PSIT Psi Tech Hldgs (MM)

ITEM 3.    KEY INFORMATION

A. Selected Financial Data

Our consolidated financial statements as of December 31, 2005 and 2006 have been restated to give effect to the following: (1) reclassification of provision for inventory losses and inventory write-offs which were incorrectly presented as special charges to cost of sales, and (2) reclassification of loss on disposal of obsolete inventories which was incorrectly presented as other income (expense) to cost of sales. Note 3 to our consolidated financial statements attached to this amended annual report provides an explanatory discussion of the restatements made.

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The following selected consolidated financial data as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements included in this Amended Annual Report. The selected consolidated financial data as of December 31, 2002, 2003 and 2004 and for the years ended December 31, 2002 and 2003 have been derived from our historical consolidated financial statements, which are not included in this Amended Annual Report. You should read the selected consolidated financial data in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements, both of which are included in this Amended Annual Report. We restated our historical results to reflect PSi Technologies Chengdu Company Limited or PSi China operations as discontinued operations. The summary consolidated statements of income 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, which have been audited by SyCip Gorres Velayo & Co. or SGV & Co., a member firm of Ernst & Young Global, are reported in U.S. dollars and have been prepared and presented in conformity with U.S. generally accepted accounting principles or GAAP, consistently applied for all years presented.

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B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

The risk factors below are associated with our company and our American Depositary Shares (“ADSs”). An investment in our ADSs involves a high degree of risk. Before purchasing our ADSs, you should carefully consider all of the information set forth in this Annual Report on Form 20-F/A and, in particular, the risks described below. If any of the following risks actually materialize, our business, financial condition and results of operations would likely suffer materially, the market price of our ADSs could decline, and you may lose all or part of the money you paid to buy our ADSs.

The risks and uncertainties below are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware and these risks could have the effects set forth above.

RISKS RELATED TO OUR BUSINESS

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

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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 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 76% in 2002, 81% in 2003, 81% in 2004, 87% in 2005 and 91.0% in 2006 of our total revenues (including revenue generated by discontinuing operations). Infineon Technologies, Inc. (“Infineon”) has been our largest customer since 2003, accounting for approximately 30%, 35% and 48% of our total revenues in 2004, 2005 and 2006, respectively. On June 19, 2006, the Company and Infineon signed a Sales and Investment Agreement for the supply of certain power packaging devices for a period of one year from the time that production capacity is put in place. If our relationship with Infineon were to erode, our business and results of operations would be materially and adversely affected.

We have lost major customers in the past and could lose other major customers in the future. For example, in 2005, Fairchild Korea Semiconductor or Fairchild Korea, terminated its relationship with us. Fairchild Korea accounted for 5.6%, 3.1% and 1.9% of our total revenues in 2003, 2004 and 2005, respectively. We cannot guarantee that our largest customers will continue to book the same level of sales with us that they have in the past or will not solicit alternative suppliers. Many of our major customers operate in cyclical businesses that are also highly competitive, and their own demand and market positions may vary considerably. Such customers have in the past and may in the future vary order levels significantly from period to period. 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.

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

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

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thereto could reduce our ability to fulfill our customers’ orders, decrease our revenue, increase our costs and materially impact our financial viability and profitability.

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

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

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

We may 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.

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

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

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

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

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In July 2003, we issued a $4.0 million, 5-year exchangeable senior subordinated note to Merrill Lynch Global Emerging Markets Partners, LLC (Merrill Lynch LLC), an affiliate of Merrill Lynch Global Emerging Market Partners, L.P. (Merrill Lynch), due in 2008 which bears interest at a rate of 10% per annum, net of Philippine withholding tax. The exchangeable note was issued to pay off certain liabilities related to our capital expenditures incurred in 2002, which were due by the end of the second and third quarters of 2003 and could not be paid out of current cash flow from operations or available lines of credit. Over the course of the first and second quarter of 2003, the Company pursued several possible avenues of financing but no such alternative could be put in place in time to pay for the liabilities. In June 2005, we issued a $7.0 million, 4-year exchangeable senior subordinated note to Merrill Lynch LLC, due in 2009, which bears interest at a rate of 10% per annum, net of Philippine withholding tax. The proceeds of the note was used to partially finance capital expenditures related to the introduction of the Company’s Power QFN (Quad Flat No-Lead) Package and for the repayment of due and outstanding suppliers’ credits and capital expenditures payables. See “Item 7—Major Shareholders and Related Party Transactions—The Merrill Lynch Exchangeable Notes.”

