new properties. The corresponding impairment
     loss of $891,754 was recognized in 2003 and included as part of "Special
     charges" in the 2003 consolidated statement of operations.

     The impairment loss of $146,965 in 2002 represents the write-down of Pacsem
     Realty's construction in progress to zero. Such construction has been
     discontinued as a result of the downturn in the worldwide electronics
     industry. There has been no plan to resume the construction until
     additional assembly and test facilities are required. Provision for
     impairment loss is included as part of "General and administrative
     expenses" in the 2002 consolidated statement of operations.

     Certain of the Company's non-power customers provide equipment on
     consignment basis. The value of the consigned equipment is not reflected
     among the Company's property, plant and equipment. Risk of loss and
     insurance for such assets are borne by the customers.

<PAGE>

                                      -21-

--------------------------------------------------------------------------------
9.   Other Noncurrent Assets

     Other noncurrent assets consist of:

                                                              2003        2002
     ---------------------------------------------------------------------------
     Deposits                                             $ 465,334   $  950,224
     Deferred financing charges - net of accumulated
        amortization of $15,391 in 2003                      81,970           --
     Deferred tax assets (see Note 17)                      444,689      168,515
     Others                                                   9,000       12,820
     ---------------------------------------------------------------------------
                                                          $1,000,993  $1,131,559
     ===========================================================================

     Deposits include advance payments to suppliers for acquisition of certain
     property and equipment amounting to $32,069 in 2003 and $506,128 in 2002.

--------------------------------------------------------------------------------
10.  Loans Payable

     Loans payable represent unsecured U.S. dollar-denominated loans from
     Philippine banks and a U.S. dollar-denominated Credit Facility obtained
     from RZB-Austria. The weighted average interest rates in 2003 and 2002 were
     4.13% and 4.21%, respectively.

     Under the terms of the Credit Facility Agreement, PSi Technologies and PSi
     Laguna are required to maintain separate escrow bank accounts and to ensure
     that certain trade receivables are capable of being assigned by PSi
     Technologies and PSi Laguna to RZB-Austria and that collections of such
     trade receivables are remitted directly to the escrow bank accounts. Also,
     PSi Technologies and PSi Laguna shall ensure the payments on certain
     Eligible Receivables (trade receivables from third parties denominated in
     U.S. dollars outstanding for no longer than 90 days from date of invoice)
     under the Borrowing Base (equivalent to 90% of the value of the outstanding
     Eligible Receivables) to the escrow bank accounts. Further, PSi
     Technologies shall maintain a Borrowing Base to cover outstanding principal
     drawings under the Credit Facility at all times. In case of shortfall, PSi
     Technologies and PSi Laguna shall have three business days to rectify such
     shortfall based on the Credit Facility Agreement. Withdrawals from the
     escrow bank accounts are allowable after the creditor bank checks the
     adequacy of the Borrowing Base (see Note 4).

     PSi Holdings and PSi Technologies are required to comply with certain
     financial ratios and covenants which shall be calculated based on
     consolidated and standalone financial statements, respectively, prepared in
     conformity with U.S. GAAP. As of December 31, 2003, PSi Technologies is in
     compliance with the provisions of the Credit Facility, except with respect
     to current ratio requirement. As mentioned in Note 1, the Company has
     obtained a one-time waiver with respect to its compliance with the current
     ratio covenant from RZB-Austria as of December 31, 2003.

<PAGE>

                                      -22-

--------------------------------------------------------------------------------
11.  Trade and Other Payables

     Trade and other payables consist of:

                                                           2003          2002
     ---------------------------------------------------------------------------
     Trade                                             $16,619,347   $23,518,750
     Accrued expenses:
        Employee salaries and benefits (see Note 18)     1,461,171     1,199,581
        Utilities                                          232,240       385,311
        Interest and others                                791,525       973,878
     Withholding taxes                                     323,099       289,342
     ---------------------------------------------------------------------------
                                                       $19,427,382   $26,366,862
     ===========================================================================

     Trade payables include liabilities to equipment suppliers amounting to
     $3,967,002 million in 2003 and $10,806,346 in 2002.

     Accrued employee salaries and benefits include accruals for compensated
     absences.

--------------------------------------------------------------------------------
12.  Obligations Under Capital Lease

     In 2003 and 2002, the Company acquired computer equipment under capital
     lease arrangements. These are included in the balance of office furniture,
     fixtures and equipment under "Property, Plant and Equipment" account in the
     consolidated balance sheets. The details are as follows:

                                                               2003       2002
     ---------------------------------------------------------------------------
     Office equipment under capital lease                    $421,617   $380,725
     Less accumulated depreciation                            200,235    130,638
     ---------------------------------------------------------------------------
     Net book value                                          $221,382   $250,087
     ===========================================================================

     The future minimum payments under the lease as of December 31, 2003 are as
     follows:

     Years ending December 31                                            Amount
     ---------------------------------------------------------------------------
     2004                                                               $133,354
     2005                                                                 22,227
     ---------------------------------------------------------------------------
     Total minimum lease obligation                                      155,581
     Less amount representing interest                                     3,015
     ---------------------------------------------------------------------------
     Present value of minimum lease payments                             152,566
     Less current portion                                                135,403
     ---------------------------------------------------------------------------
     Long-term portion                                                  $ 17,163
     ===========================================================================

