##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F

|      |  |                                                                                               
|----- |  | ----------------------------------------------------------------------------------------------
|[   ] |  | Registration Statement Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934

OR

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[ü] |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934



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|                           |  |                        
|-------------------------- |  | -----------------------
|For the Fiscal Year Ended: |  | Commission File Number:
|March 31, 2003             |  | 0-26448                



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DESWELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


British Virgin Islands
(Jurisdiction of incorporation or organization)

Unit 516-517
Hong Leong Industrial Complex
# 4 Wang Kwong Road
Kowloon Bay, Kowloon, Hong Kong
(Address of principal executive offices)



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Securities registered or to be registered pursuant to Section 12(b) of the
Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common shares, no par value per share

Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: NONE


As of March 31, 2003, there were 9,030,835 common shares of the registrant
outstanding.

Indicate by check mark whether the registrant: (i) 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 (ii) has been subject to
such filing requirements for the past 90 days.

Yes [ü]  No [   ]

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

Item 17 [   ]  Item 18 [ü]





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TABLE OF CONTENTS



|                                               |                                                                                       |  |  |  |  |  |  | 
|---------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
|PART I                                        
|                                               | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        
|                                               | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|                                               | ITEM 3. KEY INFORMATION                                                              
|                                               | ITEM 4. INFORMATION ON THE COMPANY                                                   
|                                               | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|                                               | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|                                               | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|                                               | ITEM 8. FINANCIAL INFORMATION                                                        
|                                               | ITEM 9. THE LISTING                                                                  
|                                               | ITEM 10. ADDITIONAL INFORMATION                                                      
|                                               | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|                                               | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|PART II                                       
|                                               | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|                                               | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|                                               | ITEM 15. CONTROLS AND PROCEDURES                                                     
|                                               | ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT                                            
|                                               | ITEM 16B CODE OF ETHICS                                                              
|                                               | ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      
|PART III                                      
|                                               | ITEM 17. FINANCIAL STATEMENTS                                                        
|                                               | ITEM 18. FINANCIAL STATEMENTS                                                        
|                                               | ITEM 19. EXHIBITS                                                                    
|SIGNATURES                                    
|EXHIBIT 4.2                                   
|EXHIBIT 4.3                                   
|EXHIBIT 4.4                                   
|EXHIBIT 4.5                                   
|EXHIBIT 4.6                                   
|EXHIBIT 4.7                                   
|EXHIBIT 4.8                                   
|EXHIBIT 4.9                                   
|EXHIBIT 4.10                                  
|EXHIBIT 4.11                                  
|EXHIBIT 4.12                                  
|EXHIBIT 4.13                                  
|EXHIBIT 4.14                                  
|EXHIBIT 11.1                                  
|EXHIBIT 11.2                                  
|EXHIBIT 12.1                                  
|EXHIBIT 12.2                                  
|EXHIBIT 13.1                                  



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##### Table of Contents



TABLE OF CONTENTS

|           |          |                                                |                                                                              |  |   |    |    |  | 
|---------- | -------- | ---------------------------------------------- | ---------------------------------------------------------------------------- |  | - | -- | -- |  | 
|           |          | Financial Statements and Currency Presentation |                                                                              |  | 2 |   
|PART I     |          |                                                |                                                                              |  |   |    |    | 
|           | Item 1.  |                                                | Identity of Directors, Senior Management and Advisors                        |  |   | 3  |   
|           | Item 2.  |                                                | Offer Statistics and Expected Timetable                                      |  |   | 3  |   
|           | Item 3.  |                                                | Key Information                                                              |  |   | 3  |   
|           | Item 4.  |                                                | Information on the Company                                                   |  |   | 10 |   
|           | Item 5.  |                                                | Operating and Financial Review and Prospects                                 |  |   | 22 |   
|           | Item 6.  |                                                | Directors, Senior Management and Employees                                   |  |   | 31 |   
|           | Item 7.  |                                                | Major Shareholders and Related Party Transactions                            |  |   | 34 |   
|           | Item 8.  |                                                | Financial Information                                                        |  |   | 37 |   
|           | Item 9.  |                                                | The Listing                                                                  |  |   | 38 |   
|           | Item 10. |                                                | Additional Information                                                       |  |   | 39 |   
|           | Item 11. |                                                | Quantitative and Qualitative Disclosure about Market Risk                    |  |   | 52 |   
|           | Item 12. |                                                | Description of Securities Other than Equity Securities                       |  |   | 52 |   
|PART II    |          |                                                |                                                                              |  |   |    |    | 
|           | Item 13. |                                                | Defaults, Dividend Arrearages and Delinquencies                              |  |   | 53 |   
|           | Item 14. |                                                | Material Modifications to the Rights of Security Holders and Use of Proceeds |  |   | 53 |   
|           | Item 15. |                                                | Controls and Procedures                                                      |  |   | 53 |   
|           | Item 16A |                                                | Audit Committee Financial Expert                                             |  |   | 53 |   
|           | Item 16B |                                                | Code of Ethics                                                               |  |   | 53 |   
|           | Item 16C |                                                | Principal Accountant Fees and Services                                       |  |   | 53 |   
|PART III   |          |                                                |                                                                              |  |   |    |    | 
|           | Item 17. |                                                | Financial Statements                                                         |  |   | 53 |   
|           | Item 18. |                                                | Financial Statements                                                         |  |   | 54 |   
|           | Item 19. |                                                | Exhibits                                                                     |  |   | 55 |   
|SIGNATURES |          |                                                |                                                                              |  |   |    | 57 | 

This Annual Report on Form 20-F contains forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to those discussed in the section entitled Risk Factors
under Item 3.  Key Information.

Readers should not place undue reliance on forward-looking statements,
which reflect managements view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully
review the risk factors described in other documents the Company files from
time to time with the Securities and Exchange Commission.

As used in this Report, we, our, us, Deswell or the Company
refers to Deswell Industries, Inc. and its subsidiaries unless the context
otherwise indicates.

All share and per share information in this Report, has been adjusted to
reflect the Companys three-for-two stock split effected in July 2002.




FINANCIAL STATEMENTS AND CURRENCY PRESENTATION

The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles in the United States of America
and publishes such statements in United States dollars. See Independent
Auditors Report included elsewhere herein. The Company publishes its
financial statements in United States dollars as the Company is
incorporated in the British Virgin Islands, where the currency is the
United States dollar, and the functional currency of the Companys
subsidiaries is the Hong Kong dollar, whose exchange rate has been fixed
at approximately 7.80 Hong Kong dollars to $1.00 since 1983. All dollar
amounts ($) set forth in this Report are in United States dollars, the
references to HK$ refer to Hong Kong dollars and RMB to Chinese renminbi.

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PART I




ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.




ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.




ITEM 3. KEY INFORMATION

Selected Financial Data (1)

The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and notes thereto
included elsewhere in this Report. The selected income statement data for each
of the three fiscal years in the period ended March 31, 2003, and the balance
sheet data as of March 31, 2002 and 2003 are derived from our audited
consolidated financial statements included in this Report. The selected income
statement data for the years ended March 31, 1999 and 2000, and the balance
sheet data as of March 31, 1999, 2000 and 2001 are derived from our audited
consolidated financial statements, which are not included in this Report.

|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |   | 
|--------------------------------------------------- |  | -------------------- | ---------------------------------------------------- | - | ---- | - | ------ | - | ---- | - | ------ | - |  | - | ------ | - |  | - | ------ | - | 
|                                                    |  |                      | (In thousands, except per share and percentage data)
|                                                    |  | Year ended March 31,
|                                                    |  |                     
|                                                    |  |                      | 1999                                                 |   | 2000 |   | 2001   |   | 2002 |   | 2003  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |       
|Income Statement Data                               |  |                     
|Net sales                                           |  | $                    | 53,439                                               |   |      | $ | 60,958 |   |      | $ | 80,847 |   |  | $ | 83,320 |   |  | $ | 90,905 |  
|Cost of sales                                       |  |                      | 32,179                                               |   |      |   | 38,262 |   |      |   | 52,596 |   |  |   | 54,448 |   |  |   | 61,006 |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Gross profit                                        |  |                      | 21,260                                               |   |      |   | 22,696 |   |      |   | 28,251 |   |  |   | 28,872 |   |  |   | 29,899 |  
|Selling, general and administrative expenses        |  |                      | 10,364                                               |   |      |   | 11,970 |   |      |   | 15,414 |   |  |   | 14,939 |   |  |   | 15,354 |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Operating income                                    |  |                      | 10,896                                               |   |      |   | 10,726 |   |      |   | 12,837 |   |  |   | 13,933 |   |  |   | 14,545 |  
|Interest expense                                    |  |                      | (306                                                 | ) |      |   | (3     | ) |      |   | (6     | ) |  |   | (26    | ) |  |   | (6     | )
|Other income, net                                   |  |                      | 939                                                  |   |      |   | 898    |   |      |   | 915    |   |  |   | 877    |   |  |   | 818    |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Income before income taxes                          |  |                      | 11,529                                               |   |      |   | 11,621 |   |      |   | 13,746 |   |  |   | 14,784 |   |  |   | 15,357 |  
|Income taxes                                        |  |                      | 462                                                  |   |      |   | 890    |   |      |   | 315    |   |  |   | 535    |   |  |   | 3,826  |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Income before minority interests                    |  |                      | 11,067                                               |   |      |   | 10,731 |   |      |   | 13,431 |   |  |   | 14,249 |   |  |   | 11,531 |  
|Minority interests                                  |  |                      | 1,575                                                |   |      |   | 433    |   |      |   | 621    |   |  |   | 925    |   |  |   | 1,288  |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Net income                                          |  | $                    | 9,492                                                |   |      | $ | 10,298 |   |      | $ | 12,810 |   |  | $ | 13,324 |   |  | $ | 10,243 |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Basic earnings per share (2)(3)                     |  | $                    | 1.16                                                 |   |      | $ | 1.27   |   |      | $ | 1.59   |   |  | $ | 1.59   |   |  | $ | 1.18   |  
|                                                    |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Average number of shares outstandingbasic (2)(3)   |  |                      | 8,217                                                |   |      |   | 8,118  |   |      |   | 8,064  |   |  |   | 8,403  |   |  |   | 8,672  |  
|Diluted earnings per share (3)                      |  | $                    | 1.15                                                 |   |      | $ | 1.26   |   |      | $ | 1.57   |   |  | $ | 1.57   |   |  | $ | 1.16   |  
|Average number of shares outstandingdiluted (2)(3) |  |                      | 8,286                                                |   |      |   | 8,174  |   |      |   | 8,153  |   |  |   | 8,466  |   |  |   | 8,852  |  
|Statistical Data:                                   |  |                      |                                                      |   |      |   |        |   |      |   |        |   |  |   |        |   |  |   |        |  
|Gross margin                                        |  |                      | 39.8                                                 | % |      |   | 37.2   | % |      |   | 34.9   | % |  |   | 34.7   | % |  |   | 32.9   | %
|Operating margin                                    |  |                      | 20.4                                                 | % |      |   | 17.6   | % |      |   | 15.9   | % |  |   | 16.7   | % |  |   | 16.0   | %
|Dividends per share (3)                             |  | $                    | 0.72                                                 |   |      | $ | 0.59   |   |      | $ | 0.59   |   |  | $ | 0.86   |   |  | $ | 0.77   |  

|                                     |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         | 
|------------------------------------ |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                     |  | At March 31,
|                                     |  |             
|                                     |  | 1999         |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                     |  |              |        |      |  |      |        |      |  |     
|Balance Sheet Data                   |  |             
|Working capital                      |  | $            | 41,066 |      |  | $    | 44,727 |      |  | $    | 47,356 |  |  | $ | 54,922 |  |  | $ | 58,223  | 
|Total assets                         |  |              | 64,273 |      |  |      | 71,841 |      |  |      | 83,466 |  |  |   | 94,744 |  |  |   | 106,172 | 
|Long-term debt, less current portion |  |              |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |        | 
|Total debt                           |  |              |       |      |  |      |       |      |  |      |       |  |  |   | 482    |  |  |   |        | 
|Shareholders equity                 |  |              | 48,767 |      |  |      | 53,031 |      |  |      | 63,877 |  |  |   | 69,651 |  |  |   | 81,846  | 



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|(1) |  | Our consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
and are stated in U.S. dollars. See Financial Statements and Currency
Presentation.                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Basic EPS excludes dilution from potential common shares and is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from potential common shares.
|   
|(3) |  | Share and per share amounts presented above have been adjusted to reflect
the three-for-two stock split effected in July 2002 (see Note 11 of Notes
to Consolidated Financial Statements).                                                                                        

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Risk Factors

We may from time to time make written or oral forward-looking statements.
Written forward-looking statements may appear in this document and other
documents filed with the Securities and Exchange Commission, in press releases,
in reports to shareholders, on our website, and other documents. The Private
Securities Reform Act of 1995 contains a safe harbor for forward-looking
statements on which we rely in making such disclosures. In connection with this
safe harbor we are hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statements made by us or on our behalf. Any such statement is qualified by
reference to the following cautionary statements:

We face numerous risks as a result of our operations in China and Hong Kong.

Our manufacturing facilities are located in China. As a result, our
operations and assets are subject to significant political, economic, legal and
other uncertainties associated with doing business in China, which are
discussed in more detail below.

The Chinese government could change its policies toward or even
nationalize private enterprise, which could result in the total loss of our
investment in that country.

Over the past several years, the Chinese government has pursued economic
reform policies including the encouragement of private economic activity and
greater economic decentralization. The Chinese government may not continue to
pursue these policies or may significantly alter them to our detriment from
time to time without notice. Changes in policies by the Chinese government
resulting in changes in laws, regulations, or their interpretation, or the
imposition of confiscatory taxation, restrictions on currency conversion or
imports and sources of supply could materially and adversely affect us. The
nationalization or other expropriation of private enterprises by the Chinese
government could result in the total loss of our investment in that country.

There may be a lack of remedies and impartiality under the Chinese legal
system that prevents us from enforcing the tenancy agreements under which we
operate our factories.