We have a $10 million credit facility from the Singapore Branch of Raiffeisen Zentralbank Oesterreich AG (“RZB-Austria”) of which $9.7 million was outstanding as of December 31, 2006. As of December 31, 2006, we have not complied with certain financial ratio requirements under the short term credit facility from RZB-Austria. The credit facility was for a period from 2002 and renewed every year thereafter until December 31, 2005. However, on April 4, 2006, RZB-Austria extended the credit facility granted to PSi Technologies, Inc. or PSi Technologies and PSi Technologies Laguna, Inc. or PSi Laguna until December 31, 2006 under similar terms and conditions. On April 27, 2007, we entered into a Second Supplemental Agreement with RZB-Austria under which the credit facility was extended from December 31, 2006 until March 31, 2008. However, RZB-Austria may cancel the credit facility anytime during the term of the loan and all amounts outstanding under the facility including accrued interest shall be immediately due and payable. Under the agreement, RZB-Austria also agreed to delete the financial covenants section in its entirety. However, we will provide RZB-Austria with our audited financial statements within six months from the end of the calendar year and interim financial statements within 30 days after the end of the month. We have informed RZB-Austria that we will provide our audited financial statements as of December 31, 2006 as soon as it becomes available. We have a $3 million short-term credit facility and another $4 million letter of credit and trust receipt facility with KBC Bank N.V.—Philippine Branch (“KBC Bank Philippines”). The short-term credit facility is secured by accounts receivable from a customer. As of December 31, 2006, we were not in compliance with certain financial ratio requirements under the loan agreement with KBC Bank Philippines. On March 10, 2006, KBC Bank Philippines terminated its credit facility with us to be effective 60 days from that date. On May 26, 2006, KBC Bank Philippines advised us that it had ceased operations effective April 30, 2006 and that, in view of such cessation, the loan account would be assumed by its Hong Kong branch beginning June 10, 2006. As of December 31, 2006, the aggregate amount of outstanding short term loans under these facilities was approximately $0.5 million. On January 5, 2007, we repaid the entire outstanding amount of the short-term loans and trust receipts.

We have a $3 million revolving promissory note, including a letter of credit of up to $400,000 with Philippine Veterans Bank (“PVB”) a local commercial bank. The facility is subject to annual review by PVB on or before April 11 of each year until April 11, 2010 and a 90-day availability period. As of December 31, 2006, the outstanding loan with PVB amounted to $300,000. The outstanding loan was fully settled on January 5, 2007.

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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. Also, we may not be able to renew our existing credit facilities nor repay these obligations when they mature. 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 LLC.

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

We have incurred recurring losses since 2001. Our net loss for the years ended December 31, 2006, 2005 and 2004 amounted to $11.6 million, $19.7 million and $14.6 million, respectively, while deficit amounted to $61.7 million as of December 31, 2006 and $50.1 million as of December 31, 2005. Further, our negative working capital amounted to $13.4 million as of December 31, 2006 and $13.0 million as of December 31, 2005. In 2006 and 2005, we recognized provision for impairment losses on certain property, plant and equipment amounting to $1.9 million and $4.2 million, respectively, primarily due to the net loss position from the start of commercial operations and negative projected cash flows of the China facility, decline in the recoverable value of real estate properties, low sales volume, and idle machinery and equipment which the Company no longer uses in its operations and has zero salvage value.

