The year 2006 was indeed a challenging time for Advance Modules as we encountered obstacles in our pursuit for positive earnings growth. This is the first year we are reporting a loss in our financial performance, but we believe this is only a temporary set back. As we present to you the Annual Report for the Financial Year (“FY”) 2006, we would like to share with you what we have done and are doing to improve the performance of the Company.

For the year under review, the competition in the semiconductor industry remain intense and memory products manufacturers experienced a decline in the NAND flash and DRAM pricing,
in comparison to FY2005. Maintaining careful control on inventory and capacity remains a
priority for these manufacturers. Advance Modules was not spared from these effects. The Company succumbs to a period of reduced margins as we incurred higher cost for the main
raw materials purchases and lower selling price due to the price competition in the end product
markets. Our goals now are to seek avenues to improve our earnings, ensure sustainable
growth and increase shareholders’ value.

Financial Performance

For the year under review, the Group recorded revenues of RM60.5 million which is lower as compared to RM133.7 million recorded in FY2005. The decline in sales revenue was largely
attributed to the adverse pricing arising from the intense competition in the international
semiconductor markets and lesser working capital available for financing purchases of raw materials. Following a reported net profit of RM17.45 million in FY2005, we posted a net loss of RM58.9 million in FY2006. This is mainly due to the provision for doubtful debts of RM41.0 million, arising from one of the major trade debtor. Lower revenue and the escalating prices of key raw materials also contributed to the loss experienced in FY2006. Accordingly the Company recorded a loss per share of RM34 cents in FY2006 compared to earnings per share of RM11.7 cents in FY2005.

Review of Performance

The sales of our AM Branded products continue to be the main revenue generator for the Group
in FY2006 with RM53.8 million or 89% of the total sales revenue in FY2006 in comparison with RM116.0 million or 87% of the total sales revenue in FY2005. We are glad with the continual market acceptance and superior reputation of our in-house brand. While we continue to focus on the production and sales of our AM branded products, we will continue to provide Original Equipment Manufacturing (OEM) services in order to capitalize on the greater outsourcing of electronic manufacturing from the industrial countries.

Inline with the worldwide shift from DDR1 to DDR2 devices, the sales of our AM Brand DDR2 products represented 52% of total group revenues at RM31 million in FY2006 as compared to 39% of total group revenues at RM52 million in FY2005. Our sales of flash memory products on the other hand experienced reductions in sales due to the highly volatile and adverse pricing experienced in the flash product prices. In FY2006, we managed only sales of RM290,000 for flash products totaling 0.5% of our total sales value compared against a sales value of RM17.9Million in FY2005, comprising 13.4% of the total sales value of FY2005.

In an industry that is driven by the development of end user products and the business cycle in
the consumer countries, we are cautious of the risk from exposure to a particular geographic
region. For the year under review, we have successfully secured several new customers into our list of customer base, further expanding our customer base into Europe and Asia Pacific, with Russia, Singapore, Indonesia, India and Australia as the new customer base. Whilst the new customer base was secured in FY2006, the benefit of revenue growth from this new base will be seen only from FY2007 onwards as we continue to nurture these new customers. Despite the increase in new customer base, we were hard hit by a sharp decline in orders from the loss of a one off major customer in FY2005 from the Asia Pacific region. For the year under review, America region still maintain as our top contributor with 55% of our FY2006 group revenue, while the Asia Pacific region occupies 35% of FY2006 group revenue. The Europe region is also another fast growing market segment accounting for 10% of FY2006 group revenue at RM6.2 million compared to less than 1% of FY2005 group revenue at only RM924,000.

Product and Market Developments

Despite the many challenges in the year, we have never once allowed this situation to distract our attention to grow our business. We remain excited with the long term potential of our growth strategy. We are happy to report that the demand for our DDR2 modules which was launched in FY2005 is well received with 52% of the total group revenue at RM31 million as compared to only 39% of the total group revenue or RM52million in FY2005. In line with the growing demand for higher speed and capacity for electronic products, we have reinforced our DDR2 product line-up with the addition of 2GB DDR2 modules which is capable of operating at a frequency of 800 MHz. We have also upgraded our flash memory products line with the micro SD card range which has the storage capacities of up to 2GB.

We recognize that the semiconductor industry is subjected to frequent advances in technology and the need to adapt continuously to changing markets is vital in this ever more competitive business environment. We will continue to reinforce our product line-up in our entire product segment with continuous upgrade in our product series to meet the growing demand for higher speed and high capacity products.

We have progressed in our expansion into Integrated Circuit (“ICs”) packaging at our packaging facility in Shanghai. This expansion upstream has enable us to become less reliant on IC suppliers and given us better control the quality of ICs used in the production of our memory modules.

Outlook and Prospects

In an industry that is subjected to uncertain demand and intensifying competition, the road ahead is not expected to be easy. Nevertheless, we remain confident that by remaining focus on our long term goals, we can overcome any challenges and take Advance Modules forward. In line with the dramatic shift in electronics equipment manufacturing to the Asia-Pacific region, penetrating new business prospect in China will be one of our major focuses as we move into FY2007.

Meanwhile, we continue to work hard on developing new and innovative products as well as improving our existing range of products to meet our customer’s requirement, including our ongoing work on more advanced technologies in IC packaging undertaken at our Shanghai facility.