We operate our factories under tenancy agreements with the local Chinese
government. These tenancy agreements may be difficult to enforce in China,
which could force us to accept terms that may not be as favorable as those
provided in our tenancy agreements. Unlike the U.S., China has a civil law
system based on written statutes in which judicial decisions have little
precedential value. The Chinese government has enacted some laws and
regulations dealing with matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. However, their experience in
implementing, interpreting and enforcing these laws and regulations is limited,
and our ability to enforce commercial claims or to resolve commercial disputes
is unpredictable. These matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination.

If our business licenses in China were not renewed, we would be required
to move our operations out of China, which would impair our profitability,
competitiveness and market position and jeopardize our ability to continue
operations.

Our activities in China require business licenses. This requires a review
and approval of our activities by various national and local agencies of
Chinese government. The Chinese government may not continue to approve our
activities or grant or renew our licenses. Our inability to obtain needed
approvals or licenses could prevent us from continuing to conduct operations in
China. If for any reason we were required to move our manufacturing operations
outside of China, our profitability would be substantially impaired, our
competitiveness and market position would be materially jeopardized and we may
not be able to continue operations.

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A fire, severe weather, flood, or other act of God could cause significant
damage to our properties in China and disrupt our business operations.

Firefighting and disaster relief or assistance in China are primitive by
Western standards. At March 31, 2003, we maintained fire, casualty and theft
insurance aggregating approximately $33,884,000 covering certain of
our stock in trade, goods and merchandise, furniture and equipment and
factory buildings in China. The proceeds of this insurance may not be
sufficient to cover material damage to, or the loss of, any of our factories
due to fire, severe weather, flood, or other act of God or cause. We do not
maintain any business interruption insurance.

Possible changes and uncertainties in economic policies in the Special
Economic Zones of China in which we operate could harm our operations by
eliminating benefits we currently enjoy.

As part of its economic reform, China has designated certain areas,
including Shenzhen where we have certain manufacturing facilities, as Special
Economic Zones. Foreign enterprises in these areas benefit from greater
economic autonomy and more favorable tax treatment than enterprises in other
parts of China. Changes in the policies or laws governing Special Economic
Zones could eliminate these benefits. Moreover, economic reforms and growth in
China have been more successful in certain provinces than others, and the
continuation or increase of these disparities could affect the political or
social stability of China.

Changes to Chinese tax laws and heightened efforts by the Chinese tax
authorities to increase revenues could subject us to greater taxes.

Under applicable Chinese law, we have been afforded a number of tax
concessions by the Chinese taxing authorities and have avoided paying taxes on
a substantial portion of our operations in China by reinvesting all or part of
the profits attributable to our Chinese plastic manufacturing subsidiary for at
least five years. However, the Chinese tax system is subject to substantial
uncertainties with respect to its interpretation and enforcement. Currently,
under the Chinese tax system we can obtain tax breaks by reinvesting profits of
certain of our subsidiaries in China. We reinvested a portion of our profits of
$4,000,000, from our Chinese plastic manufacturing subsidiary for the year
ended December 31, 2001 and, we are subject to taxes of 7.5% on these
operations for the remaining profits for tax year ended December 31, 2001. For
the tax years commencing January 1, 2002 and 2003, the Company is subject to
taxes of 10% on these operations and has made a provision for taxes for the
2002 tax year on its financial statements at and for the year ended March 31,
2003. Following the Chinese governments program of privatizing many state
owned enterprises, the Chinese government has attempted to augment its revenues
through heightened tax collection efforts. Continued efforts by the Chinese
government to increase tax revenues could result in decisions or
interpretations of the tax laws by the Chinese tax authorities that would
increase our future tax liabilities or deny us expected concessions or refunds.

We could suffer losses from corrupt or fraudulent business practices.
Conducting business in China is inherently risky.

Corruption, extortion, bribery, pay-offs, theft, and other fraudulent
practices are common in China. We could suffer losses from these practices if
we are not successful in implementing and maintaining preventative measures.

Controversies affecting Chinas trade with the United States could harm
our operations or depress our stock price.

While China has been granted permanent most favored nation trade status in
the United States, controversies between the United States and China may arise
that threaten the status quo involving trade between the United States and
China. These controversies could adversely affect our business by, among other
things, causing our products in the United States to become more expensive,
which could result in a reduction in the demand for our products by customers
in the United States. Political or trade friction between the United States and
China, whether or not actually affecting our business, could also adversely
affect the prevailing market price of our common shares.

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Changes in currency rates involving the Hong Kong dollar or Chinese yuan
could increase our expenses or cause economic or political problems affecting
our business.

Our sales are predominately denominated in Hong Kong dollars. The Chinese
government may not continue to maintain the present currency exchange
mechanism, which fixes the Hong Kong dollar at approximately 7.80 to each
United States dollar. If the currency exchange mechanism between the Hong Kong
dollar and the U.S. dollar is changed, our results of operations and financial
condition could be materially adversely affected. Any material increase in the
value of the Hong Kong dollar or Chinese yuan relative to the U.S. dollar would
increase our expenses when translated to US dollars. A devaluation of the Hong
Kong dollar or yuan relative to the U.S. dollar would be likely to reduce our
expenses when translated to US dollars. However, any benefits we receive from
devaluation could be offset if the devaluation results in inflation or
political unrest.

Our financial results could be adversely impacted by tax audits by the
Hong Kong Inland Revenue Department on profits derived from activities of
certain of our subsidiaries.

The Hong Kong Inland Revenue Department, or IRD, which is tax authority of
the Hong Kong Government, is currently engaged in aggressive and frequent field
audits and close and critical scrutiny of commercial transactions. For example,
during 2003 through July 2003, the Company engaged in discussions with the IRD
regarding whether Deswell should be assessed taxes on profits derived from
activities of certain of its subsidiaries during the six fiscal years ended
March 31, 2002, which the Company believed were conducted outside of Hong Kong
and were not subject to a profits tax under the Hong Kong Inland Revenue
Ordinance. While, based on consultations with Hong Kong tax experts, Deswell
believes that its tax position for these years was sound and supportable,
management nevertheless concluded that it would be in the Companys best
interest to reach an immediate resolution of the tax issue with the IRD in
order to avoid the expenditure of substantial time, effort and expense involved
in proceedings that could extend years and to limit the assessment of taxes,
interest and/or penalties that would be incurred if the Company did not prevail
or sought to settle the dispute later. Accordingly, in June 2003 the Company
made a proposal to settle the entire tax dispute and in July 2003, the IRD
accepted the proposal. As a result, a provision of $3,532,000 was charged to
the Companys consolidated income statements for year ended March 31, 2003 and
this adversely impacted the Companys net income reported for the fourth
quarter of, and, the year ended March 31, 2003. The Company believes, based on
consultations with Hong Kong tax experts, that it has restructured the
operations of its subsidiaries in order to strengthen further its tax position
if audited by the IRD in the future for fiscal years after March 31, 2002.
However, litigating with the IRD is inherently uncertain, lengthy, time
consuming and expensive and there is no guarantee that the Company would
prevail. Even if the Company believed it would prevail, Deswell might choose to
settle future assessments for amounts in excess of the tax provisions it made
for the years involved in order to eliminate the expense or uncertainty of
challenging such assessments. In either event, Deswells financial results
could be adversely impacted.

Any future outbreak of severe acute respiratory syndrome may have a
negative impact on our business and operating results.

In the first calendar quarter of 2003, several economies in Asia,
including Hong Kong, where our accounting and logistic support office is
located, and southern China, where our factories are located, were affected by
the outbreak of severe acute respiratory syndrome, or SARS. If there is a
recurrence of an outbreak of SARS, it may adversely affect our business and
operating results. For example, a future SARS outbreak could result in
quarantines or closures to some of our offices in Hong Kong or factories in
China if our employees are infected with SARS and ongoing concerns regarding
SARS, particularly its effect on travel, could negatively impact our customers
and suppliers based in Hong Kong or China and our business and operating
results.

Political and economic instability of Hong Kong could harm our operations.

Our administration and logistic support office and some of our customers
and suppliers are located in Hong Kong, formerly a British Crown Colony.
Sovereignty over Hong Kong was transferred effective July 1, 1997 to China.
Since then, Hong Kong has become a Special Administrative Region of China,
enjoying a high degree of autonomy except for foreign and defense affairs.
Moreover, Chinas political system and policies are not practiced in Hong Kong.
Under the principle of one country, two systems, Hong Kong maintains a legal
system that is based on

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the common law and is different from that of China. It
is generally acknowledged as an open question whether Hong
Kongs future prosperity in its role as a hub and gateway to China after
Chinas recent accession to the World Trade Organization (introducing a market
liberalization in China) will be diminished. The continued stability of
political, economic or commercial conditions in Hong Kong remains uncertain,
and any instability could have an adverse impact on our business.

We are dependent on a few major customers and have no long-term contracts with
them. Our sales would substantially decrease and we would suffer decreases in
net income or losses if we lose any of our major customers, if they
substantially reduce their orders or if they are unable to pay us.

Historically, a substantial percentage of our sales have been to a small
number of customers. Our five largest customers during the year ended March 31,
2003 were Epson Precision (H.K.) Limited, Digidesign Inc., Inter-Tel
Incorporated, VTech Telecommunications Limited and Kyocera Mita Industrial Co.
(H.K.) Limited. Each of these customers individually accounted for 10% or more
of our total net sales during the year ended March 31, 2003 and accounted for
an aggregate of 70.7%, 62.7% and 71.3%, respectively, of our total net sales
during the years ended March 31, 2001, 2002 and 2003, respectively. Our sales
are based on purchase orders and we have no long-term contracts with any of our
customers and the percentage of sales to any of our customers may fluctuate
from time to time. The loss of any one of our largest customers or a
substantial reduction in orders from any of them would adversely impact our
sales and decrease our net income or cause us to incur losses unless and until
we were able to replace the customer or order with one or more of comparable
size. In addition, a substantial portion of our sales is made on credit and our
results of operations would be adversely affected if a major customer were
unable to pay for our products or services.

We have no long-term contracts to obtain plastic resins and our profit margins
and net income could suffer from an increase in resin prices.

The primary materials used by us in the manufacture of our plastic
injection molded products are various plastic resins. The following table shows
our cost of plastic resins as a percentage of our cost of plastic products sold
and as a percentage of our total costs of goods sold for the years ended March
31, 2001, 2002 and 2003:

|                                               |  |                      |    |      |  |      |    |   |  |  |    |  
|---------------------------------------------- |  | -------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                               |  | Year ended March 31,
|                                               |  |                     
|                                               |  | 2001                 |    | 2002 |  | 2003
|                                               |  |                      |    |      |  |     
|Resins cost as a % of plastic products sold    |  |                      | 58 | %    |  |      | 52 | % |  |  | 53 | %
|Resins cost as a % of total cost of goods sold |  |                      | 32 | %    |  |      | 25 | % |  |  | 25 | %

We have no long-term contracts with our resin suppliers. Accordingly, our
financial performance is dependent to a significant extent on resin markets and
the ability to pass through price increases to our customers. The capacity,
supply and demand for plastic resins and the petrochemical intermediates from
which they are produced are subject to cyclical price fluctuations, including
those arising from supply shortages. Consequently, resin prices may fluctuate
as a result of changes in natural gas and crude oil prices and the capacity,
supply and demand for resin and petrochemical intermediates from which they are
produced. We have found that increases in resin prices are difficult to pass
on to our customers. In the past increases in resin prices have increased our
costs of goods sold and adversely affected our profit margins. A significant
increase in resin prices in the future could likewise adversely affect our
profit margins and results of operations.

We are facing increasing competition, which has had an adverse effect on our
gross profit margins.

Over the last few years we have been forced to lower our prices as a
result of increasing competition in our market segments. This has resulted in
lower gross profit margins, which have declined by:



| |  |  | 5.2%, from 34.7% during the year ended March 31, 2002 to 32.9%
during the year ended March 31, 2003,    
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | 0.6%, from 34.9% during the year ended March 31, 2001 to 34.7%
during the year ended March 31, 2002, and
|
| |  |  | 6.2%, from 37.2% during the year ended March 31, 2000 to 34.9%
during the year ended March 31, 2001.    

7



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##### Table of Contents



If we are forced to continue to lower our prices and are unable to offset this
decrease by increasing our sales volumes, our net sales and gross margins will
decline. If we cannot stem the decline in our gross margins, our financial
position may be harmed and our stock price may decrease.

Our customers are dependent on shipping companies for delivery of our products
and interruptions to shipping could materially and adversely affect our
business and operating results.

Generally, we sell our products F.O.B. Hong Kong or F.O.B. China and our
customers are responsible for the transportation of products from Hong Kong or
China to their final destinations. Our customers rely on a variety of carriers
for product transportation through various world ports. A work stoppage, strike
or shutdown of one or more major ports or airports could result in shipping
delays materially and adversely affecting our customers, which in turn could
have a material adverse effect on our business and operating results.
Similarly, an increase in freight surcharges due to rising fuel costs or
general price increases could materially and adversely affect our business and
operating results.

Because our operations are international, we are subject to significant
worldwide political, economic, legal and other uncertainties.

We are incorporated in the British Virgin Islands and have subsidiaries
incorporated in the British Virgin Islands, Hong Kong, Samoa, Malaysia and
China. Our accounting and logistic support office is located in Hong Kong. We
manufacture all of our products in China. As of March 31, 2003, approximately
44.4% of the net book value of our total identifiable fixed assets was located
in China. We sell our products to customers principally in China, the United
States, Europe and Hong Kong. Our international operations may be subject to
significant political and economic risks and legal uncertainties, including:



| |  |  | changes in economic and political conditions and in governmental policies,    
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | changes in international and domestic customs regulations,                    
|
| |  |  | wars, civil unrest, acts of terrorism and other conflicts,                    
|
| |  |  | changes in tariffs, trade restrictions, trade agreements and taxation,        
|
| |  |  | difficulties in managing or overseeing foreign operations, and                
|
| |  |  | limitations on the repatriation of funds because of foreign exchange controls.