The foregoing conditions, risks and uncertainties raise substantial doubt as to our ability to continue as a going concern and could affect our ability to develop advanced technology and expanded services, compete against companies with greater operating capacity and financial resources, increase production capacity, obtain assembly and test equipment to meet the demand for our products and services, obtain favorable terms from suppliers, and repay bank loans and obtain additional bank credit facilities. Our continued operation as a going concern is dependent on our ability to generate sufficient cash flows from operations and/or seek other sources of financing; however, there are no assurances that positive operating results can be achieved or that any additional financing or refinancing can be obtained on favorable terms, or at all. We plan to mitigate our going concern risk by engaging in cost reduction measures through plant closures, rationalizing our capital expenditures and promoting better operating efficiencies. In addition, we plan to increase our revenue by targeting higher volume and margin sales from existing and new customers.

We are dependent on entering into financing arrangements with third parties to meet our financing obligations. For more information on these arrangements, see “Note 11 of the Consolidated Financial Statements”. We need a significant amount of capital to fund our capital expenditures and execute our business strategies. We may be unable to repay short-term suppliers and bank credit facilities incurred to fund our capital expenditures program, which would have a negative effect on our operations and financial viability” as discussed in the section of this Annual Report of Form 20-F/A entitled “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”

In difficult market conditions, our high fixed costs adversely impact our financial results.

We are driven to reduce prices in response to competitive pressures and, at the same time, we are also faced with a decline in utilization rates in our plants due to decreases in demand for our power packages. Because our industry is characterized by high fixed costs, we are not always able to reduce our total costs in line with revenue declines. Reduced average selling prices for our power packages, therefore, adversely affect our results of operations. We achieved a gross profit of $3.7 million in 2006, an improvement from a gross loss of $2.3 million in 2005 due to higher sales volume from our top five customers, favorable package mix, an increase in copper price that was passed on to our customers and a decrease in depreciation. We cannot assure you that difficult market conditions will not affect the capacity utilization of our plants and consequently, our future gross profit margins. Further, increased competition in the power semiconductor sector may lead to further price erosion, lower revenue growth rates and lower gross profit margins in the future.

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

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

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

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

Although we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these problems in the future. Our quarterly and annual results of operations would be adversely affected if we are unable to obtain adequate supplies of raw materials or equipment in a timely manner or if there were significant increases in the cost of raw materials or problems with the quality of these raw materials.

Our financial condition may be adversely affected by credit risk.

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

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

In 2006, we acquired property, plant and equipment totaling $8.7 million (including equipment acquired on account through suppliers’ credits of $2.5 million as of December 31, 2006) for our Taguig and Laguna manufacturing facilities. If we experience delays in the purchase and delivery of equipment needed to expand our capacity or support the expansion of capacity, we may not be able to meet the demand for our products and services. Our inability to expand capacity could reduce our ability to meet customer needs, which may prompt our customers to place orders with our competitors.

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

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

The semiconductor industry experienced a significant downturn in 2001 and the lingering effects of that downturn adversely affected our operating results in the succeeding years. The 2001 downturn was characterized by production overcapacity, reduced product demand, excessive inventories and rapid erosion of average selling prices. Historically, companies in the semiconductor industry have expanded aggressively during periods of increased demand, as we and our competitors have done. As a result, periods of overcapacity in the semiconductor industry have in the past followed periods of increased demand. In addition, the markets for semiconductors are characterized by rapid technological change, evolving industry standards, intense competition and fluctuations in end-user demand. In 2002, the market for semiconductors stabilized, registering growth in worldwide semiconductor revenues as measured by Semiconductor Industry Association (SIA)/World Semiconductor Trade Statistics (WSTS), of 1.3% and expanded by 28.0%, 6.8% and 8.9% in 2004, 2005 and 2006, respectively. Nonetheless, a future downturn in the semiconductor industry could seriously harm our company. In particular, the combination of weak demand, a sharp correction of inventory by our customers and their end markets, and deterioration in economic performance, particularly in the United States, and an increase in underutilized capacity in 2006 could seriously harm our industry and our company.