Our team of Research & Development engineers carries out continuous ongoing product development to come out with prototypes that is consistent with the market trend. We are bracing ourselves for the opportunities in the DRAM modules segment in anticipation of DDR3 becoming the standard for next generation memory chips. DDR3 improves on DDR2 with double the processing speed and capability of more dense memory configuration for higher capacities.

At the same time we are constantly seeking for new business opportunities in line with the trend towards greater functionally and higher capability emerging from the continuous technological advancement. Recently the Company had, through its wholly owned subsidiary, Advance Modules
Sdn Bhd acquired a subsidiary in Hong Kong with the intention of undertaking investment in China. We believe that the opportunities in China are aplenty and the economic development there remains robust.

We aim to steer the Group back into the black to achieve our business objectives through building on our effort on product development, improving our market share and providing quality products in a cost effective way. Emphasis will be placed into increasing the volume of business and keeping a tight rein on cost without reducing the service quality. We endeavor to rebuild the confidence of our shareholders, by ensuring that Advance Modules will be well positioned to take
advantage of the many opportunities and responses to the challenges ahead.

Challenges

The FY2006 was a challenging time for us as we were plagued by negative publicity surrounding the Company and at this point, we want to address these concerns. As most of you are already aware, we are still working to recover the full payment from a sale of a significant amount recorded by the Company’s Malaysian subsidiary, Advance Modules Sdn Bhd close to the end of FY2005. In May 2006, after conducting an audit of the consolidated financial statement of the Group, the external auditors of the Company at that time, Deloitte & Touche determine that they could not render an opinion on the Group’s financial statement for the FY2005. The disclaimer resulted from insufficient evidence to support the validity of the sales and the recoverability of the trade receivable from the customer

When the issue first came to light, there were speculations regarding Advance Modules’ ability
to pay the targeted dividend declared in FY2005 and the recovery the outstanding debt. These
speculations have resulted in rising concerns from the public especially from our valued shareholders. We recognize and appreciate your concerns and would like to clarify that there were instances where we regret that we are not able to openly address the concerns due to the uncertainty of the potential outcome. However whenever possible, the Company would take the initiative to communicate directly with the relevant authorities and our valued shareholders through announcements of the latest updates through SGX Net.

Effort and Progress Made

The Company has been forthright regarding this matter with the Singapore Exchange Securities Trading Limited (SGX) through regular communication in order to keep SGX up-to-date on what we have been doing to address these concerns. Full cooperation and attention was also rendered to the Accounting and Corporate Regulatory Authority (ACRA) in addressing the concerns raised in their letter to the board of directors of the Company in order to clarify the speculation on the possible noncompliance of Companies Act. We assure our shareholders that full efforts were undertaken to pursue our outstanding debt. At times, this process has been frustrating but we will not relent in our effort to pursue the full collection from the customer. Our Managing Director, Mr.
Vincent Tan who is also a major shareholder of the Company had in an act of good faith undertook to indemnify the Company for the sum owing from the customer even though he
is not legally obligated to do so. We believe this serve as a comfort to our shareholders in our00
effort to protect the interests of the Company.

Instead of staying distressed with the qualified opinion, we have chosen to embrace it and taken
on the opportunity to pursue improvements through the strengthening of our internal controls. In July 2006, our internal auditor has carried out a thorough review on the Company’s internal audit controls and procedures. The Company has since implemented new systems and procedures, particularly with respect to the payment terms, credit evaluation and debt collection processes. We are doing this not only to address the weaknesses in the internal control processes but to also improve our policies and operation activities for the future of the Company. We are determined to focus our greatest attention and time into rebuilding Advance Modules and putting the Company back to profitability.

Dividend

The Company does not have a formal dividend policy. For FY2005, our Board of Directors
recommended a dividend of 2.21 SGD cents and this was approved at the Company’s Annual
General Meeting in June 2006. As promised, the shareholders received the dividend of SGD
cents 2.21 or RM cents 5.02 per share in July last year. Based on the financial performance
hereby reported, the Directors do not recommend any payment of dividends in respect
of the financial year ended 31 December 2006.

Appreciation

On behalf of the board of directors, we are pleased to welcome Mr Wee Liang Hiam who joined the Board on 12 June 2006 and extend our heartfelt thanks to Dr Dominic Er who retired from the company as the Independent Director. Mr Wee has also taken on the position as the Chairman of the Audit Committee on 26 March 2007 from Mr Chua Beng Huat who remains a member of the Audit Committee. We also saw the resignation of Mr Koh Yeow Lay as the Executive Director/ Group Financial Controller and would like to take this opportunity to record our appreciation to Mr Koh Yeow Lay for his services and contributions to the Company during his tenure. In his place, we welcome Mr Deng Heng Fatt who was appointed to head the Group Corporate and Finance division in his capacity as the Chief Financial Officer.

It has been an important year as we worked hard in addressing the challenges faced by the Company and moving forward thereon. Through all that has happened we are grateful to our valued customers, Board of Directors, management and staff, and our shareholders. On behalf the board of directors of Advance Modules, we would like to thank you for your support and understanding during this time. Rest assured that all of us at Advance Modules are committed to growing the company and will not permit the little setbacks to distract us from our goals. We will continue to work towards success for our shareholders.

Michael Tang Vee Mun
Chairman / Independent Director

Vincent Tan
Group Managing Director