The occurrence or consequences of any of these factors may restrict our
ability to operate in the affected region and decrease the profitability of our
operations in that region.

Our loss of certain members of our senior management could cause disruptions in
our business and harm our customer relationships thereby adversely affecting
sales.

We depend to a large extent on the abilities and continued participation of



| |  |  | Richard Lau, our Chairman of the Board and Chief Executive Officer;                                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | C. P. Li, our Executive Director, General Manager in
charge of our day-to-day manufacturing and administrative
operations for plastic products, and Chief Financial Officer;
|
| |  |  | C. W. Leung, Executive Director of Engineering in
charge of the mold division and engineering for our plastic
manufacturing operations;                                     
|
| |  |  | S. K. Lee, our Director of Administration and Marketing
and General Manager in charge of our day-to-day administrative
and marketing operations for electronic products;    
|
| |  |  | M. C. Tam, our Director of Engineering and
Manufacturing, in charge of manufacturing and operations for
electronic products; and                                            
|
| |  |  | Dickson Lam, our Director of Marketing for plastic and electronic products.                                                                                                 

Messrs. Lau, Li and Leung founded our company and have played integral roles in
the management, growth and development of our company in general and our
plastic injection molding business in particular. They have developed and
maintain relationships with several of our key customers in our plastic
injection molding business. Mr. S. K. Lee and Mr. M. C. Tam founded our
electronic products manufacturing business and have developed and continue to
manage it since we acquired the business from them. Mr. Dickson Lam has
developed and maintains

8



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several key relationships with our key customers in our
electronic and plastic injection products manufacturing
business. We have no employment contracts with any of these executives and
their loss would require us to find executives suitable to replace them, which
could be difficult and disruptive to our business. Customers with whom they
have relationships may cease to deal with us or choose to use a competitor for
a greater portion of their business, resulting in our loss of sales.

The concentration of share ownership in our senior management allows them to
control or substantially influence the outcome of matters requiring shareholder
approval.

Our senior management as a group, each of whom are also members and
constitute a majority of our board of directors, directly or indirectly through
an affiliated company beneficially own approximately 39% of our shares at
August 28, 2003. As a result, acting together they may be able to control, and
they can substantially influence, the outcome of all matters requiring approval
by our shareholders, including the election of directors and approval of
significant corporate transactions. This ability may have the effect of
delaying or preventing a change in control of Deswell, or causing a change in
control of Deswell that may not be favored by our other shareholders.

Our boards ability to amend our charter without shareholder approval could
have anti-takeover effects that could prevent a change in control.

As permitted by the law of the British Virgin Islands, our Memorandum and
Articles of Association, which are the terms used in the British Virgin Islands
for a corporations charter and bylaws, may be amended by our board of
directors without shareholder approval provided that a majority of our
independent directors do not vote against the amendment. This includes
amendments to increase or reduce our authorized capital stock. Our boards
ability to amend our charter documents without shareholder approval could have
the effect of delaying, deterring or preventing a change in control of Deswell,
including a tender offer to purchase our common shares at a premium over the
then current market price.

Our exemptions from certain of the reporting requirements under the Exchange
Act limits the protections and information afforded to investors.

We are a foreign private issuer within the meaning of rules promulgated
under the Securities Exchange Act of 1934. As a foreign private issuer, we are
exempt from certain provisions applicable to United States public companies
including:



| |  |  | the rules under the Exchange Act requiring the filing
with the Commission of quarterly reports on Form 10-Q or current
reports on Form 8-K;                                                                                                                                                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the sections of the Exchange Act regulating the
solicitation of proxies, consents or authorizations in respect to
a security registered under the Exchange Act;                                                                                                                                                                                    
|
| |  |  | and the sections of the Exchange Act requiring insiders
to file public reports of their stock ownership and trading
activities and establishing insider liability for profits
realized from any short-swing trading transaction (i.e., a
purchase and sale, or sale and purchase, of the issuers equity
securities within less than six months).

In addition, because the Company is a foreign private issuer, certain of
the corporate governance standards of The Nasdaq Stock Market that are applied
to domestic companies having securities included on The Nasdaq Stock Market may
not be applied to us.

Because of these exemptions, investors are not afforded the same
protections or information generally available to investors in public companies
organized in the United States or with securities included on The Nasdaq Stock
Market.

9



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##### Table of Contents






ITEM 4. INFORMATION ON THE COMPANY

History and Development of Deswell

The Company was incorporated in December 1993 as a limited liability
International Business Company under the laws of the British Virgin Islands.
The Companys corporate administrative matters are conducted in the British
Virgin Islands through its registered agent, HWR Services Limited, P.O. Box 71,
Craigmuir Chambers, Road Town, Tortola, British Virgin Islands. The Companys
principal executive office is located in Hong Kong at Unit 516-517, Hong Leong
Industrial Complex, No. 4, Wang Kwong Road, Kowloon Bay, Kowloon, Hong Kong,
and its telephone number is (852) 2796-6993 and its facsimile number is (852)
2796-7741.

Deswell developed from the initial incorporation of Jetcrown Industrial
Limited, a Hong Kong limited liability company (Jetcrown), in February 1987.
Richard Lau, C. P. Li and C. W. Leung founded Jetcrown to manufacture
injection-molded plastic parts for OEMs and contract manufacturers. Jetcrown is
the ultimate predecessor of the Company as restructured in March 1994. In
January 1990, Jetcrown Industrial (Shenzhen) Limited, a limited liability China
foreign operation (Jetcrown Shenzhen), was organized to conduct the Companys
manufacturing operations in China and Jetcrowns manufacturing operations were
relocated to China in 1990. Marcon Enterprises Limited, a British Virgin
Islands International Business Company (Marcon), was organized in July 1991
to hold the beneficial ownership of Jetcrown Shenzhen and to supervise the
latters manufacturing operations. Richtex Services Limited, a Hong Kong
limited liability company, was organized in November 1991 to serve as Marcons
local agent and to discharge Marcons duties to supervise the manufacturing
operations of Jetcrown Shenzhen.

In October 1992, the Company purchased a controlling interest of the
outstanding stock of Kwanasia Electronics Company Limited, a Hong Kong limited
liability company (Kwanasia) and an independent contract manufacturer of
electronic products, components and subassemblies, from two former
shareholders. In December 1994, the Company increased its interest in Kwanasia
to 51% of the outstanding Kwanasia shares by purchasing the requisite stock
from Mr. S. K. Lee and Mr. M. C. Tam, Kwanasias then remaining two
shareholders. The total price paid by the Company in 1994 for its majority
interest in Kwanasias shares was approximately $517,000, which was paid in
cash. At the time majority control of Kwanasia was acquired by the Company,
Kwanasia had one active operating subsidiary, Bright Ace Limited (Bright
Ace), a Hong Kong limited liability company. Bright Ace had been inactive
since April 2001 and was struck off from the Companies Registry of Hong Kong in
October 2002.

Kwanasia originally conducted the Companys contract electronic
manufacturing operations through a joint venture enterprise (organized as a
limited liability China company) called Shenzhen Kwanam Electronics, Co., Ltd.
(Shenzhen Kwanam). Shenzhen Kwanam was initially established as a 70%-30%
joint venture company pursuant to a Joint Venture Agreement between Kwanasia
and Commercial Trading Corporation (CTC), an independent Chinese party.
However, the parties to the Joint Venture Agreement subsequently elected to
modify such arrangement. Such modification took various forms but in each case
essentially provided that Kwanasia and its successor (through the subsidiaries
which held the joint venture interest) would have in substance a 100% economic
interest in the joint venture enterprise, subject to a RMB60,000 (approximately
$7,200 at May 30, 1996) annual payment by it to CTC. In May 1996, Kwanasia and
CTC agreed that Kwanasia would purchase CTCs 30% interest in Shenzhen Kwanam
(the Buy-out Agreement) for RMB180,000 (approximately $22,000 at May 30,
1996, the day the purchase price was paid). This transaction was completed
during the year ended March 31, 1998 and resulted in Shenzhen Kwanam becoming a
wholly owned subsidiary. Following reorganization in electronic operations and
its move into a new manufacturing plant in Dongguan, China, the manufacturing
operations of Shenzhen Kwanam were switched to another wholly owned subsidiary,
Dongguan Kwan Hong Electronics Co. Ltd. (Kwan Hong) commencing April 1,
1999. Kwan Hong was initially established as an 85%-15% joint venture company
pursuant to a Joint Venture Agreement dated January 31, 1997 between Kwanasia
and Dongguan Cheung On Lang Wang Electronics Development Company (Lang Wang),
an independent Chinese party. Pursuant to a subsequent supplemental agreement
signed on February 27, 1997 between Kwanasia and Lang Wang, both parties agreed
that Kwanasia would have in substance a 100% economic interest in the joint
venture enterprise with Lang Wang guaranteed an annual rental income for the
buy out.

10



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The Companys incorporation in the British Virgin Islands in December 1993
was part of a restructuring in which Deswell Industries, Inc. was organized to
become the ultimate parent holding company of the companies engaged in actual
business operations and to the spin off to Messrs. Lau, Li and Leung other
companies that hold real estate in Hong Kong. This restructuring, which was
completed in March 1994 involved the following steps. First, on December 13,
1993, the Company (i) allotted a total of 2,539 common shares to provide the
initial capital of the Company and (ii) acquired the entire issued share
capital of Leesha Holdings Limited, the former ultimate parent company, in
exchange for which it issued a total of 3,387,304 common shares. These shares
were issued in equal portions to Messrs. Lau, Li and Leung, the former
shareholders of Leesha Holdings Limited. Second, on March 22, 1994, the
Company acquired the entire issued share capitals of Jetcrown, Marcon
(including its interest in Jetcrown Shenzhen) and Richtex from Leesha
Enterprises Limited, a wholly owned subsidiary of Leesha Holdings Limited and a
second-tier holding company, in exchange for which the Company issued an
aggregate of 7,618 common shares in equal proportions to Messrs. Lau, Li and
Leung. Third, also on March 22, 1994, the Company acquired Leesha Enterprises
Limiteds 50.00005% interest in Kwanasia in exchange for the issue of 2,539
common shares in the Company in equal proportions to Messrs. Lau, Li and Leung
and the assignment of a debt due to Jetcrown of approximately $465,000 relating
to the original purchase of Kwanasia. Finally, on March 22, 1994, the Company
made a distribution in specie of the entire share capital of Leesha Holdings
Limited to Messrs. Lau, Li and Leung. The immediate effect of this
restructuring was that the Company wholly owned Jetcrown, Marcon (which wholly
owned Jetcrown Shenzhen) and Richtex and also owned 51% of the outstanding
capital stock of Kwanasia (which, in turn had a 100% economic interest in
Shenzhen Kwanam). Messrs. Lee and Tam owned the balance of Kwanasia. In 1995,
this restructuring was fine-tuned for tax purposes, with the Company forming
two new corporations, Union International Limited (which changed its name to
Integrated International Limited on May 1, 1996) (Integrated) and Oriental
Enterprises Limited (which changed its name to Bright Oriental Enterprises
Limited on May 1, 1996) (Oriental Enterprises), both corporations organized
under the laws of Western Samoa. Integrated issued its shares proportionately
to Deswell and Messrs. Lee and Tam in exchange for all outstanding capital
stock of Kwanasia respectively held by them, with the result that through
February 1998, Integrated was 51%-owned by Deswell and 49%-owned by Messrs. Lee
and Tam. In March 1998, Messrs. Lee and Tam together sold 5% shareholding
interest in Integrated to another minority shareholder. In January 2003, the
Company increased its interest in Integrated to 71% by purchasing an additional
20% from Messrs. Lee and Tam in exchange for the issuance to Messrs. Lee and
Tam of an aggregate of 251,880 common shares of Deswell. Integrated in turn
owns all of the outstanding capital stock of Kwanasia. Messrs. Lee and Tam
still own, in equal shares, 24% of the capital stock of Integrated and continue
to serve as the executives in charge of administrative and manufacturing
operations, respectively, for the Companys contract manufacturing operations
for electronic products and subassemblies. See Item 6 Directors, Senior
Management and Employees.

As part of the Companys fine-tuning for tax purposes, Oriental
Enterprises was organized as a wholly-owned subsidiary of Integrated and it was
assigned Kwanasias joint venture interest in Shenzhen Kwanam and assumed
Kwanasias rights and responsibilities under the Shenzhen Kwanam joint venture.
With the completion during the year ended March 31, 1998 of the purchase of
CTCs 30% joint venture interest in Shenzhen Kwanam pursuant to the Buy-out
Agreement, Shenzhen Kwanam became a wholly owned subsidiary of Oriental
Enterprises.

In October 1996, Integrated acquired a 64.9% interest in Kwanta Precision
Metal Products Co., Ltd. (Kwanta), a corporation organized under the laws of
Hong Kong, for $64,000, which was paid in cash. In April and July 1999,
Integrated acquired the remaining 35.1% interest in Kwanta for $6,000, which
was paid in cash. Kwanta manufactures metallic molds and accessory parts for
use in audio equipment, copying machines and fax machines. Kwanta supplies
metallic molds for the Companys plastic and electronic operations and
manufactures metal parts for OEMs and contract manufacturers, including the
Company.

In January 1999, the Company organized Star Peace Limited, a British
Virgin Islands International Business Company, in order to hold securities the
Company acquires for investment.

In January, 2000, the Company organized Blue Collar Holdings Limited, a
British Virgin Islands International Business Company to hold the beneficial
ownership of Jetcrown Industrial (Dongguan) Limited (Jetcrown Dongguan).
Jetcrown Dongguan, a limited liability China Foreign Enterprise registered in
January 2000, was organized to conduct the Companys plastic injection molding
manufacturing operations in Dongguan, China. Jetcrown Dongguan commenced
production in July 2000.

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In April 2000, Integrated organized Digiwave Limited (originally named
Wisetop Technology Limited), a limited liability Hong Kong Company, to carry on
original design manufacturing, or ODM, in connection with our electronic
manufacturing business.