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

We are particularly affected by fluctuations in the prices of commodities such as copper, nickel, aluminum, gold, silver and other metals used in our raw materials and manufacturing process, and higher energy costs. Copper base materials that form part of our finished products are a significant component of our finished product cost. Copper prices have increased by 37% from US$4,585 per ton as of December 31, 2005 to US$6,280 per ton as of December 31, 2006. Crude oil prices were higher by 40.5%, gold prices were higher by 25.8%, silver prices were higher by 50.9%, copper prices were higher by 37% and nickel prices were higher by 158% in 2006 as compared to 2005.

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

Fluctuations in exchange rates could materially harm our business by increasing costs.

Approximately 99.9% of our consolidated revenue is 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 European euro 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 European euro and the U.S.

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dollar. Since all of our revenues are in U.S. dollars, fluctuations in foreign currency exchange rates, particularly the European 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.

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

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

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

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

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

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

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

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We 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 is intense. We have had significant executive turnover in the past and may experience difficulty retaining key executives in the future.

On March 31, 2007, Thelma G. Oribello, our Senior Vice President and Chief Finance Officer resigned to join her family in Jakarta, Indonesia. She was replaced by Francisco H. Suarez, Jr., formerly the Chief Financial Officer of SPi Technologies, Inc. On October 31, 2007 Francisco H. Suarez, Jr. resigned and he was replaced by Hilarion V. Cajucom, Jr. Further, in May 2006, our Chief Technology Officer, James Knapp, resigned and he was not replaced until April 2007, when we appointed Thomas Moersheim as our new Chief Technology Officer.

We cannot assure you that we will not lose, or that we will be able to attract and retain, additional personnel required to successfully develop new and enhanced assembly and test services and to continue to grow and operate profitably. We maintain limited directors and officers liability insurance.

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

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

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 and not breaching licenses granted to us. 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 technology protected by existing patents, or to cross-license or otherwise obtain the right to use the process or package technologies we require. We believe that companies in our industry will face more frequent patent infringement claims as the number and coverage of patents, copyrights and other third party intellectual property rights in our industry increases. In the event a valid claim is made against us, we may be required to:

We may be required to seek licenses from or enter into agreements with third parties covering intellectual property. We cannot guarantee that any of those licenses can be obtained on acceptable terms, if at all. We may

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also have to commence lawsuits against companies who infringe on our intellectual property rights. Those potential claims could result in substantial costs and diversion of our resources.

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

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

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

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

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

We are subject to liabilities and compliance obligations arising under environmental, health and safety laws. These laws impose various controls on the quality of our air and water discharges, on the storage, handling, discharge and disposal of chemicals the company uses, and on employee exposure to hazardous substances in the workplace. Environmental, health and safety laws could require us to incur capital and operational costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination. In July 2004, for example, PSi Technologies Laguna received an order from local governmental authorities regarding failure to conform with certain environmental standards. We have since passed the requirements of the standards and paid the applicable penalties and fees. See “Item 4—Information on the Company—Property, Plants and Equipment—Environmental Matters” for more details. We cannot assure you that applicable environmental, health and safety laws will not in the future impose the need for additional capital equipment or other process requirements upon the company, curtail its operations, or restrict its ability to expand its operations. The adoption of new environmental, health and safety laws, the failure to comply with new or existing laws, or issues relating to hazardous substance contamination could subject the company to future material liability.

We face numerous risks (including legal, regulatory, managerial and financial risks) as a consequence of the dissolution of PSi Chengdu, our former operating facility in China.