<PAGE>

                                      -23-

--------------------------------------------------------------------------------
13.  Long-term Liability Due to a Customer

     On December 11, 2001, the Company entered into an Equipment Purchase
     Agreement (Agreement) with one of its customers (the Customer). Under the
     Agreement, the Company purchased from the Customer certain equipment
     (Equipment) for a total contract price of $3.5 million, with estimated fair
     value of $3.1 million using a 5.054% imputed interest. A downpayment of
     $350,000 was made upon delivery of the Equipment in 2001 and a series of
     installment amounts is payable over 24 months beginning January 1, 2002
     based on the pre-agreed production volume from such Equipment. Any
     remaining liability after the said installments should be fully settled on
     December 14, 2003. However, the Customer was unable to meet the pre-agreed
     production volume. Consequently, the Company did not pay the liability.

     Also, under the terms of the Agreement, upon conclusion of the purchase and
     installation of the Equipment, the Customer shall designate the Company as
     its key supplier for a power package (the Package). As a key supplier, the
     Company shall receive preferential treatment for the loading of the Package
     production demands. The liability of the Customer and the Company under the
     agreement is limited to the delivery, installation and payment of the
     acquisition cost of the Equipment.

     In 2003, the Company entered into an agreement with the Customer to
     restructure the outstanding liability. Instead of a final balloon payment
     in December 2003, the restructuring allows the Company to pay down the
     liability on a monthly basis at an amount based on the production volume
     provided by the Customer, interest-free and with final payment due in June
     2005. On the basis of the actual volume loaded as of May 2004 and projected
     production volume to be provided by the Customer, the Company expects that
     the estimated liability of $1.6 million as of December 31, 2003 will be
     settled in 2004.

--------------------------------------------------------------------------------
14.  Exchangeable Note

     The Note represents a $4.0 million exchangeable senior subordinated note
     payable to Merrill Lynch in 2008, net of calculated debt discount of $3.1
     million as of December 31, 2003. The debt discount represents the value of
     the beneficial conversion feature calculated in accordance with the
     provisions of EITF 98-5, Accounting for Convertible Securities with
     Beneficial Conversion Features or Contingently Adjustable Conversion
     Ratios. Interest on unpaid principal amount of the Note is at a rate of 10%
     per annum, payable semi-annually in arrears on each Interest Payment Date;
     provided that if (a) upon any interest payment date, the Company is
     prohibited from paying cash interest due to restriction in its senior
     credit facility or (b) PSi Holding's Earnings Before Interest Taxes
     Depreciation and Amortization (EBITDA) for the two consecutive fiscal
     quarters ending immediately prior to any interest payment date is less than
     $1.0 million, then the Company may, by notice to the Note holder, elect to
     pay all or any portion of such interest by adding it to the principal
     amount of the Note, whenever such amount shall bear interest at the rate
     aforesaid and shall no longer be considered to be interest due. Following
     are the significant terms of the Note:

<PAGE>

                                      -24-

--------------------------------------------------------------------------------
Grant of Exchange Right           PSi Holdings grants Merrill Lynch an
                                  irrevocable right to exchange Right all or
                                  part of its Note to PSi Holdings' common
                                  stock (Common Stock) at a price per share of
                                  Common Stock initially equal to $1.47 (Note
                                  Exercise Price), provided however that:

                                  i.   If PSi Holdings' EBITDA for the
                                       three-month period ending September 30,
                                       2003 was less than $3.89 million, then
                                       the Exercise Price shall be reduced to
                                       $1.29 per share; and

                                  ii.  If PSi Holdings' EBITDA for the
                                       three-month period ending December 31,
                                       2003 is less than $3.92 million, then
                                       the Note Exercise Price shall be reduced
                                       to (a) $1.15 per share if the Note
                                       Exercise Price was reduced pursuant to
                                       clause (i) above, and (b) $1.29 per
                                       share, if the Note Exercise Price was not
                                       reduced pursuant to clause (i) above.

                                  The EBITDA for the three-month periods ended
                                  September 30, 2003 and December 31, 2003 is
                                  less than $3.89 million and $3.92 million,
                                  respectively. As of December 31, 2003, the
                                  Note Exercise Price was reduced to $1.15 per
                                  share.

                                  At any time after July 3, 2004, the Exchange
                                  Right may be exercised by Merrill Lynch at
                                  its sole discretion, in whole or in part
                                  until such time as all of the Note is
                                  exchanged for Common Stock, paid at maturity
                                  or redeemed in accordance with its terms.