In June 2000, the Company organized Jetcrown Industrial Sdn. Bhd., a
limited liability Malaysian Company, to establish a representative office in
Dongguan, China to handle our overseas plastic injection product sales. On May
22, 2001, the Companys representative office successfully obtained a
registration certificate to allow it to do business from the Chinese Government
and it commenced business in August 2001.

In August 2001, the Company organized Jetcrown & Kwanasia (OEM) Specialist
Limited (J&K OEM), a limited liability Hong Kong Company, to conduct
marketing for Deswells plastic and electronic businesses. The capital stock
of J&K OEM is owned 51% by Deswell, 39% by Dickson Lam, Deswells Director of
Marketing for plastic and electronic products, and 10% by two other
individuals, who are employees of J&K OEM.

In March 2003, the Company organized Rainbow Hill Limited, a 100% owned
British Virgin Islands International Business Company, in order to establish a
new 100% owned Macao incorporated company, namely Jetcrown Industrial (Macao
Commercial Offshore) Limited (JIMCO). In August 2003, JIMCO was incorporated
and obtained business license approval to carry out offshore trading activities
in Macao.

In March 2003, the Company also organized Triumph Wise Technology Limited
(Triumph Wise), a British Virgin Islands International Business Company, in
order to establish another new 100% owned Macao incorporated company, namely
J&K (OEM) Specialist (Macao Commercial Offshore) Limited (J&KMCO). The
capital stock of Triumph Wise is owned 51% by Deswell, 39% by Dickson Lam,
Deswells Director of Marketing for plastic and electronic products, and 10% by
two other individuals, who are employees of J&K OEM. In August 2003, J&KMCO
was incorporated and obtained business license approval to carry out offshore
marketing service activities in Macao.

For a chart showing the Companys organizational structure at March 31,
2003, see Organizational Structure, below.

Capital Expenditures

Principal capital expenditures and divestitures made by Deswell during the
three years in the period ended March 31, 2003 include the following:

|                                                        |  |      |            |      |  |      |           |  |  |   |           | 
|------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                        |  | 2001 |            | 2002 |  | 2003
|                                                        |  |      |            |      |  |     
|Purchase of property, plant and equipment               |  | $    | 13,926,000 |      |  | $    | 4,397,000 |  |  | $ | 9,731,000 | 
|Proceeds from the sale of property, plant and equipment |  |      | 113,000    |      |  |      | 276,000   |  |  |   | 127,000   | 

Principal capital expenditures made and currently in progress relate to
improvements we are constructing on the land we purchased in Dongguan, China to
build a new factory. The construction of our new Dongguan factory and
dormitories will consist of three to four phases. The pace of its development
depends on our financial situation and future operating results.

Through March 31, 2003, Deswell spent an aggregate of approximately $12
million on the first phase of construction of its new plastic injection molding
plant. The facility comprises approximately 440,000 square feet of factory
space, an 85,000 square foot amenity center and 95,000 square feet of dormitory
space. Construction began in October 2001 and was completed in March 2003 with
interior build-out finished in June 2003. After installation of machinery and
final touch up, Phase I of the new factory is expected to be operational by the
end of November 2003. During the same period, approximately $3.5 million was
used to expand the Companys injection molding capacity through the purchase of
additional injection molding machinery.

Following completion of space built through Phase I, we estimate spending
an aggregate of approximately $5.5 million for the second phase of
construction, which will comprise an additional two factory building units
covering approximately 220,000 square feet and two additional dormitory units
of approximately 195,000 square feet. Phase III of construction, with a
planned cost of $4 million, will consist of an approximate 100,000 square foot

12



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office building and an additional 150,000 square feet of factory space.
Phase IV of construction, which will consist of an additional two dormitory
units and two other buildings, is planned for the long-term, with construction
to begin following completion of Phase III, as resources become available.

In March 2003, Deswell also committed $4.1 million to acquire 240,000
square feet of land and 400,000 square feet of factory buildings and
accommodations in Cheung On, Dongguan. These premises were previously leased
from a local government unit for the Companys electronics and metallic
operations.

All of the foregoing capital expenditures were financed principally from
internally generated funds and our current plan is to continue to use
internally generated funds principally to finance future capital expenditures.

Business Overview

Introduction to Deswell

The Company is an independent manufacturer of injection-molded plastic
parts and components, electronic products and subassemblies and metallic molds
and accessory parts for original equipment manufacturers, or OEMs and
contract manufacturers. The Company conducts all of its manufacturing
activities at separate plastics, electronics and metallic operation factories
located in the Peoples Republic of China.

The Company produces a wide variety of plastic parts and components that
are used in the manufacture of consumer and industrial products, including



| |                                                        |  | cases and key tops for calculators and personal organizers;                                                                       
| | ------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|
| |                                                        |  | cases for flashlights, telephones, paging machines, projectors and alarm clocks;                                                  
|
| |                                                        |  | grips and rods for fishing tackle; and                                                                                            
|
| |                                                        |  | toner cartridges and cases for photocopy machines.                                                                                
|
| | Electronic products manufactured by the Company include
|
| |                                                        |  | complex printed circuit board assemblies using surface
mount (SMT) and pin-through-hole (PTH) interconnection
technologies and
|
| |                                                        |  | finished products which include                                                                                                   

|  |  |                                                                                                                                                                                                              
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ø |  | telecommunication products such as special
purpose telephones used as a private automated branch
exchange, a network terminal and an internet phone, for
each of which we also manufacture the plastic parts,
|  |  |                                                                                                                                                                                                              
|Ø |  | telephone answering machines, and                                                                                                                                                                            
|  |  |                                                                                                                                                                                                              
|Ø |  | sophisticated professional audio equipments
such as power amplifiers, mixers and digital signal
processors and DVD players.                                                                                  

Since mid 1999, Deswells electronics research and development team has also
developed new products such as full-duplex conference speakerphones, tele-video
monitoring systems and digital color cameras.

Metal products manufactured by Deswell include metallic molds and
accessory parts used in audio equipment, telephones and copying machines.

As part of its manufacturing operations, the Company consults with its
customers in the design of plastic parts and the design and production of the
molds used to manufacture plastic parts, which are made by Deswell at its
customers expense, and provides advice and assistance in the design and
manufacturing of printed circuit boards. The Company believes that its ability
to manufacture high-end plastic and metal parts of the quality required by OEMs
and contract manufacturers which furnish products and services internationally,
Deswells expertise in designing and manufacturing molds for its customers and
the Companys low production costs distinguish Deswell from most other
manufacturers of plastic products and provide it with a competitive advantage.
However, as a result of increased competition, Deswell has been forced to
reduce the sales prices of its products during the years ended March 31, 2001,
2002 and 2003, which has resulted in lower gross profit margins during these
years.

13



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Industry Overview

Management believes that the injection molding and metal molds and parts
manufacturing industries have each benefited in recent years from a trend among
major users of injection molded and metal products to outsource an increasing
portion of the parts requirements and to select a small number of suppliers or
a sole supplier to provide those products. The Company is not aware of any
empirical data defining the manufacturing industry in China, however,
management believes that injection molding and metal manufacturing firms which
are much smaller than the Company make up the largest segment of the industry
in China. The Companys experience indicates that such smaller firms are often
unable to react quickly and responsively to the diverse demands of many
customers and are not capable of furnishing the level of quality that high-end
plastic and metal products require. Management believes that this inability on
the part of these smaller manufacturers has created opportunities for the
Company to increase sales by catering to the outsourcing requirements of OEMs
and contract manufacturers that manufacture such high-end products.

Similarly, as a result of the recognition by OEMs in the electronics
industry of the rising costs of operating a manufacturing site and the need to
add more sophisticated and expensive manufacturing processes and equipment,
OEMs have turned increasingly to outside contract manufacturers. By doing so,
OEMs are able to focus on research, product conception, design and development,
marketing and distribution, and to rely on the production expertise of contract
manufacturers. Other benefits to OEMs of using contract manufacturing include:
access to manufacturers in regions with low labor and overhead costs, reduced
time to market, reduced capital investment, improved inventory management,
improved purchasing power and improved product quality. In addition, the use
of contract manufacturers has helped OEMs manage production in view of
increasingly shorter product life cycles.

Operations

Plastic Injection Molding

Plastic injection molding manufacturing accounted for 62.2%, 57.0% and
54.9% of the Companys total sales during the years ended March 31, 2001, 2002
and 2003, respectively. At March 31, 2003, the Company conducted its plastic
manufacturing operations in approximately 412,600 and 114,900 square feet of
factory space in its factories located in Shekou, Shenzhen, China and Dongguan,
Guangzhou, China, respectively.

The Companys plastic injection molding process consists of three phases:
(1) mold design and production; (2) plastic injection; and (3) finishing.

Mold design and production.The plastic injection-molding process begins
when a customer provides the Company with specifications for a product or part,
which specifications are often created in consultation with the Companys
technical staff. Next the Company designs and produces the mold, using great
care in the design process and in the selection of materials to produce the
mold in an effort to create a high quality appearance of the completed product
by reducing or eliminating potential flaws such as the sinkage of materials and
irregularities in the knit line of joints.

The mold-making process ranges from 25 to 75 days, depending on the size
and complexity of the mold. Mold making requires specialized machines and is
capital intensive. At March 31, 2003, the Company used 24 EDMs (electrical
discharge machines), 25 CNC (computer numerical control) milling machines and
63 NC (numerical control) milling machines in the mold-making process.

Deswell is continually adding equipment to expand its mold making and
injection molding capabilities. During the period from June to November 2000,
the Company purchased six sets of EDM, 14 sets of CNC milling machines and 11
sets of NC milling machines for approximately $995,000. During February to
April 2002, the Company purchased 12 additional injection-molding machines with
clamping force of 365 to 550 tons for approximately $1.5 million. These new
injection-molding machines were installed in July 2002. In December 2002, the
Company purchased five additional sets of injection-molding machines with
clamping force of 368 to 650 tons for approximately $1 million. These new
injection-molding machines, two of which have gas injection functionality, were
installed in March 2003. In March 2003, the Company purchased four sets of
precision double injection molding machines and one additional
injection-molding machine with clamping force of 650 tons for an aggregate of

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approximately $1 million. These new injection-molding machines were installed
in March and July 2003. Molds
produced by the Company generally weigh from 220 to 12,000 pounds and
generally cost between $3,000 and $500,000.

The customer generally bears the cost of producing the molds and, as is
customary in the industry, the customers own them. However, the Company
maintains and stores the molds at its factory for use in production and it is
the Companys policy not to make molds for customers unless the customer
undertakes to store its molds at the Companys factory and uses the Company to
manufacture the related parts. In this way, the Company seeks to use its
mold-making expertise to create dependence on the Company for the customers
parts requirements.

During the year ended March 31, 2003, the Company made on average about 70
to 100 different molds every month. Management believes that the Companys
skills and expertise in mold-making, coupled with having its facilities and
operations in China, allow the Company to produce molds at costs substantially
less than molds of comparable quality made in Japan, Korea and Taiwan.

Plastic Injection.During the mold-making process, suitable plastic resin
for the particular product is selected and purchased. See Raw Materials,
Component Parts and Suppliers. The completed mold is mounted onto injection
machines, which are classified according to the clamping force (the pressure
per square inch required to hold a mold in place during the injection molding
process). At March 31, 2003, the Company had 261 injection molding machines,
ranging from 50 to 1,600 tons of clamping force, with most machines in the
range of from 80 to 100 tons. Each of the Companys machines is capable of
servicing a variety of applications and product configurations and the Company
has machines, which permit the Company to fabricate plastic parts as small as a
button and as large as a 3 ft. x 2 ft. case for a copy machine.

Using separate shifts, injection molding is generally conducted 24 hours a
day, seven days per week, other than normal down time for maintenance and
changing of product molds. Molding of products requiring extra concerns for
appearance, such as cases for calculators, personal organizers and telephones
are conducted in an isolated and dust free section of the factory. In a
continuous effort to assure quality, the Companys quality control personnel
inspect the products produced from each machine generally at hourly intervals
during production. When defects are discovered, the Companys maintenance
personnel inspect the mold and the machine to determine which is responsible.
If the mold is the cause of the defect, it will be immediately removed from the
machine and serviced or repaired by one of a team of technicians employed to
maintain molds. The mold will then be remounted on the machine and production
will continue. If the machine is the source of the defect, the Companys
technicians and engineers service the machine immediately. Through this
continuous vigilance to molds and machines, the Company has experienced what it
believes to be a relatively low scrap rate and has been able to maintain a high
level of productivity of its injection molding machines.

Finishing.After injection molding, products are finished. Finishing
consists of smoothing and polishing, imprinting letters, numbers and signs
through silk screening process, pad printing or epoxy ultra violet cutting, and
treating the product with an anti-fog coating for a lasting and attractive
appearance. Most of these functions are conducted by hand.

Electronic Products and Assemblies

In an aggregate of approximately 298,000 square feet of factory space at
March 31, 2003 located at facilities in Dongguan, China, the Company
manufactures and assembles electronic products and electronic assemblies for
OEMs. Finished products include consumer and sophisticated studio-quality
audio equipment, telephones and telephone answering machines, computer
peripherals such as local area network (LAN) add-in cards, CD-ROM drives and
sound cards, electronic toys, infrared remote controls and radar detectors.
Assemblies consist of PCBs with passive (e.g., resistors, capacitors,
transformers, switches and wire) and active (e.g., semiconductors and memory
chips) components mounted on them. During the years ended March 31, 2001, 2002
and 2003, manufacturing of electronic products accounted for approximately
35.4%, 40.4% and 42.0%, respectively, of the Companys total sales. During the
same periods, manufacturing of finished products accounted for 91%, 96% and
97%, respectively, of electronic product sales and assembling of printed
circuit boards accounted for the balance of such sales during those periods.

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In assembling printed circuit boards the Company purchases packaged boards
with the active components already mounted and use both PTH and SMT
interconnection technologies to assemble the other components onto the PCBs.

PTH is a method of assembling printed circuit boards in which component
leads are inserted and soldered into plated holes in the board. While this
technology is several decades old and is labor intensive, it still has a
significant market, particularly for consumer product applications.