We opened an assembly and test facility in Chengdu, Sichuan Province, People’s Republic of China (“PRC”), in 2004. We incurred $3.8 million in capital expenditures for our new Chengdu facility on the expectation that it would reduce future production costs as a result of the relatively inexpensive labor costs in the region. We also hoped that our Chengdu facility would have created new business and sales opportunities in China. On September 8, 2005, the representatives of the Management Committee of the Chengdu Hi-Tech Zone (“CHTZ”), a government entity of Chengdu City and The Management Office of Sichuan Chengdu Export Processing Zone informed PSi Chengdu of the government’s plan to convert the Southern Export Processing Zone where PSi Chengdu is located to another commercial area and the need for PSi Chengdu to relocate from the Southern Export Processing Zone to the Western Export Processing Zone. The relocation issue, which could have further drained PSi Chengdu’s resources, coupled with continuous operating and cash flow losses from the start of commercial operations up to 2005, triggered an impairment review in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” as of December 31, 2005. Management estimated that the undiscounted future cash flows to be generated by PSi Chengdu to be negative compared with

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the carrying amount of PSi Chengdu’s long-lived assets of $2.7 million. Management then estimated the fair value of those assets at negative $0.2 million using the expected cash flow approach as a measure of fair value. This resulted in write-down of the assets amounting to $2.7 million, which was included under “Special charges” account in the 2005 statement of operations.

On April 5, 2006, the Board of Directors of PSi Technologies and PSi Technologies China Holdings Co. Ltd. or PSi Mauritius through its subsidiary, PSi Chengdu, informed the Management Committee of the CHTZ of its decision to close the facility in Chengdu City, Sichuan Province, PRC. PSi Chengdu ceased commercial operations on April 30, 2006. As of May  31, 2007 PSi Chengdu is in the process of completing the requirements for liquidation and dissolution. The outcome and results of the liquidation and dissolution process may differ materially from our expectations, due to a variety of legal, regulatory, managerial and financial risks, including but not limited to:

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

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

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

As a result of PSi Technologies, Inc.’s decision to register with the Philippine Economic Zone Authority (“PEZA”) as a tax planning strategy, PSi Technologies, Inc. shall henceforth be subject to a final tax, in lieu of all taxes, computed at 5% of gross income less allowable deductions as defined in Republic Act (RA) No. 8748 of the Philippines. PSi Technologies, Inc. availed of ITH incentives amounting to $61,351 in 2006. No income tax incentives were availed by PSi Technologies, Inc. in 2005. Our Laguna facility, through PSi Laguna, Inc., however, received tax incentives amounting to $26,346 in 2005 and $44,271 in 2006.

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

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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.

RISKS RELATED TO OUR ADS

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

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. (“Merrill Lynch”) and Greathill Pte., Ltd. (“Greathill”), own, in the aggregate, approximately 68.5% of our outstanding voting securities as of December 31, 2006. Greathill was a wholly-owned subsidiary of NJI NO.2 Investment Fund that was in members voluntary liquidation (“NJI”). However, on February 27, 2007, NJI and Primasia and Bridge No. 1 Greater China Secondary Fund L.P. (“Primasia”) entered into a Sale and Purchase Agreement under which NJI transferred its entire shareholdings or 7,630,001 ordinary shares of Greathill to Primasia effective March 1, 2007. Primasia is managed by Primasia Private Equity Management, Ltd. or Primasia Equity. Acting together, or in Merrill Lynch’s case, individually, our principal shareholders will be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions. See “Item 10—Additional Information—Articles of Incorporation and By-laws.” Matters that require shareholder approval through two-thirds vote include, among other things:

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

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

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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 Incorporation and By-Laws” for a discussion on the rights of shareholders.

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 $0.46 per share. Fluctuations in our stock price could continue. Among the factors that could affect our stock price are:

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

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

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

On June 14, 2004, JAFCO Investment (Asia Pacific), Ltd. (“JAFCO”), 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 demand registration rights under the Registration Rights Agreement described in Item 7—”Major Shareholders and Related Party Transactions—Related Party Transactions.” The registration request was not ultimately pursued by NJI. Greathill, as NJI’s successor in interest, continues to have the registration rights of NJI under the Registration Rights Agreement.