                                  The Company shall not be permitted to prepay
                                  the Note in whole or in part.
--------------------------------------------------------------------------------
Mandatory Issuance Rights         Merrill Lynch, at its discretion, may elect
                                  to replace all of its Exchange Rights with
                                  the right to (i) assign a portion or all of
                                  the Note to PSi Technologies; provided
                                  however, that prior to such assignment, PSi
                                  Technologies shall redeem a portion of such
                                  Note and (ii) subscribe for shares of Common
                                  Stock (Mandatory Issuance) at a price per
                                  share equal to the then par value of one
                                  share of Common Stock (Stock Issuance Price).
--------------------------------------------------------------------------------
Redemption                        Simultaneously with the consummation of the
                                  Mandatory Issuance, PSi Technologies shall
                                  redeem from Merrill Lynch for a cash payment
                                  (including accrued and unpaid interest)
                                  relating to such redeemed Note, a portion of
                                  the conversion principal amount of the Note
                                  equal to the Issuance Purchase Price of the
                                  shares being issued in the Mandatory
                                  Issuance.
--------------------------------------------------------------------------------

The Exercise Price of the Note is below the prevailing share price of PSi
Holdings common share as of July 3, 2003, the commitment date, which is $2.08
per share. Under EITF 98-5, such beneficial

<PAGE>

                                      -25-

conversion feature has to be valued separately at issuance date. The embedded
beneficial conversion feature should be recognized and measured by allocating a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. That amount should be calculated at the commitment
date as the difference between the conversion price and the fair value of the
common stock into which the Note is convertible, multiplied by the number of
shares into which it is convertible. Any adjustment made to the Exercise Price
of the Note upon the occurrence of the stated future event should also be given
accounting recognition on a prospective basis.

As of December 31, 2003, the Note has a carrying amount of $0.9 million (net of
discount of $3.1 million). Upon redemption or conversion of the Note prior to
June 1, 2008, any remaining unamortized discount will be charged to operations
on the year of redemption or conversion. The embedded beneficial conversion
feature recognized as additional paid-in capital amounted to $2.9 million as of
December 31, 2003.

In 2003, the Company recognized debt discount amortization of $0.1 million
presented as part of "Interest and bank charges" in the 2003 consolidated
statement of operations.

--------------------------------------------------------------------------------
15.  Retained Earnings

     The carryover of the retained earnings from PSi Technologies is consistent
     with the accounting of the Company's Reorganization at historical cost in a
     manner similar to a pooling of interests. This account includes inherited
     retained earnings from PSi Technologies.

     The retained earnings determined for Philippine statutory reporting
     purposes, expressed in Philippine pesos, shall be the basis of any dividend
     declaration. As of December 31, 1999, the amount of the inherited retained
     earnings was 385.8 million (converted to U.S. dollars as of December 31,
     2003 exchange rate as $6.9 million). However, with special approval by the
     Philippine SEC, the inherited retained earnings was carried forward to the
     holding company and will be available for distribution as dividends once
     declared as such by PSi Technologies.

     The retained earnings balance as of December 31, 2003 and 2002 of PSi
     Holdings included accumulated equity in net earnings of subsidiaries and
     PSitech Realty of (Pesos) 772.9 million and (Pesos)145.2 million (as
     restated), respectively, computed at the Philippine GAAP parent company
     financial statements level of PSi Holdings. The Philippine GAAP financial
     statements of PSi Holdings were restated to give effect to a change in
     Philippine accounting policy. The accumulated equity in net earnings of
     subsidiaries and PSitech Realty is not available for dividend declaration
     until declared as dividends by PSi Technologies to PSi Holdings.

     As of December 31, 2003, the Company has not declared dividends since its
     incorporation.

<PAGE>

                                      -26-

--------------------------------------------------------------------------------
16.  Special Charges

     Special charges in 2003 consist of the following:

     Provision for impairment losses on property and
        equipment (see Note 8)                                       $11,367,649
     Provision for inventory losses                                      881,236
     Write-off of inventories                                            521,884
     Write-off of deposit                                                125,000
     ---------------------------------------------------------------------------
                                                                     $12,895,769
     ===========================================================================

--------------------------------------------------------------------------------
17.  Income Tax

     The components of the Company's deferred tax assets, which are all
     Philippine income tax components, are as follows:

                                                              2003       2002
     ---------------------------------------------------------------------------
     Deferred tax assets - current:
        Allowance for:
           Inventory obsolescence                          $ 67,440   $   97,460
           Doubtful accounts                                     --       70,505
     ---------------------------------------------------------------------------
                                                             67,440      167,965
     Less valuation allowance                                 7,274           --
     ---------------------------------------------------------------------------
                                                           $ 60,166   $  167,965
     ===========================================================================

     Deferred tax assets - noncurrent:
        Provision for impairment losses                    $570,824   $   47,029
        NOLCO                                                91,877    1,564,039
        Accrual for retirement benefits                      29,777      168,515
        MCIT                                                  4,531       27,238
        Stock compensation                                       --      211,159
        Preoperating expenses                                    --        9,521
     ---------------------------------------------------------------------------
                                                            697,009    2,027,501
        Less valuation allowance                            252,320    1,858,986
     ---------------------------------------------------------------------------
                                                           $444,689   $  168,515
     ===========================================================================

     Deferred tax assets - current and deferred tax assets - noncurrent are
     included in the "Other current assets" and "Other noncurrent assets"
     accounts, respectively, in the consolidated balance sheets.

     The net decrease in the valuation allowance amounted to $1,606,666 in 2003
     and the net increase in the valuation allowance amounted to $1,120,773 in
     2002.