SMT is the method of assembling printed circuit boards in which components
are fixed directly to the surface of the board, rather than being inserted into
holes. With this process, solder is accurately stenciled in paste form on pads
located on the printed circuit board. The components are then placed into the
solder paste and heated to the point of melting the paste (a process called
reflow) to establish a strong solder joint. The SMT process allows for more
miniaturization, cost savings and shorter lead paths between components (which
results in greater signal speed). Additionally, it allows components to be
placed on both sides of the printed circuit board, a major factor in the
miniaturization process.

Manufacturing operations include PCB assembly and testing and, in those
cases where finished products are to be provided, assembly into final product
housing. While the Company has automated various aspects of the many
processes, the assembly of components into electronic products remains a
labor-intensive process generally requiring a high degree of precision and
dexterity in the assembly stage and multiple quality control checks prior to
shipment. The Company utilizes specially designed equipment and techniques to
maintain its ability to assemble efficiently a wide variety of electronic
products and assemblies.

Metal Parts Manufacturing

In an aggregate of approximately 120,100 square feet of factory space at
March 31, 2003 located at facilities in Dongguan, China near to the facilities
the Company uses to manufacture and assemble electronic products and electronic
assemblies, the Company manufactures metallic molds and accessory parts for use
in audio equipment, telephone and copying machines. The manufacturing by the
Company of metal mold products accounted for approximately 2.4%, 2.6% and 3.1%
of the Companys total sales during the years ended March 31, 2001, 2002 and
2003, respectively.

Quality Control

The Company maintains strict quality control procedures for its products.
At hourly intervals, the Companys quality control personnel monitor machines
and molds to assure that plastic parts are free from defects.

For electronic operations, the Companys quality control personnel check
all incoming components. Moreover, during the production stage, the Companys
quality control personnel check all work in process at several points in the
production process. Finally, after the assembly stage, the Company randomly
checks finished products.

Plastic, electronic and metal products manufactured and assembled at the
Companys facilities have a low level of product defects, and aggregate returns
represented less than 3% of total net sales during each of the years ended
March 31, 2001, 2002 and 2003.

In 1995, the Company earned ISO 9002 certifications for both its plastic
and electronic products manufacturing operations. In April 2000, the Company
also received ISO 9002 for its metal manufacturing operation. The ISO or
International Organization for Standardization is a Geneva-based organization
dedicated to the development of worldwide standards for quality management
guidelines and quality assurance. ISO 9000, which is the first quality system
standard to gain worldwide recognition, requires a company to gather, analyze,
document and monitor and to make improvements where needed. ISO 9002 is the
ISO level appropriate for manufacturers like the Company. The Companys receipt
of ISO 9002 certification demonstrates that the Companys manufacturing
operations meet the established world standards.

In August 2003, the Companys plastic injection manufacturing plant in
Shenzhen obtained ISO 14001 certification, which evidences that the Companys
environmental management standards or EMS meet established

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international standards. ISO 14000 is a series of international standards
on environmental management, ISO 14001 is the most well known of these
standards and is often seen as the corner stone standard of the ISO 14000
series.

Raw Materials, Component Parts and Suppliers

Plastic Resins.The primary raw materials used by the Company in the
manufacture of its plastic parts are various plastic resins, primarily ABS
(acrylonitrile-butadiene-styrene), which in the years ended March 31, 2001,
2002 and 2003 averaged approximately 58%, 52% and 53%, respectively, of the
Companys cost of plastic products sold and 32%, 25% and 25%, respectively, of
the Companys total cost of goods sold. Because plastic resins are commodity
products, the Company selects its suppliers primarily based on price. The
Company has no long-term supply agreements for plastic resins. The Company
currently obtains its plastic resins from suppliers in Hong Kong, Japan and
Taiwan and normally maintains a three to four month inventory supply.

The Company used in excess of 14,400,000 pounds of plastic resins during
the year ended March 31, 2003. Management believes that the Companys large
volume purchases of plastic resin have generally resulted in lower unit raw
material costs and generally has enabled the Company to obtain adequate
shipments of raw materials. While the Company is not generally bound by fixed
price contracts with its customers, the Company has found that increases in
resin prices can be difficult to pass on to its customers and, as a
consequence, a significant increase in resin prices could have, and in the past
has had, a material adverse effect on the Companys operations.

The primary plastic resins used by the Company are produced from
petrochemical intermediates derived from products of the natural gas and crude
oil refining processes. Natural gas and crude oil markets have in the past
experienced substantially cyclical price fluctuations as well as other market
disturbances including shortages of supply and crises in the oil producing
regions of the world. The capacity, supply and demand for plastic resins and
the petrochemical intermediates from which they are produced are also subject
to cyclical and other market factors. Consequently, plastic resin prices may
fluctuate as a result of natural gas and crude oil prices and the capacity,
supply and demand for resin and petrochemical intermediates from which they are
produced.

Although the plastics industry has from time to time experienced shortages
of plastic resins, the Company has not experienced to date any such shortages.
Management believes that there are adequate sources available to meet the
Companys raw material needs.

Component Parts and Supplies.The Company purchases over 500 different
component parts from more than 100 suppliers and is not dependent upon any
single supplier for any essential component. The Company purchases from
suppliers in Japan, Taiwan, Korea, Hong Kong and elsewhere. At various times
there have been shortages of parts in the electronics industry, and certain
components, including PCBs and semiconductors, have been subject to limited
allocations. Although shortages of parts and allocations have not had a
material adverse effect on the Companys results of operations, there can be no
assurance that any future shortages or allocations would not have such an
effect.

Raw Metal. The primary materials used by the Company in metal molds and
parts manufacturing are various metals, but purchases of raw metal were
immaterial to the Companys total operations during the years ended March 31,
2001, 2002 and 2003. Typically the Company buys metals from a variety of
suppliers in Hong Kong and China and has no long-term contracts with metal
suppliers.

Transportation

Transportation of components and finished products to customers in
Shenzhen and to and from Hong Kong and Shenzhen and Dongguan is by truck.
Generally, the Company sells its products F.O.B. China or F.O.B. Hong Kong. To
date, the Company has not been materially affected by any transportation
problems and has found that the transition of Hong Kong to Chinese control in
July 1997 has not had an adverse impact on the Companys ability to transport
goods to and from Hong Kong and China.

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Customers and Marketing

The Companys customers are OEMs and contract manufacturers. The Company
sells its products in Asia (Hong Kong, Japan and China), the United States and
Europe (Germany, United Kingdom, France and Italy). Net sales to customers by
geographic area are determined by reference to shipping destinations as
directed by the Companys customers. For example, if the products are
delivered to the customer in Hong Kong, the sales are recorded as generated in
Hong Kong; if the customer directs the Company to ship its products to Europe,
the sales are recorded as sold to Europe. See Note 16 of Notes to Consolidated
Financial Statements for the dollar amounts of export sales by geographic area
for each of the years ended March 31, 2001, 2002 and 2003. Net sales as a
percentage of total sales to customers by geographic area consisted of the
following for the years ended March 31, 2001, 2002 and 2003:

|                 |       |      |      |       |   |      |      |       |   |  |      |       |  
|---------------- | ----- | ---- | ---- | ----- | - | ---- | ---- | ----- | - |  | ---- | ----- | -
|Geographic areas |       | 2001 |      | 2002  |   | 2003
|                 |       |      |      |       |   |     
|China            |       |      | 54.5 | %     |   |      | 56.3 | %     |   |  | 58.9 | %    
|United States    |       |      | 22.6 |       |   |      | 23.2 |       |   |  | 28.5 |      
|Europe           |       |      | 2.2  |       |   |      | 4.9  |       |   |  | 8.2  |      
|Hong Kong        |       |      | 19.2 |       |   |      | 14.0 |       |   |  | 3.1  |      
|Others           |       |      | 1.5  |       |   |      | 1.6  |       |   |  | 1.3  |      
|                 |       |      |      |       |   |      |      |       |   |  |      |      
|                 | Total |      |      | 100.0 | % |      |      | 100.0 | % |  |      | 100.0 | %
|                 |       |      |      |       |   |      |      |       |   |  |      |      

The Company markets its products and services to existing customers
through direct contact with the Companys management and direct sales
personnel. The Companys sales personnel attend trade shows, advertise in
trade publications such as Asian Source  Electronics and Asian Source
Components,and use direct mail catalogues and product literature. The
Companys Hong Kong-based marketing staff contacts existing and potential
customers by telephone, mail, fax, e-mail via the Internet and in person.

Major Customers

The table below sets forth each of the Companys customers which accounted
for 10% or more of net sales during the year ended March 31, 2003 the products
purchased and the percentage of total Company net sales accounted for by such
customers during the years ended March 31, 2001, 2002 and 2003.

|                                           |  |                                  |  |      |      |                      |  |      |      |   |  |  |      |   |  | 
|------------------------------------------ |  | -------------------------------- |  | ---- | ---- | -------------------- |  | ---- | ---- | - |  |  | ---- | - |  | 
|                                           |  |                                  |  |      |      | Year ended March 31,
|                                           |  |                                  |  |      |      |                     
|Customer                                   |  | Product                          |  | 2001 |      | 2002                 |  | 2003
|                                           |  |                                  |  |      |      |                      |  |     
|Epson Precision (H.K.) Limited             |  | Plastic components               |  |      | 13.0 | %                    |  |      | 17.5 | % |  |  | 22.3 | %
|Digidesign, Inc.                           |  | Professional audio equipments    |  |      | *    |                      |  |      | *    |   |  |  | 13.5 | %
|Inter-Tel Incorporated                     |  | Telephones                       |  |      | 20.0 | %                    |  |      | 11.6 | % |  |  | 13.0 | %
|VTech Telecommunications Limited           |  | Telephones and organizers        |  |      | 17.6 | %                    |  |      | 15.3 | % |  |  | 11.6 | %
|Kyocera Mita Industrial Co. (H.K.) Limited |  | Plastic components and  assembly |  |      | 18.7 | %                    |  |      | 13.6 | % |  |  | 10.9 | %



---

|* |  | Less than 10%.
|- |  | --------------

The Companys success will depend to a significant extent on the success
achieved by its customers in developing and marketing their products, some of
which may be new. Many of the industry segments served by the Companys
customers are subject to technological change, which can result in short
product life cycles. The Company could be materially adversely affected if
advances in technology or other factors reduce the marketability of essential
products of its customers or if new products being developed by its customers
do not attain desired levels of acceptance. If the Company was to lose any
customers who account for a material portion of total net sales, or if any of
these customers were to decrease substantially their purchases from the
Company, the Companys revenues, earnings and financial position would be
materially and adversely affected. The Companys dependence on these customers
is expected to continue in the foreseeable future.

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The Companys sales transactions with all of its customers are based on
purchase orders received by the Company from time to time. Except for these
purchase orders, the Company has no written agreements with its customers.
Sales of plastic parts and metallic products are primarily made on credit
terms, with payment in Hong Kong dollars expected within 30 to 60 days of
shipment. Sales of electronic products are typically based on letters of
credit and are payable in United States dollars. To date the Company has not
experienced any significant difficulty in collecting accounts receivable on
credit sales. Management communicates regularly with credit sale customers and
closely monitors the status of payment and in this way believes it has kept the
default rate low. Additionally, plastic parts deliveries are made in several
installments over a lengthy period of time, which permits the Company to
withhold delivery in the event of any delinquency in payment for past
shipments. While the Company has not experienced any difficulty in being paid
by its major customers, there can be no assurance that the Companys favorable
collection experience will continue in every case or at all. The Company could
be adversely affected if a major customer were unable to pay for the Companys
products or services.

Competition

Management believes that the plastic injection molding, contract
electronic manufacturing and metal molds and accessories industries are each
highly fragmented, although it is not aware of any empirical data defining the
business segments in China. Plastic injection molding and metal molds and
accessories manufacturing are characterized by a large number of relatively
small operators and divisions of larger companies and contract electronic
manufacturing by numerous independent manufacturers whose capabilities are
evaluated by customers against each other and against the merits of in-house
production. Competition in each industry is intense and many competitors in
each industry are larger and have greater financial and other resources than
the Company.

The Company believes that competition for plastic injection molding,
contract electronic manufacturing and metal molds and parts manufacturing
businesses are based on price, quality, service and the ability to deliver
products in a timely and reliable basis. The Company believes that it competes
favorably in each of these areas in each business segment.

Patents, Licenses and Trademarks

The Company has no patents, trademarks, licenses, franchises, concessions
or royalty agreements that are material to its business.

Seasonality

For information concerning the seasonality of the Companys business, see
Seasonality included under Item 5 Operating and Financial Review and
Prospects.

Organizational Structure

The chart below illustrates the organizational structure of the Company
and its active subsidiaries at March 31, 2003.

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(ORGANIZATIONAL STRUCTURE CHART)

Property, Plants and Equipment

Hong Kong

The Company owns Unit 516-517, Hong Leong Industrial Complex, No. 4 Wang
Kwong Road, Kowloon Bay, Kowloon, Hong Kong and uses these premises for
accounting and logistic support of its plastic injection molding operations in
China. In addition, the Company leases from unaffiliated parties Units 514, 515
and 602, Hong Leong Industrial Complex, No. 4 Wang Kwong Road, Kowloon Bay,
Kowloon, Hong Kong for use as an office and warehouse for its plastic injection
molding operations. The total monthly rent under the leases is approximately
$3,000. These leases expire from December 2003 to July 2004.

The Company owns Unit 10-14, 19/F., Kwong Sang Hong Centre, 151-153 Hoi
Bun Road, Kwun Tong, Hong Kong This property has been vacant since July 2002
when the Company contracted its operations in Hong Kong and began having more
administrative and marketing staff travel between Hong Kong and China. The
Company leases from an unaffiliated party Unit 605, Hong Leong Industrial
Complex, No. 4 Wang Kwong Road, Kowloon Bay, Kowloon, Hong Kong, an office
adjacent to its plastic injection offices in Hong Kong for use as a support
office for its electronic and metal operations.