On March 23, 2007 Primasia Private Equity Management Ltd, on behalf of Greathill, requested that Greathill’s 1,955,741 shares in us be converted into American Depositary Receipts. The application process is expected to commence subsequent to the filing of this Form 20-F with the United States Securities and Exchange Commission or U.S. SEC.

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

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

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

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

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

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

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

RISKS RELATED TO THE PHILIPPINES

Our business may be affected by political or social or economic instability in the Philippines.

On May 10, 2004, the Philippines held a presidential election, where the incumbent President Gloria Macapagal-Arroyo successfully retained her post. Shortly after the elections, allegations of irregularities in the presidential elections, such as stolen ballots and vote buying intensified. The Philippine Congress commenced an inquiry into a wire tapped audio tape which contains a conversation allegedly between President Arroyo and a commissioner of the Commission on Elections discussing the counting of certain votes during the last presidential election. On June 27, 2005, President Arroyo publicly stated that she did speak to a commissioner of the Commission on Elections in order to protect her votes, but not to influence the outcome of the election. Impeachment complaints based on allegations of culpable violation of the Constitution, graft and corruption and betrayal of public trust were filed against President Arroyo with the Philippine Congress. In 2005 and 2006, the Philippine Congress voted to reject the impeachment complaints against President Arroyo.

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On May 14, 2007, the Philippines held its national and local elections for the Senate and House of Representatives. The elections resulted in victory for majority of the opposition candidates in the Senate and majority of the Administration candidates in the House of Representatives. In view thereof, any impeachment complaints against President Arroyo will probably not succeed. However, with opposition candidates ruling the Senate, there can be no assurance that economic policies conducive to sustained economic growth will be adopted by the Philippine Congress.

Coup d’etat attempts against the administration of President Arroyo have been reported. On February 24, 2006, President Arroyo declared a state of emergency allowing for warrant less arrests and a temporary take-over of privately-owned utility companies. On March 3, 2006, President Arroyo lifted the state of emergency.

The Philippine government is also facing a fiscal deficit, which it is aiming to eliminate by 2008 by implementing a number of economic reforms.

The fiscal deficit position of the Philippine government and the ongoing political uncertainty has resulted in increased concerns about the political and economic stability of the country. There can be no assurance that the political environment in the Philippines will be stable or that the current or any future government will adopt economic policies conducive to sustained economic growth or which do not impact adversely on the current regulatory environment for companies operating in the Philippines.

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 will not be subject to increased economic difficulties in the future or that the current trends will significantly improve in the near future.

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

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

We generate a significant portion of our revenues from international markets, including customers in Southeast Asia, the United States and Europe. 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.

We are vulnerable to natural disasters and other disruptive events.

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

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

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

The occurrence of natural catastrophes may materially disrupt our operations

The Philippines has experienced a number of major natural catastrophes over the years including the typhoons, volcanic eruptions and earthquakes that may materially disrupt and adversely affect our business operations. There can be no assurance that the insurance coverage that we maintain for these risks will adequately compensate it for all damages and economic losses resulting from natural catastrophes.

Epidemics, such as the Severe Acute Respiratory Syndrome or avian influenza or other contagious diseases, may adversely affect our operations and our profitability.

Epidemics such as the Severe Acute Respiratory Syndrome (“SARS”) or a potential avian influenza pandemic could materially affect our operations and our financial health. We rely on more than 2,800 individuals located in manufacturing facilities in the Philippines, without whom it is not possible to assemble and test the company’s products. The Philippines was one among 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. In 2005 and 2006, there have been no reports of SARS or avian influenza in the Philippines.

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

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

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 administrative, sales, and

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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 armed forces in Iraq could have a further impact on our domestic and international sales, our supply chain, our production capability and our ability to deliver product to our customers.

The Philippines experienced terrorist incidents in the southern island of Mindanao and bombing threats within Metro Manila. We cannot assure you that political and economic instability in the Philippines or other regions of the world may not also result and will not negatively impact our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could ultimately have an adverse effect on our business or your investment.