     NOLCO can be claimed as deduction from regular taxable income as follows:

<PAGE>

                                      -27-

     Year Incurred          Expiry Date
     ------------------------------------------------
     December 31, 2003   December 31, 2006   $  9,177
     December 31, 2002   December 31, 2005     54,276
     December 31, 2001   December 31, 2004    223,662
     ------------------------------------------------
                                             $287,115
     ================================================

     The NOLCO can only be used to offset against any income from non-registered
     activities while MCIT can only be carried forward and credited against any
     normal income tax due for the three immediately succeeding taxable periods.

     In May 2004, the area within the FTI Complex where the facilities of PSi
     Technologies are located was declared as an export zone (see Note 27). As
     part of the Company's tax planning strategies, PSi Technologies registered
     as PEZA enterprise. All of its operations which have previously been
     entitled to income tax holiday(ITH) incentives or subjected to 32% income
     tax 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.

     All of the Company's revenues are generated from Philippine operations.

     The reconciliation between the Company's Philippine statutory income tax
     rate and effective income tax rates is as follows:

                                                             2003   2002   2001
     --------------------------------------------------------------------------
     Statutory income tax rate                               (32%)  (32%)  (32%)
     Income tax effects of:
        Foreign exchange adjustments                          12     15     17
        Change in tax rate due to approval of PEZA
           registration                                        9     --     --
        Lower tax rate of PEZA registered activities           2     --     --
           ITH on registered activities                       --    (13)   (11)
        Losses of registered activities subject to
           ITH                                                --     14     16
        Interest income subjected to final
           withholding tax                                    --     --     (1)
     Valuation allowance                                       8     16     11
     --------------------------------------------------------------------------
     Effective income tax rates                               (1%)    0%     0%
     ==========================================================================

     Foreign exchange adjustments represent a nondeductible tax item for
     Philippine tax reporting purposes which is a permanent difference on the
     U.S. GAAP book basis.

     PSi Technologies has registrations with the BOI. Such registrations entitle
     the registered activities of PSi Technologies to tax and nontax incentives
     such as ITH, NOLCO, additional deduction for incremental labor expense, and
     exemption from taxes and duties on imported

<PAGE>

                                      -28-

     supplies and spare parts. Under such registrations, PSi Technologies is
     also subject to certain conditions imposed by the BOI, principally relating
     to exportation of certain percentage of its production output.

     Except for sales of voltage regulators and testing of certain semiconductor
     devices which are still subject to ITH incentive, income derived from sales
     of products moved from the Taguig Plant is subject to the regular
     Philippine corporate income tax rate of 32%. PSi Technologies has
     registrations with the BOI as (1) new export producer of voltage regulator
     on a preferred non-pioneer status until June 2003, and (2) service exporter
     in the field of testing semiconductor devices on a non-pioneer status until
     August 2003. Under the terms of these registrations, PSi Technologies is
     entitled to ITH for a period of four years until June 2003 as new export
     producer of voltage regulator and until August 2003 as service exporter in
     the field of testing semiconductor devices.

     Had PSi Technologies not been entitled to the ITH incentive, the reported
     net losses for the years ended December 31, 2002 and 2001 would have been
     higher by $920,626 ($0.07 per share) in 2002 and $602,274 ($0.05 per share)
     in 2001. No income tax holiday incentive was availed for the year ended
     December 31, 2003.

     As a result of PSi Technologies' registration with PEZA (see Notes 1 and
     27) in May 2004, it voluntarily returned its registration as an export
     enterprise to the BOI.

     As discussed in a previous paragraph, PSi Technologies 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 RA No. 8748, which shall be
     paid and remitted in accordance with the amendments contained therein, as
     follows:

     a.   Three percent to the National Government; and

     b.   Two percent which shall be directly remitted to the treasurer's office
          of the municipality or city where the enterprise is located.

     Accordingly, the change in the Company's tax rate and basis were applied in
     the determination of the Company's deferred tax assets and liabilities as
     of December 31, 2003. PSi Technologies' MCIT and estimated NOLCO that will
     not be applied by May 1, 2004 were written off.

     PSi Laguna is registered with the PEZA as a nonpioneer Economic Zone
     (ECOZONE) Export Enterprise for the manufacture, assembly and test of
     semiconductor devices (smart alphanumeric, rectifier devices and small
     signal transistor). The registration of PSi Laguna as a special ECOZONE
     Export Enterprise entitle it to, among others, certain rights, privileges
     and incentives granted by the Omnibus Investments Code of 1987.

<PAGE>

                                      -29-

     Under the terms of the PEZA registration, PSi Laguna is entitled to ITH as
     follows:

     Power Devices                                        ITH Period
     -------------------------------------------------------------------------
     Smart alphanumeric                          December 1999 - November 2003
     Rectifier devices                           May 2000 - April 2004
     Small signal transistor                     December 2000 - November 2004

     After the ITH period, PSi Laguna is subject to a final tax, in lieu of all
     taxes. The final tax is computed at 5% of gross income less allowable
     deductions as defined under RA No. 8748.