Southern China

In October 2000, the Company acquired under sale and purchase agreement
with third party an aggregate of approximately 112,900 square feet of
manufacturing space at Block G, Wing Village Industrial Estate, Shekou,
Shenzhen, China which was previously leased by the Company for the use of its
plastic injection molding operations. Deswell paid approximately $1,461,000 to
acquire this property.

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At March 31, 2003, the Company leased approximately 295,600 square feet of
manufacturing space at Block A, 1/F-2/F, Block B, 1/F-3/F, Block C, 1/F, Block
D, 1/F-5/F, Block E, 2/F-5/F, Block F, 1/F-5/F, and Block H, G/F and 2/F-5/F
Wing Village Industrial Estate, Shekou, Shenzhen, China which are used for its
plastic injection molding operations. These factory premises are leased from
the local Chinese government and third parties under separate leases expiring
from September 2003 to December 2007. The aggregate monthly rent is
approximately $64,900.

In January 2000, the Company also leased approximately 56,800 square feet
of manufacturing space and 37,100 square feet of ancillary dormitory space at
Huangguan Industrial Estate, Houjie Town, Dongguan, Shenzhen, China, which are
used for its plastic injection molding operations. Additionally, in May and
August 2000, the Company leased approximately 58,100 square fee of
manufacturing space and 22,400 square feet of ancillary dormitory space at
Huangguan Industrial Estate, Houjie Town, Dongguan, Guangzhou, China, which are
used for its plastic injection molding operations. The new premises are
adjacent to the factory leased in January 2000. These premises are leased from
the local Chinese government and a third party under separate leases expiring
from June 2003 to July 2004. The aggregate monthly rental is approximately
$16,000.

The Company leases space at various locations near its plastics
manufacturing factories in Shekou and Dongguan that it uses as dormitories for
factory workers. Management estimates that the space leased for dormitories
approximated 97,200 square feet and 30,600 square feet at March 31, 2003 in
Shekou and Dongguan, respectively. The facilities are leased for a period of
one year, expiring in December 2003. The aggregate monthly rental is
approximately $23,300. The Company has acquired under purchase and sale
agreements with third parties an aggregate of approximately 24,600 square feet
of additional space at various locations near its plastics manufacturing
operations in Shenzhen, which are also used as dormitories for factory workers.

In March 2003, the Company committed to acquire under sale and purchase
agreement with a third party an aggregate of approximately 244,000 square feet
of land and approximately 420,000 square feet of buildings, including six
blocks of dormitory buildings, a canteen, a factory building, a car park and a
guard room, at Cheung On, Dongguan, China, which was previously named Kwan Hong
Building. This property was previously leased by the Company for the use in its
contract electronic and metal manufacturing operations. The land use period is
for 50 years from February 1, 2003 to January 31, 2053. The Company paid
approximately $4,186,000 to acquire this property.

At March 31, 2003, the Company leased approximately



| |  |  | 1,000 square feet of office space in Yee Ho Plaza, Nanshan, Shenzhen, China and                               
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | approximately 22,200 square feet of ancillary dormitory space at
Lan Wang Building, Cheung On, Dongguan, China

for its contract electronic manufacturing operations;



| |  |  | 84,500 square feet of manufacturing and warehouse space in Lan Wang
Building, Cheung On, Dongguan, China
| | - |  | --------------------------------------------------------------------------------------------------------

for both its contract electronic manufacturing and metal manufacturing operations; and



| |  |  | 69,400 square feet of manufacturing space in Kwanta Building, Cheung On, Dongguan, China, and
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | 44,700 square feet of ancillary dormitory space at Lan Wang Building                         

for its contract metal manufacturing operation. These premises are leased from
third parties under separate leases expiring from September 2003 to May 2007.
The aggregate monthly rental is approximately $22,900.

In addition, the Company leases approximately 24,200 square feet of space
at various locations near its contract electronics and metal manufacturing
factories in Dongguan, Shenzhen, which are used as staff quarters. The

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facilities are leased from third parties for periods of one to two years
and expire from April 2003 (and are from month-to-month thereafter) to November
2004. The aggregate monthly rental is approximately $4,100

Management believes that Deswell will be able to renew each of the leases
described above as it expires for periods comparable to the current term.

The Company believes that its existing offices and manufacturing space,
together with manufacturing space in close proximity to its existing facilities
which management believes will be available as needed for limited expansion,
will be adequate for the operation of its business for at least the next two
years.




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Except for statements of historical facts, this section contains
forward-looking statements involving risks and uncertainties. You can identify
these statements by forward looking words including expect, anticipate,
believe seek, estimate. Forward looking statements are not guarantees of
Deswells future performance or results and the Companys actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under the section of
this Report entitled Item 3. Key Information  Risk Factors. This section
should be read in conjunction with the Companys Consolidated Financial
Statements included under Item 18 of this Report.

Operating Results

The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included later in this
Report. The Company prepares its financial statements in accordance with U.S.
GAAP.

General

The Companys revenues are derived from the manufacture and sale of
injection-molded plastic parts and components, electrical products and
subassemblies and metallic molds and accessories. Jetcrown (a wholly owned
subsidiary) carries on the plastics operations whereas Integrated carries out
the electronics operations. The Company acquired a controlling interest in
Integrateds predecessor in October 1992 and has included the results of the
predecessor in its consolidated financial statements from the date of
acquisition. Integrated acquired a 64.9% interest in Kwanta in October 1996 and
the Company has included the results of Kwanta in its consolidated financial
statements since the date of acquisition. In April and July 1999, Integrated
acquired the remaining 35.1% interest in Kwanta. Through December 2002, the
Company owned a 51% interest in Integrated. In January 2003, the Company
increased its interest in Integrated to 71% by purchasing an additional 20%
from its minority shareholders in exchange for the issuance to them of an
aggregate of 251,880 common shares.

The Companys plastics operations are the mainstay of its business and
have accounted for the majority of its sales. The Company carries out all of
its manufacturing operations in Southern China, where it is able to take
advantage of the lower overhead costs and inexpensive labor rates as compared
to Hong Kong. At the same time, the proximity of the Companys factories in
Southern China to Hong Kong permits the Company to manage easily its
manufacturing operations from Hong Kong, facilitates transportation of its
products through Hong Kong and provides the Companys plastic manufacturing
operations with access to electricity from Hong Kong and to nearby water, both
of which resources are needed in abundance to manufacture plastic parts and are
often inadequate elsewhere in China.

The Companys earnings have benefited from favorable overall effective
income tax rates of 2.3% and 3.6% for the years ended March 31, 2001 and 2002,
respectively. The Company is subject to Hong Kong income tax on its income
arising in, or derived from, Hong Kong. For information relating to the
Companys recent settlement of a tax dispute with the Hong Kong Inland Revenue
Department, or IRD, regarding whether Deswell should be assessed additional
taxes on profits derived from activities of certain of its subsidiaries during
the six fiscal years ended March 31, 2002, see the discussion under Year ended
March 31, 2003 Compared to Year Ended March 31, 2002, below.

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Currently, under the Chinese tax system we can obtain tax breaks by
reinvesting profits of certain of our subsidiaries in China. We reinvested a
portion of our profits of $4,000,000, from our Chinese plastic manufacturing
subsidiary for the year ended December 31, 2001 and, we are subject to taxes of
7.5% on these operations for the remaining profits for tax year ended December
31, 2001. For the tax years commencing January 1, 2002 and 2003, the Company
is subject to taxes of 10% on these operations and has made a provision for
taxes for the 2002 tax year on its financial statements at and for the year
ended March 31, 2003.

Certain of the Companys income accrue in tax-free jurisdictions and are
not subject to any income taxes. See Note 8 of Notes to consolidated financial
statements for a further description of income taxes. The Company expects to
continue to benefit from a low overall effective income tax rate in the future,
barring unforeseen changes in tax laws and regulations in the various
jurisdictions in which it operates. See Uncertain applications of Chinese tax
laws could subject us to greater taxes in China included under We face
numerous risks as a result of our operations in China and Hong Kong in Item 3.
Key Information  Risk Factors.

Deswells material operations are generally organized in three segments:
plastic injection molding, or the plastic segment, electronic products
assembling and metallic parts manufacturing. Results from Companys metallic
parts manufacturing operations have not been material to the Companys
operations as a whole and have therefore been combined as the electronic &
metallic segment for the table presentation and discussion below. The Companys
reportable segments are strategic business units that offer different products
and services. The following table sets forth present selected consolidated financial information stated as a
percentages of net sales for each of the three years in the period
ended March 31, 2003.

|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  
|------------------------------------------ |  | ------------------------- | ----- | ------------------------- |  | ------------------------- | ----- | ------- |  | ---------- | ----- | ---------- |  | ------- | ----- | ------- |  | ---------- | ----- | ---------- |  | ------- | ----- | - |  |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                           |  | Year ended March 31, 2001 |       | Year ended March 31, 2002 |  | Year ended March 31, 2003
|                                           |  |                           |       |                           |  |                          
|                                           |  | Plastic                   |       |                           |  |                           |       |         |  |            |       | Plastic    |  |         |       |         |  |            |       |            |  | Plastic |       |   |  |  |       |   |  | 
|                                           |  | Injection-                |       | Electronic                |  |                           |       |         |  | Injection- |       | Electronic |  |         |       |         |  | Injection- |       | Electronic |  |         |       |  
|                                           |  | Molding                   |       | & Metallic                |  |                           |       |         |  | Molding    |       | & Metallic |  |         |       |         |  | Molding    |       | & Metallic |  |         |       |  
|                                           |  | Segment                   |       | Segment                   |  | Total                     |       | Segment |  | Segment    |       | Total      |  | Segment |       | Segment |  | Total     
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |           
|Net sales                                  |  |                           | 100.0 | %                         |  |                           | 100.0 | %       |  |            | 100.0 | %          |  |         | 100.0 | %       |  |            | 100.0 | %          |  |         | 100.0 | % |  |  | 100.0 | % |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of sales                              |  |                           | 58.9  | %                         |  |                           | 74.7  | %       |  |            | 65.1  | %          |  |         | 55.2  | %       |  |            | 78.8  | %          |  |         | 65.3  | % |  |  | 57.0  | % |  |  | 79.4  | % |  |  | 67.1  | %
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  
|Gross profit                               |  |                           | 41.1  | %                         |  |                           | 25.3  | %       |  |            | 34.9  | %          |  |         | 44.8  | %       |  |            | 21.2  | %          |  |         | 34.7  | % |  |  | 43.0  | % |  |  | 20.6  | % |  |  | 32.9  | %
|Selling, general and
administrative        |  |                           | 17.8  | %                         |  |                           | 21.0  | %       |  |            | 19.0  | %          |  |         | 18.8  | %       |  |            | 16.8  | %          |  |         | 18.0  | % |  |  | 19.1  | % |  |  | 14.1  | % |  |  | 16.9  | %
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  
|Operating income                           |  |                           | 23.3  | %                         |  |                           | 4.3   | %       |  |            | 15.9  | %          |  |         | 26.0  | %       |  |            | 4.4   | %          |  |         | 16.7  | % |  |  | 23.9  | % |  |  | 6.5   | % |  |  | 16.0  | %
|Interest expense                           |  |                           | 0.0   | %                         |  |                           | 0.0   | %       |  |            | 0.0   | %          |  |         | 0.0   | %       |  |            | - 0.1 | %          |  |         | 0.0   | % |  |  | 0.0   | % |  |  | 0.0   | % |  |  | 0.0   | %
|Other income, net                          |  |                           | 1.7   | %                         |  |                           | 0.2   | %       |  |            | 1.1   | %          |  |         | 1.4   | %       |  |            | 0.7   | %          |  |         | 1.1   | % |  |  | 1.6   | % |  |  | 0.0   | % |  |  | 0.9   | %
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  
|Income before income and minority interest |  |                           | 25.0  | %                         |  |                           | 4.5   | %       |  |            | 17.0  | %          |  |         | 27.4  | %       |  |            | 5.0   | %          |  |         | 17.7  | % |  |  | 25.5  | % |  |  | 6.5   | % |  |  | 16.9  | %
|Income taxes                               |  |                           | 0.3   | %                         |  |                           | 0.5   | %       |  |            | 0.4   | %          |  |         | 0.9   | %       |  |            | 0.3   | %          |  |         | 0.6   | % |  |  | 4.1   | % |  |  | 4.3   | % |  |  | 4.2   | %
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  
|Income before
minority interests           |  |                           | 24.7  | %                         |  |                           | 4.0   | %       |  |            | 16.6  | %          |  |         | 26.5  | %       |  |            | 4.7   | %          |  |         | 17.1  | % |  |  | 21.4  | % |  |  | 2.2   | % |  |  | 12.7  | %
|Minority interests                         |  |                           | 0.0   | %                         |  |                           | 2.0   | %       |  |            | 0.8   | %          |  |         | 0.2   | %       |  |            | 2.3   | %          |  |         | 1.1   | % |  |  | 0.8   | % |  |  | 2.1   | % |  |  | 1.4   | %
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  
|Net income                                 |  |                           | 24.7  | %                         |  |                           | 2.0   | %       |  |            | 15.8  | %          |  |         | 26.3  | %       |  |            | 2.4   | %          |  |         | 16.0  | % |  |  | 20.6  | % |  |  | 0.1   | % |  |  | 11.3  | %
|                                           |  |                           |       |                           |  |                           |       |         |  |            |       |            |  |         |       |         |  |            |       |            |  |         |       |   |  |  |       |   |  |  |       |   |  |  |       |  

Year ended March 31, 2003 Compared to Year Ended March 31, 2002

Net Sales.The Companys net sales for the year ended March 31, 2003 were
$90,905,000, an increase of $7,585,000 or 9.1% as compared to year ended March
31, 2002. Sales to Inter-Tel Incorporated (Inter-Tel), Kyocera Mita
Industrial Co. (H.K.) Ltd. (Mita), VTech Telecommunications Ltd. (VTech),
Epson Precision (H.K.) Ltd. (Epson) and Digidesign, Inc., the Companys five
largest customers during the year ended March 31, 2003, represented
approximately 71.3% of net sales for the year. See Item 4. Information on the
Company  Major Customers.