--------------------------------------------------------------------------------
18.  Retirement Benefit Plan

     The Company has a defined retirement benefit plan that covers all of its
     officers and full-time employees in the Phillipines. Retirement costs are
     charged to operations and are based on amounts computed by an independent
     actuary.

     The components of net periodic pension cost for the defined benefit plan
     are as follows:

<TABLE>
<CAPTION>
                                                       2003       2002       2001
     ------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>
     Service cost of current year                    $237,804   $134,495   $132,780
     Interest cost on projected benefit obligation     79,274     67,627     61,366
     Actuarial adjustments                                 --     13,782         --
     Expected return on plan assets                   (16,690)   (20,319)    (9,882)
     Net amortization and deferrals                    26,958      7,449     15,047
     ------------------------------------------------------------------------------
          Total pension expense                      $327,346   $203,034   $199,311
     ==============================================================================
</TABLE>

     The following table sets forth the funded status and the amounts recognized
     in the consolidated balance sheets for the defined benefit retirement plan:

                                                           2003         2002
     ---------------------------------------------------------------------------
     Change in benefit obligation
        Benefit obligation, beginning of year           $1,389,210   $  709,154
        Service cost                                       243,452      138,887
        Interest cost                                       81,157       69,835
        Benefits paid                                       (1,585)          --
        Actuarial adjustment                               (92,429)     514,507
        Translation adjustment                             (61,569)     (43,173)
     ---------------------------------------------------------------------------
        Benefit obligation, end of year                 $1,558,236   $1,389,210
     ===========================================================================

<PAGE>

                                      -30-

<TABLE>
<S>                                                    <C>            <C>
     Change in plan assets
        Fair value of plan assets, beginning of year   $    141,535   $    131,639
        Actual return on plan assets                          9,422          8,388
        Employer contribution                                    --          5,813
        Translation adjustment                               (5,946)        (4,305)
     -----------------------------------------------------------------------------
        Fair value of plan assets, end of year         $    145,011   $    141,535
     =============================================================================

     Funded status                                      ($1,413,225)   ($1,247,675)
     Unamortized transition obligation                      314,748        342,932
     Unrecognized net actuarial loss                        352,232        467,632
     -----------------------------------------------------------------------------
     Accrued benefit cost                                 ($746,245)     ($437,111)
     =============================================================================
</TABLE>

     The accumulated benefits obligation amounted to $620,232 and $540,590 in
     2003 and 2002, respectively.

     It is the Company's policy to invest pension fund assets in fixed income
     debt securities. In determining the overall expected long-term
     rate-of-return-on assets assumption, due consideration was given to the
     historical performance of plan investments. As of December 31, 2003 and
     2002, 100% of the fair value of plan assets consisted of investment in debt
     securities.

     The Company expects to make approximately $27 thousand of cash
     contributions to its pension plan in 2004. The significant assumptions used
     in determining the actuarial present value of the projected benefits
     obligations as of December 31, 2003 and 2002 are as follows:

                                                                     2003   2002
     ---------------------------------------------------------------------------
     Weighted average assumptions:
        Discount rate                                                 6%     6%
        Expected return on plan assets                                6%     6%
        Rate of compensation increase                                 5%     5%

     The table below presents the expected compulsory pension benefits of the
     Company to be paid out of the fund for the next ten years:

     Year                                                                Amount
     ---------------------------------------------------------------------------
     2004                                                               $ 15,500
     2005                                                                 20,100
     2006                                                                 25,400
     2007                                                                 31,400
     2008                                                                 38,200
     2009 to 2013                                                        263,400

<PAGE>

                                      -31-

     In 2001, the Company offered a voluntary early retirement program to
     selected employees. A total of 225 employees availed of the program and the
     total employee benefits accrued and paid amounted to $679,884.

     Accrued retirement benefit costs of $746,245 in 2003 and $437,111 in 2002
     are included in the "Trade and other payables" account in the consolidated
     balance sheets.

     The measurement date of the Company's December 31, 2003 actuarial valuation
     is March 16, 2004.

--------------------------------------------------------------------------------
19.  Stock Option (SO) Plan

     On February 22, 2000, the Company's stockholders approved the SO Plan.
     Under the SO Plan, the total number of shares of the Company that may be
     distributed shall not exceed 741,162 common shares, and participation shall
     be limited to certain directors, officers and employees. On the same date,
     627,100 options were granted at a weighted average exercise price of $13.30
     per share. Another 10,000 shares with the same terms as the initial award
     was granted on June 16, 2000 to include another officer. On a calendar year
     basis, these options vest over 5 to 7 years and will expire 3 years from
     the vesting date.

     The SO Plan is being administered by a committee (the "Committee") who
     established the exercise price at the time any SO is granted at such amount
     as the Committee determines, except that such exercise price shall not be
     less than 90% of the fair market value which is defined as the latest
     available price of the underlying shares of common stock on the day such SO
     is granted.

     The vesting period shall in no event be beyond 10 years from the date of
     grant of such SO. Each SO granted shall be exercisable within 3 years from
     the time the right to such SO becomes vested, unless the necessary approval
     for such extension is first secured from the Philippine SEC.