The increase in sales during the year ended March 31, 2003 was mainly
related to the increase in sales of plastic segment of $2,403,000 and the
increase in sales of electronic and metallic segment of $5,182,000. This
represented an increase of 5.1% and 14.5%, respectively, as compared with
respective net sales from these segments

23



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in the prior year. The increase in
net sales in both segments
was mainly due to an increase in orders from
existing customers, together with orders from new customers.

Net sales to customers by geographic area are determined by reference to
shipping destinations as directed by the Companys customers. During the year
ended March 31, 2003, sales to China, the United States and Europe and
increased by $6,627,000, $6,574,000 and $3,382,000, respectively, and sales to
Hong Kong and other areas decreased by $8,852,000 and $145,000, respectively,
over levels for the year ended March 31, 2002.

Gross Profit.The gross profit for the year ended March 31, 2003 was
$29,899,000, representing a gross profit margin of 32.9%. This compares with
the overall gross profit and gross profit margin of $28,872,000 or 34.7% for
the year ended March 31, 2002. The slight decrease in gross profit margin
primarily relates to the mix of products sold.

Gross profit in the plastic segment increased by 0.9%, to $21,463,000 or
43.0% of net sales, for fiscal year ended March 31, 2003 compared to
$21,280,000 or 44.8% of net sales, for fiscal 2002.

Gross profit in the electronic & metallic segment increased by 11.1%, to
$8,436,000 or 20.6% of net sales, for fiscal year ended March 31, 2003 compared
to $7,592,000 or 21.2% of net sales, for fiscal 2002. The increase was
primarily attributed to the increase in net sales, despite the slight decrease
in gross profit margin in both segments.

Selling, general and administrative expenses.SG&A expenses for the year
ended March 31, 2003 were $15,354,000, amounting to 16.9% of total net sales,
as compared to $14,939,000 or 17.9% of total net sales for the year ended March
31, 2002.

SG&A expenses in the plastic segment increased by $626,000 or 7.0%, to
$9,557,000 or 19.1% of net sales, for the year ended March 31, 2003 compared to
$8,931,000 or 18.8% of net sales, for fiscal 2002. SG&A expenses in the
electronic & metallic segment decreased by $211,000 or 3.5%, to $5,797,000 or
14.1% of net sales, for fiscal year ended March 31, 2003 compared to $6,008,000
or 16.8% of net sales, for fiscal 2002. The decrease in SG&A in electronic and
metal segment was mainly attributed to the decrease in selling expenses, which
were shifted to the plastic segment.

Operating income.Operating income was $14,545,000 for the year ended
March 31, 2003, an increase of $612,000 or 4.4% as compared with the prior
year. On a segment basis, the operating income of plastic segment decreased
$443,000 to $11,906,000, or 23.9% of net sales, in fiscal 2003 compared to
$12,349,000, or 26.0% in net sales in fiscal 2002. This decrease in operating
income is attributable to the increase in SG&A expenses offsetting the increase
in gross profit described above. The operating income of electronic & metallic
segment increased $1,055,000 to $2,639,000, or 6.4% of net sales in fiscal
2003, compared to $1,584,000 or 4.4% of net sales in fiscal 2002. This
increase in operating income is attributable to the increase in gross profit
and the decrease in SG&A expenses described above.

Income Taxes. During 2003 through July 2003, the Company engaged in
discussions with the Hong Kong Inland Revenue Department, or IRD, regarding
whether Deswell should be assessed taxes on profits derived from activities of
certain of its subsidiaries during the six fiscal years ended March 31, 2002,
which the Company believed were conducted outside of Hong Kong and were not
subject to a profits tax under the Hong Kong Revenue Ordinance. While, based on
consultations with Hong Kong tax experts, Deswell believes that its tax
position for these years was sound and supportable, management nevertheless
concluded that it would be in the Companys best interest to reach an immediate
resolution of the tax issue with the IRD in order to avoid the expenditure of
substantial time, effort and expense involved in proceedings that could extend
years. The resolution also limits the assessment of taxes, interest and/or
penalties that would be incurred if the Company did not prevail or sought to
settle the dispute later. Accordingly, in June 2003 the Company made a
proposal to settle the entire tax dispute and in July 2003, the IRD accepted
the proposal. As a result, a provision of $3,532,000 has been charged to the
Companys consolidated income statements for year ended March 31, 2003. Of the
tax provision of $3,532,000, $2,085,000 was related to the plastic segment and
$1,447,000 was related to the electronic & metallic segment.

Income tax expense was $3,826,000 for the year ended March 31, 2003,
compared to $535,000 for the prior

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year. The increase was primarily the result
of the tax provision of $3,532,000, offset by a provision for a tax refund of
$322,000 resulting from the reinvestment of part of the retained earnings in
one of the Companys plastic
manufacturing subsidiaries in China.

Minority Interest.Minority interests represent a 29% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswells electronics and metallic subsidiaries and a 49% minority interest
in Jetcrown & Kwanasia (OEM) Specialist Limited, the subsidiary conducting
marketing for Deswells plastic and electronic businesses. In January 2003, the
Company acquired an additional 20% interest in Integrated, increasing its
ownership in that subsidiary from 51% to 71%. Despite the decrease in minority
interest in Deswells electronic & metallic segment, the dollar amount of
minority interest increased to $1,288,000 for the year ended March 31, 2003,
from $925,000 for the year ended March 31, 2002, which reflects that both the
electronics and metallic subsidiaries and Deswells marketing subsidiary
generated more net income in the fiscal 2003 as compared to fiscal 2002.

Net Income.Net income was $10,243,000 for the year ended March 31, 2003,
a decrease of $3,081,000 or 23.1%, as compared to the year ended March 31,
2002, and net income as a percentage of net sales decreased to 11.3% from
16.0%. The decrease in net income for fiscal 2003 was primarily the result of
the tax provision of $3.5 million made as a result of the settlement in July
2003 of the tax dispute with the IRD.

Net Income for the plastic segment decreased 18.0% to $10,223,000 for
fiscal 2003 compared to $12,469,000 for fiscal 2002. The decrease in net
income of the plastic segment was mainly the result of the increase in income
taxes described above. Net Income for the electronic & metallic segment
decreased 97.7% to $20,000 for fiscal 2003 compared to $855,000 for fiscal
2002. The decrease in net income of the electronic & metallic segment was
mainly the result of the increase in income taxes and the increase in the
dollar amount of Deswells minority interest in Integrated, as described above.

Year ended March 31, 2002 Compared to Year Ended March 31, 2001

Net Sales.The Companys net sales for the year ended March 31, 2002 were
$83,320,000, an increase of $2,473,000 or 3.1% as compared to year ended March
31, 2001. Sales to Inter-Tel, Mita, VTech and Epson, the Companys four
largest customers during the year ended March 31, 2002, represented
approximately 58.0% of the net sales for the year. See Item 4. Information on
the Company  Major Customers.

The increase in sales during the year ended March 31, 2002 was mainly
related to increases in sales of electronic and metallic products of $4,311,000
offset by a decrease in sales of injection-molded plastic products of
$1,838,000. This represented an increase of 13.7% and a decrease of 3.7%,
respectively, as compared with the net sales during the year ended March 31,
2001. The increase in net sales in the electronics and metallic divisions was
mainly due to an increase in orders from existing customers of these divisions,
together with orders from new customers during the year. The decrease in orders
from customers of our plastics segment was the primary factor accounting for
the decrease in sales in that segment.

During the year ended March 31, 2002, sales to China, the United States,
Europe and other areas increased by $2,797,000, $1,093,000, $2,291,000 and
$599,000, respectively, and sales to Hong Kong and Japan decreased by
$3,867,000 and $440,000, respectively, over levels for the year ended March 31,
2001.

Gross Profit.The overall gross profit for the year ended March 31, 2002
was $28,872,000, representing a gross profit margin of 34.7%. This compares
with the overall gross profit and gross profit margin of $28,251,000 and 34.9%,
respectively, for the year ended March 31, 2001. The absolute and percentage
decrease in the overall gross profit margin was 0.2% and 0.6%, respectively,
for years ended March 31, 2002 and 2001.

Gross profit in the plastic segment increased by 4.9%, to $21,280,000 or
44.8% of net sales, for fiscal year ended March 31, 2002 compared to
$20,290,000 or 41.1% of net sales, for fiscal 2001. The increase was mainly
attributed to increased sales of higher-margin products.

Gross profit in the electronic & metallic segment decreased by 4.6%, to
$7,592,000 or 21.2% of net sales, for fiscal year ended March 31, 2002 compared
to $7,961,000 or 25.3% of net sales, for fiscal 2001. The decrease

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was mainly
attributed to a change in product mix.

Selling, general and administrative expenses.SG&A expenses for the year
ended March 31, 2002 were $14,939,000, amounting to 18.0% of total net sales,
as compared to $15,414,000 or 19.0% of total net sales for the year ended March
31, 2001. The decrease in selling, general and administrative expenses of
$475,000 over the prior year was mainly attributed to the stricter control on
these expenses, primarily in electronic & metallic segment.

SG&A expenses in the plastic segment increased by $143,000 or 1.6%, to
$8,931,000 or 18.8% of net sales, for fiscal year ended March 31, 2002 compared
to $8,788,000 or 17.8% of net sales, for fiscal 2001. SG&A expenses in the
electronic & metallic segment decreased by $618,000 or 9.3%, to $6,008,000 or
16.8% of net sales, for fiscal year ended March 31, 2002 compared to $6,626,000
or 21.0% of net sales, for fiscal 2001.

Operating income.As a result of the increase in sales revenue and a
decrease in selling, general and administrative expenses, operating income was
$13,933,000 for the year ended March 31, 2002, an increase of $1,096,000 or
8.5% as compared with the year ended March 31, 2001.

On a segment basis, the operating income of plastic segment increased
$847,000 to $12,349,000, or 26.0% of net sales, in fiscal 2002 compared to
$11,502,000, or 23.3% in net sales in fiscal 2001. The increase in operating
income is attributable to the increase in gross profit, more than offsetting
the increase in SG&A expenses described above. The operating income of
electronic & metallic segment increased $249,000 to $1,584,000, or 4.4% of net
sales in fiscal 2002, compared to $1,335,000 or 4.2% of net sales in fiscal
2001. The increase in operating income is attributable to the decrease in
SG&A expenses, more than offsetting the decrease in gross profit described
above.

Income Taxes. Income tax expense was $535,000 for the year ended March 31,
2002, compared to $315,000 for the prior year.

Minority Interest.Minority interests represent a 49% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswells electronics and metallic subsidiaries and a 49% minority interest
in Jetcrown & Kwanasia (OEM) Specialist Limited, the subsidiary conducting
marketing for Deswells plastic and electronic businesses, which the Company
established during the year ended March 31, 2002. The increase in minority
interest to $925,000 for the year ended March 31, 2002, from $621,000 for the
year ended March 31, 2001, reflects the fact that the electronics and metallic
businesses generated more net income in the year ended March 31, 2002 as
compared to the prior year.

Net Income.As a result of the above factors, net income was $13,324,000
for the year ended March 31, 2002, an increase of $514,000 or 4.0%, as compared
to the year ended March 31, 2001, and net income as a percentage of net sales
increased slightly to 16.0% from 15.8%.

Net Income for the plastic segment increased 2.3% to $12,469,000 for
fiscal 2002 compared to $12,185,000 for fiscal 2001. The increase in net
income of the plastic segment was mainly the result of a higher gross profit
margin described above. Net Income for the electronic & metallic segment
increased 36.8% to $855,000 for fiscal 2002 compared to $625,000 for fiscal
2001. The increase in net income in the electronic & metallic segment was
mainly the result of the increase in net sales and the reduction in SG&A
expenses, more than offsetting the decreased in gross profit margin described
above.

Seasonality

The following table sets forth certain unaudited quarterly financial
information for the twelve quarters in the three-year period ended March 31,
2003 (in thousands):

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##### Table of Contents



|                 |  |                      |        |      |  |      |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|---------------- |  | -------------------- | ------ | ---- |  | ---- | ------ | -- |  | -- | ------ | -- |  | -- | ------ | -- |  | -- | ------ | -- |  | -- | ------ | -- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | -
|                 |  | Year ended March 31,
|                 |  |                     
|                 |  | 2001                 |        | 2002 |  | 2003
|                 |  |                      |        |      |  |     
|                 |  | Q1                   |        | Q2   |  | Q3   |        | Q4 |  | Q1 |        | Q2 |  | Q3 |        | Q4 |  | Q1 |        | Q2 |  | Q3 |        | Q4
|                 |  |                      |        |      |  |      |        |    |  |    |        |    |  |    |        |    |  |    |        |    |  |    |        |   
|Net sales        |  | $                    | 17,786 |      |  | $    | 24,809 |    |  | $  | 21,376 |    |  | $  | 16,876 |    |  | $  | 21,884 |    |  | $  | 22,189 |    |  | $ | 20,217 |  |  | $ | 19,030 |  |  | $ | 23,305 |  |  | $ | 22,603 |  |  | $ | 25,272 |  |  | $ | 19,725 |  
|Gross profit     |  |                      | 6,255  |      |  |      | 9,155  |    |  |    | 7,619  |    |  |    | 5,222  |    |  |    | 7,523  |    |  |    | 7,564  |    |  |   | 7,225  |  |  |   | 6,560  |  |  |   | 7,447  |  |  |   | 7,733  |  |  |   | 8,473  |  |  |   | 6,246  |  
|Operating income |  |                      | 2,820  |      |  |      | 5,071  |    |  |    | 3,337  |    |  |    | 1,609  |    |  |    | 3,956  |    |  |    | 3,806  |    |  |   | 3,447  |  |  |   | 2,724  |  |  |   | 3,532  |  |  |   | 3,665  |  |  |   | 4,583  |  |  |   | 2,765  |  
|Net income       |  |                      | 2,757  |      |  |      | 4,011  |    |  |    | 3,589  |    |  |    | 2,453  |    |  |    | 3,369  |    |  |    | 3,635  |    |  |   | 3,430  |  |  |   | 2,890  |  |  |   | 3,691  |  |  |   | 3,672  |  |  |   | 3,787  |  |  |   | (907   | )

The first calendar quarter (the fourth quarter of the fiscal year) is
typically the Companys slowest sales period because, as is customary in China,
the Companys manufacturing facilities in China are closed for two weeks for
the Chinese New Year holidays. The Company does not experience any other
significant seasonal fluctuations.