     The Company applies APB Opinion No. 25 and related interpretations in
     accounting for its plans. For each of the years ended December 31, 2003,
     2002 and 2001, total stock compensation expense amounted to $235,110,
     $197,331 and $239,953, respectively. A summary of the status of the
     Company's SO Plan as of December 31, 2003, 2002 and 2001, and changes
     during the years then ended are presented below:

<TABLE>
<CAPTION>
                                                2003                   2002                   2001
     -----------------------------------------------------------------------------------------------------
                                                    Weighted               Weighted               Weighted
                                                     Average                Average                Average
                                          Number    Exercise     Number    Exercise     Number    Exercise
                                        of Shares     Price    of Shares     Price    of Shares     Price
     -----------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>        <C>         <C>        <C>         <C>
     Outstanding at beginning of year    596,350     $13.30     635,850     $13.30     637,100     $13.30
     Granted                                  --                     --                     --
     Exercised                                --                     --                     --
     Forfeited                           (16,000)     13.30     (39,500)     13.30      (1,250)     13.30
     Outstanding at end of year          580,350      13.30     596,350      13.30     635,850      13.30
     Options exercisable at yearend      348,210                232,140                116,070
</TABLE>

     The weighted average remaining contractual life of the options as of
     December 31, 2003 and 2002 is 4.2 years and 5.2 years, respectively.

     The Company uses the Black-Scholes option pricing model to calculate the
     value of the options

<PAGE>

                                      -32-

     at date of grant using the following assumptions: volatility of 1.2%,
     risk-free interest rate of 2.1%, at the date of grant, dividend yield of 0%
     and an expected term of ten years.

--------------------------------------------------------------------------------
20.  Related Party Transactions

     On September 10, 1999, PSi Technologies and Pacsem Realty entered into a
     loan agreement, whereby PSi Technologies extended Philippine peso advances
     to Pacsem Realty of 50.8 million ($0.92 million at the December 31, 2003
     exchange rate of 55.5 to $1). The proceeds of the loan were used by Pacsem
     Realty to acquire a parcel of land from Philippine Township, Inc. The loan
     is for a period of 10 years from the date of the initial availment and is
     subject to 15% interest per annum. Under the terms of the loan agreement,
     beginning on the 61st month after the date of the initial availment, PSi
     Technologies may, at its option and only to the extent permitted under
     Philippine law, elect to convert the principal amount of the loan to shares
     of stock of Pacsem Realty at the ratio of one common share with a par value
     of 5 for every 5 worth of unpaid principal.

     Advances to officers represent outstanding market rate loans to certain
     officers granted in December 1998 and November 2000.

--------------------------------------------------------------------------------
21.  Operating Lease Commitments

     The Company leases certain of its office spaces until 2004, land until 2008
     and warehouse until 2015. The leases are renewable at the end of the
     respective lease terms under such terms and conditions the parties may
     mutually agree upon.

     The Investment Agreement between PSi Technologies and the Management
     Committee of CHTZ signed on December 7, 2003 contains provisions for leases
     of two pre-fabricated factories and two adjacent parcels of land in the
     Sichuan Chengdu Export Processing Zone. The term of both leases is three
     years from the date the lease is to begin. The leases also contain option
     to purchase the factories and the right to use the land.

     The following is a schedule of future annual minimum rental payments
     (converted at 55.50 to US$1, the exchange rate as of December 31, 2003) as
     of December 31, 2003:

     Years Ending December 31                                           Amount
     ---------------------------------------------------------------------------
     2004                                                             $  532,035
     2005                                                                416,768
     2006                                                                456,524
     2007                                                                434,760
     2008                                                                136,872
     2009 and thereafter                                                 300,883
     ---------------------------------------------------------------------------
                                                                      $2,277,842
     ===========================================================================

     Rent expense amounted to $646,159, $681,804 and $648,041, for the years
     ended December 31, 2003, 2002 and 2001, respectively.

<PAGE>

                                      -33-

--------------------------------------------------------------------------------
22.  Fair Value of Financial Instruments

     The estimated fair value of financial instruments had been determined by
     the Company using available market information and standard discounting
     methodologies. However, considerable judgment was required in interpreting
     market data to develop the estimates for fair value. Accordingly, these
     estimates are not necessarily indicative of the amounts that the Company
     could realize in a current market exchange. Certain of these financial
     instruments are with major financial institutions and expose the Company to
     market and credit risks and may at times be concentrated with certain
     counterparties or groups of counterparties. The creditworthiness of
     counterparties is continually reviewed, and full performance is
     anticipated.

     The methods and assumptions used to estimate the fair value of significant
     classes of financial instruments are as follows:

     Cash. The carrying amount approximates fair value because of the short
     maturity of the instruments.

     Short-term borrowings (loans payable and trust receipts payable).
     Short-term borrowings bear interest at variable rates that reflect
     currently available terms and conditions for similar borrowings. The
     carrying amount of this debt is a reasonable estimate of the fair value.

     Long-term liability due to a customer. Long-term liability due to a
     customer bears imputed interest at rates that reflect currently available
     terms and conditions for similar debt. The carrying amount of this debt is
     a reasonable estimate of the fair value.

     Exchangeable note. The exchangeable note includes a beneficial conversion
     option. The carrying amount of this debt is discounted at 11% effective
     interest rate taking into account the value of the beneficial conversion
     option.

--------------------------------------------------------------------------------
23.  Reporting Segment

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
     Information," requires that a public business enterprise report financial
     and descriptive information about its reportable segments. Operating
     segments are components of an enterprise about which separate financial
     information is available and is evaluated regularly by management in
     deciding how to allocate resources and in assessing performance. Generally,
     financial information is required to be reported on the basis that it is
     used internally for evaluating segment performance and deciding how to
     allocate resources to segments.

<PAGE>

                                      -34-

     The Company is primarily engaged in one industry segment, semiconductor
     assembly and test services. Revenues summarized by geographic region (by
     customer domicile), are as follows:

                                                           2003    2002    2001
     --------------------------------------------------------------------------
     United States                                        37.97%  48.20%  53.44%
     Europe                                               51.09%  39.49%  27.11%
     Asia                                                 10.94%  12.31%  19.45%

     The Company's top five customers, as a percentage of its total revenues,
     are as follows:

                                                                   Percentage to
                                                                   Total Revenue
     ---------------------------------------------------------------------------
     2003
        Infineon Technologies, Inc.                                     33.9
        Texas Instruments, Inc.                                         18.6
        Semiconductor Components Industries, Ltd.                       12.7
        Philips Components Philippines, Inc.                             8.6
        Fairchild Semiconductor International, Inc.                      7.0

     ---------------------------------------------------------------------------
     2002
        Infineon Technologies, Inc.                                     21.9
        Semiconductor Components Industries, Ltd.                       19.9
        Texas Instruments, Inc.                                         18.5
        Philips Components Philippines, Inc.                             9.0
        Fairchild Semiconductor International, Inc.                      7.0

     ---------------------------------------------------------------------------
     2001
        Semiconductor Components Industries, Ltd.                       17.0
        Infineon Technologies, Inc.                                     10.8
        Philips Components Philippines, Inc.                            10.8
        Fairchild Semiconductor International, Inc.                     10.0
        Power Integrations                                               7.3

     As a result of such concentration of the customer base, loss or
     cancellation of business from, or significant changes in scheduled
     deliveries or decreases in the prices of products sold to, any of these
     customers could materially and adversely affect the Company's results of
     operations and financial position.

<PAGE>

                                      -35-

--------------------------------------------------------------------------------
24.  Denomination of Monetary Assets and Liabilities

     The Company's monetary assets and liabilities and their U.S. dollar
     equivalents follow:

                                             In Philippine Pesos
                                              (Translated into
                                                 U.S. Dollars
     2003                  In U.S. Dollars     at P55.50 to $1)        Total
     --------------------------------------------------------------------------
     Assets                 $ 15,735,725        $  1,969,309       $ 17,705,034
     Liabilities              23,782,113           3,694,619         27,476,732
     --------------------------------------------------------------------------
     Net Liabilities         ($8,046,388)        ($1,725,310)       ($9,771,698)
     ==========================================================================

                                            In Philippine Pesos
                                             (Translated into
                                                U.S. Dollars
     2002                 In U.S. Dollars     at P53.254 to $1)        Total
     --------------------------------------------------------------------------
     Assets                $  15,086,101        $2,720,267        $  17,806,368
     Liabilities              35,962,131         2,893,415           38,855,546
     --------------------------------------------------------------------------
     Net Liabilities        ($20,876,030)        ($173,148)        ($21,049,178)
     ==========================================================================

--------------------------------------------------------------------------------
25.  Computation of Earnings Per Share

<TABLE>
<CAPTION>
                                                             2003           2002          2001
     --------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>           <C>
     Net loss                                            ($21,003,522)  ($6,918,082)  ($5,507,877)
     Adjusted weighted average number of common shares
        issued and outstanding during the year             13,289,525    13,289,525    13,289,525
     --------------------------------------------------------------------------------------------
     Earnings per share                                        ($1.58)       ($0.52)       ($0.41)
     ============================================================================================
</TABLE>

     For the year ended December 31,2003, potentially dilutive Note and stock
     options which would have antidilutive effect on earnings per share were
     excluded from the computation of earnings per share.

--------------------------------------------------------------------------------
26.  Contingencies and Other Matters

     a.   In September 2001, two substantially identical class action complaints
          alleging violations of the federal securities laws were filed in the
          United States District Court for the Southern District of New York
          naming as defendants, in the aggregate, PSi Holdings, certain of
          its current or former officers and directors, and certain underwriters
          of its IPO. Similar complaints have been filed against over 300 other
          issuers that have had IPOs

<PAGE>

                                      -36-

          since 1998 and all such actions have been included in a single
          coordinated proceeding. A consolidated amended complaint was filed on
          April 24, 2002. The amended complaint alleges, among other things,
          that the underwriters of PSi Holdings' IPO violated the securities
          laws by failing to disclose certain alleged compensation arrangements
          (such as undisclosed commissions or stock stabilization practices) in
          the offering's registration statement and by engaging in manipulative
          practices to artificially inflate the price of PSi Holdings' stock in
          the after-market subsequent to the IPO. PSi Holdings, together with
          certain of its officers and directors, and underwriters of the IPO are
          named in the amended complaint pursuant to Section 11 of the
          Securities Exchange Act of 1933, and Section 10(b) and Rule 10b-5 of
          the Securities Exchange Act of 1934 on the basis of an alleged failure
          to disclose the underwriters' alleged compensation arrangements and
          manipulative practices. The complaint seeks unspecified damages. On
          July 1, 2002, the underwriter defendants in the consolidated actions
          moved to dismiss all of the IPO Allocation Litigations, including the
          action involving PSi Holdings. On July 15, 2002, PSi Holdings, along
          with other non-underwriter defendants in the coordinated cases, also
          moved to dismiss the litigation. Those motions were fully briefed on
          September 13, 2002 and September 27, 2002, respectively, and argument
          on the motions was heard on November 1, 2002. On February 19, 2003,
          the Court ruled on the motions. The Court granted PSi Holdings' motion
          to dismiss the claims against it under Rule 10b-5, due to the
          insufficiency of the allegations against PSi Holdings. The Court also
          granted the motion of the individual defendants to dismiss the claims
          against them under Rule 10b-5 and Section 20 of the Exchange Act. The
          motions to dismiss the claims under Section 11 of the Securities Act
          were denied as to virtually all of the defendants in the consolidated
          cases, including PSi Holdings. On or about July 22, 2003, a committee
          of PSi Holdings' BOD conditionally approved a proposed partial
          settlement with the plaintiffs in this matter. The settlement would
          provide, among other things, a release of PSi Holdings and of the
          individual defendants for the conduct alleged in the amended complaint
          to be wrongful. PSi Holdings would agree to undertake other
          responsibilities under the partial settlement, including agreeing to
          assign away, not assert, or release certain potential claims PSi
          Holdings may have against its underwriters. Any direct financial
          impact of the proposed settlement is expected to be borne by PSi
          Holdings' insurance carriers. The committee agreed to approve the
          settlement subject to a number of conditions, including the
          participation of a substantial number of other Issuer Defendants in
          the proposed settlement, the consent of PSi Holdings' insurers to the
          settlement, and the completion of acceptable final settlement
          documentation. Furthermore, the settlement is subject to a hearing on
          fairness and approval by the Court overseeing the IPO Litigations. Any
          unfavorable outcome of this litigation could have an adverse impact on
          PSi Holdings' business, liquidity, financial condition and results of
          operations. Due to the inherent uncertainties of litigation, PSi
          Holdings cannot accurately predict the ultimate outcome of the
          litigation.

     b.   On November 19, 2003, PSi Holdings filed an injunction complaint
          against Manila Electric Company (Meralco) to enjoin it from
          disconnecting its supply of electric service on account of a billing
          differential in the amount of 21.2 million ($400 thousand, translated
          using the exchange rate of $55.50 to $1) reckoned from April 1, 1998
          to July 12, 2002. The billing differential came about from a defective
          meter installation by Meralco. Claiming negligence on the part of
          Meralco, PSi Holdings refused to pay the full amount and offered
          settlement of 2 million ($36 thousand, translated using the exchange
          rate of $55.50 to $1). Meralco insisted on full payment, hence the
          filing of the complaint. On December 17, 2003, the court granted PSi
          Holdings' application for the issuance of a writ of preliminary
          injunction and approved the injunction bond. Meralco has already filed
          its

<PAGE>

                                      -37-

          answer to the complaint. Meralco also filed a motion for
          reconsideration from the order granting the injunction, which incident
          is now submitted for resolution. The Company does not believe that the
          ultimate outcome of these proceedings will have a material adverse
          effect on the Company's overall financial position or results of
          operations.

     c.   As of December 31, 2003, the Company has outstanding letters of credit
          amounting to $1.9 million.

     d.   Shipping and handling costs incurred in 2003, 2002 and 2001 amounted
          to $443,565, $254,147 and $215,449, respectively.

--------------------------------------------------------------------------------
27.  Subsequent Events

     Supply Agreement

     On January 14, 2004, the Company signed a long-term Supply Agreement with
     Philips, a division of Philips Electronics UK Ltd., to provide outsourced
     power semiconductor assembly and test services through the Company's
     facility in Chengdu, China (see Note 1).

     PEZA Registration

     On March 19, 2004, PSi Technologies, together with two other semiconductor
     assembly and test locators (collectively referred to as "Semicon Locators")
     in the FTI Complex signed a Memorandum of Agreement with the management of
     FTI and the local government of the Municipality of Taguig whereby the
     location of such Semicon Locators shall be proclaimed as a PEZA zone. In
     line with this, the Semicon Locators have also filed their individual
     applications for registration as PEZA enterprises. On May 1, 2004, the
     President of the Republic of the Philippines signed the proclamation
     creating and designating the location of the Semicon Locators as a PEZA
     zone. In May 2004, PSi Technologies was registered as a PEZA entity.
     Henceforth, it shall be entitled to the incentives under RA No. 8748 (see
     Notes 2 and 17).