Impact of Inflation

The Company believes that inflation has not had a material effect on its
business. Although the Company has found it difficult to increase the prices
of its products in order to keep pace with inflation, particularly in its
plastics operations, the Company believes that the location of its
manufacturing operations in Southern China has resulted in a lower cost base
which still provides it with a competitive advantage. Accordingly, the Company
is reliant upon increasing its transaction volume in order to compensate for
the effects of inflation.

Exchange Rates

The Company sells most of its products and pays for most components in
either Hong Kong dollars or U.S. dollars. Exchange rate fluctuations have not
had a significant impact on the Companys operating results. Labor cost and
overhead expenses of the Companys Hong Kong operations and China factories are
paid in Hong Kong dollars and renminbi, respectively. The exchange rate of the
Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government
since 1983 at approximately HK$7.80 to $1.00 and accordingly has not
represented a currency exchange risk to the U.S. dollars. The Chinese
government has announced its intention to maintain this fixed exchange rate,
but despite such assurances there has been uncertainty reported in this regard.
There can be no assurance that the Chinese government will continue to maintain
the present currency exchange mechanism and the Company could face increased
currency risks if the current exchange rate mechanism is changed. If the
currency exchange mechanism between the Hong Kong dollar and the U.S. dollar is
changed, the Companys results of operations and financial condition could be
materially adversely affected.

In 1994, China adopted a floating currency system whereby the official
exchange rate is equal to the market rate. Since the market and official Yuan
rates were unified, the value of the Yuan against the dollar has been
essentially stable, with an average rate of 8.28 Yuan per $1.00 during
Deswells fiscal years ended March 31, 2001, 2002 and 2003. The Company
believes, because its Chinese operations presently are confined to
manufacturing products for export or for customers in China that are controlled
by foreign investors and which pay the Company in Hong Kong dollars, that the
current economic climate in China should not have a direct adverse impact on
the Companys business.

The Company did not hedge its currency risk during the years ended March
31, 2001, 2002 or 2003 and at March 31, 2003, the Company had no open forward
currency contracts. The Company continues to review its hedging strategy and
there can be no assurance that hedging techniques implemented by the Company
will be successful or will not result in charges to the Companys results of
operations.

Liquidity and Capital Resources

For the year ended March 31, 2003, net cash generated from operations
totaled $15,781,000, including net income of $10,243,000 and depreciation and
amortization of $4,692,000. Accounts receivable decreased by $161,000, and
inventories increased by $1,559,000, over levels at March 31, 2002, primarily
as a result of better controls over customers credit and the general increase
in business activities. Accounts payable increased by $2,060,000 over March
31, 2002, primarily because of the increase materials purchases resulting from
the increase in net sales. For the year ended March 31, 2002, net cash
generated from operations totaled $18,203,000, including
net income of $13,324,000 and depreciation and amortization of $4,918,000.
Accounts receivable and inventories

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increased by $1,111,000 and $1,191,000,
respectively, over levels at March 31, 2001, primarily as a result of increases
in sales and the general increase in business activities. Accounts payable
increased by $3,309,000 over the March 31, 2001 level.

Net cash used in investing activities amounted to $9,111,000 and
$4,994,000 for the years ended March 31, 2003 and 2002, respectively. Capital
expenditures during these periods totaled $9,731,000 and $4,397,000,
respectively, and were financed by cash generated from operations during each
year. The capital expenditure primarily related to the construction of our new
Dongguan manufacturing plant and acquisition of plant and machinery for the
Companys production facilities in China. Cash of $495,000 was released as
security for the short-term borrowing facilities during the year ended March
31, 2003.

Net cash used in financing activities for the years ended March 31, 2003
and 2002 was $3,804,000 and $7,005,000, respectively. Net cash used in
financing activities during the year ended March 31, 2003 was primarily to fund
the Companys dividend payments to its shareholders of $6,687,000, dividend
payments to minority shareholders of subsidiaries of $851,000 and repayment of
short-term bank borrowings of $482,000 netting off the proceeds of $4,217,000
from the exercise of stock options from directors and employees. Net cash used
in financing activities during the year ended March 31, 2002 was primarily to
fund the Companys dividend payments to its shareholders and to repurchase
51,500 common shares of the Company for $564,000, netting off the short-term
bank borrowings of $482,000, the proceeds of $243,000 from the exercise of
stock options from employees and $63,000 contribution from minority
shareholders of a subsidiary.

As a consequence of the fixed exchange rate between the Hong Kong dollar
and the U.S. dollar, interest rates on Hong Kong dollar borrowings are similar
to U.S. interest rates. The Hong Kong Prime Rate fluctuated during the year
ended March 31, 2003, decreasing from 5.125% at the beginning of the year to
5.0% at March 31, 2003.

At March 31, 2003, the Company had cash and cash equivalents of
$34,400,000 and committed credit facilities of $20,839,000, of which none had
been used. The Company also had restricted cash of $2,366,000 and leasehold
land and buildings of $1,318,000, which were pledged as collateral for those
credit facilities and cash of $21,000 pledged as deposit for customs duty in
Dongguan, China. The Company expects that working capital requirements and
capital additions will continue to be funded through cash on hand and
internally generated funds. The Companys working capital requirements are
expected to increase in line with the growth in the Companys business. The
Company had capital commitments for construction of our Dongguan plastic
injection-molding manufacturing plant, purchase of plant and machinery and
purchase of our Dongguan electronic & metallic manufacturing plant of
$6,099,000 as of March 31, 2003. The Company expects that internally generated
funds will be sufficient to satisfy its cash needs for at least the next 12
months. The Company plans to fund the payment of its tax settlement with the
IRD discussed in Operating Results  Year ended March 31, 2003 Compared to
Year Ended March 31, 2002, above and which resulted in a provision of
$3,532,000 to the Companys consolidated income statements for the year ended
March 31, 2003 with cash on hand. Deswell expects to make the payment in
September 2003.

At March 31, 2003, the Company was obligated under operating leases
requiring minimum rentals of $3,259,000 as follows:

|                         |  |                       |       |      |  |      |     |      |  |      |     |            |  |   |     |  |  |   |     |  |  |          |  | 
|------------------------ |  | --------------------- | ----- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---------- |  | - | --- |  |  | - | --- |  |  | -------- |  | 
|                         |  | (In thousands)       
|                         |  | Year ending March 31,
|                         |  |                      
|                         |  |                       |       |      |  |      |     |      |  |      |     |            |  |   |     |  |  |   |     |  |  | 2009 and
|                         |  | 2004                  |       | 2005 |  | 2006 |     | 2007 |  | 2008 |     | thereafter
|                         |  |                       |       |      |  |      |     |      |  |      |     |           
|Operating lease payments |  | $                     | 1,220 |      |  | $    | 662 |      |  | $    | 550 |            |  | $ | 540 |  |  | $ | 287 |  |  | $ nil   

To date, the Company has generated sufficient funds from its operating
activities to finance its operations and there has been little need for
external financing. The Company had no outstanding short-term borrowings or
long-term debt at March 31, 2003 and outstanding short-term borrowings of
$482,000 and no long-term debt at March 31, 2002.

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Critical Accounting Policies

The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates its
estimates and judgments, including those related to inventories and the
valuation of long-lived assets. The Company bases its estimates and judgments
on historical experience and on various other factors that the Company believes
are reasonable. Actual results may differ from these estimates under different
assumptions or conditions.

The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the Companys consolidated
financial statements.

Inventories  Inventories, consisting of raw materials, work-in-progress
and finished goods, are stated at the lower of cost or market with cost
determined using the first-in, first-out method. The Company makes certain
obsolescence and other assumptions to adjust inventory based on historical
experience and current information. The Company writes down inventory for
estimated obsolete or unmarketable inventory equal to the difference between
the costs of inventory and estimated market value, based upon assumptions about
future demand and market conditions. These assumptions, although consistently
applied, can have a significant impact on current and future operating results
and financial position.

Valuation of long-lived assets - The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including other
intangible assets subject to amortization, when events and circumstances
warrant such a review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost to dispose.

Recent Changes in Accounting Standards

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment of FASB
Statement No. 123 (SFAS 148). This Statement provides alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock based compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entitys accounting policy decisions with
respect to stock-based employee compensation. Further, SFAS 148 amends
Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial information. SFAS
148 is effective for our financial statements beginning April 1, 2002. The
Company has not determined whether it will voluntarily change to the fair value
based method of accounting for stock-based compensation.

On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 changes the accounting for certain financial instruments
that, under previous guidance, could be classified as equity or mezzanine
equity, by now requiring those instruments to be classified as liabilities (or
assets in some circumstances) in the statement of financial position. Further,
SFAS 150 requires disclosure regarding the terms of those instruments and
settlement alternatives. SFAS 150 affects an entitys classification of the
following freestanding instruments: mandatory redeemable instruments, financial
instruments to repurchase an entitys own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to
settle by issuing a variable number of its shares or other equity instruments
based solely on (a) a fixed monetary amount known at inception or (b) something
other than changes in its own equity instruments. SFAS 150 is effective for
periods beginning after June 15, 2003. The Companys adoption of this
interpretation is not expected to have an effect on its consolidated financial
statements.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a

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guarantor to
recognize, at the inception of a qualified guarantee, a liability for fair
value of the obligation undertaken
in issuing the guarantee. FIN 45 is effective on a prospective basis for
qualified guarantees issued or modified after March 31, 2003. Management does
not expect the adoption of this Interpretation to have a material impact on the
Companys financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 explains how to
identify variable interest entities and how an enterprise assesses its interest
in a variable interest entity to decide whether to consolidate that entity.
This Interpretation requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. FIN 46 is effective
immediately for variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. Management does not expect the adoption of this Interpretation to
have a material impact on the Companys financial position or results of
operation.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The directors and executive officers of the Company at August 28, 2003 are
as follows:

|                            |  |     |    |                          |  |                                                                                                                                                                           
|--------------------------- |  | --- | -- | ------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                        |  | Age |    | Position(s) with Company
|                            |  |     |    |                         
|Lau Pui Hon (Richard Lau)   |  |     | 58 |                          |  | Chief Executive Officer and Chairman of the
Board of Directors                                                                                                            
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Li Chin Pang (C. P. Li)     |  |     | 57 |                          |  | Executive Director and General Manager of
Manufacturing and Administration for Plastic
Operations, Chief Financial Officer, Secretary
and Member of the Board of Directors
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Leung Chi Wai (C. W. Leung) |  |     | 48 |                          |  | Executive Director of Engineering for Plastic
Operations and Member of the Board of Directors                                                                             
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Lee Shu Kwan (S. K. Lee)    |  |     | 57 |                          |  | Director of Administration and Marketing for
Electronic Operations                                                                                                        
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Tam Man Chi (M. C. Tam)     |  |     | 53 |                          |  | Director of Engineering and Manufacturing for
Electronic Operations                                                                                                       
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Dickson Lam                 |  |     | 61 |                          |  | Director of Marketing for Plastic and
Electronics Operations                                                                                                              
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Eliza Y. P. Pang            |  |     | 41 |                          |  | Financial Controller                                                                                                                                                      
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Hung-Hum Leung              |  |     | 57 |                          |  | Member of Board of Directors and Audit Committee                                                                                                                          
|                            |  |     |    |                          |  |                                                                                                                                                                           
|Allen Yau-Nam Cham          |  |     | 56 |                          |  | Member of Board of Directors and Audit Committee                                                                                                                          

Richard Lau. Mr. Lau has served as Chief Executive Officer and Chairman
of the Board of Directors of the Company and its predecessors since their
inception in 1987.

C. P. Li.Mr. Li has served the Company as a Member of the Board of
Directors and in various executive capacities with the Company and its
predecessors since their inception in 1987. He became Secretary of the Company
in February 1995 and Chief Financial Officer in May 1995. As Executive Director
and General Manager of Manufacturing and Administration for Plastic Operations,
Mr. Li is in charge of the day-to-day manufacturing and administrative
operations for the Companys plastic products. Mr. Li received his Bachelor of
Science degree from Chun Yan Institute College, Taiwan in 1967.

C. W. Leung.Mr. Leung has served the Company as a Member of the Board of
Directors and in various executive capacities with the Company and its
predecessors since their inception in 1987. As Executive Director of
Engineering for Plastic Operations, Mr. Leung is in charge of the mold division
and engineering for the Companys plastic manufacturing operations.

S. K. Lee. Mr. Lee has served as Director of Administration and Marketing
for Electronic Operations since the Company acquired its majority interest in
Kwanasia, Integrateds predecessor, in 1992 and has served as the Chief
Executive Officer of Kwanasia and Integrated since Kwanasias inception in
1986. As Director of Administration and Marketing for Electronic Operations,
Mr. Lee is in charge of the Companys day-to-day administrative and marketing
operations for electronic products. Mr. Lee received his Bachelor of Science
degree in Electronic Engineering from National Taiwan University in 1967.

M. C. Tam.Mr. Tam has served as Director of Engineering and Manufacturing
for Electronic Operations since the Company acquired its majority interest in
Kwanasia, Integrateds predecessor, in 1992 and has served in a similar
capacity for Kwanasia and Integrated since Kwanasias inception in 1986. As
Director of Engineering and Manufacturing for Electronic Operations, Mr. Tam is
in charge of the Companys day-to-day contract manufacturing activities for
electronic products. Mr. Tam received his Bachelor of Science degree with a
major in physics and minor in electronics from the Chinese University of Hong
Kong in 1973.

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Dickson Lam. Mr. Lam joined the Company as Director of Marketing in April
1990 and assumed the title of Director of Marketing for Plastic and Electronic
Operations in August 2001. From 1983 until joining the Company, Mr. Lam managed
Heng Shing Industrial Company, his own plastics manufacturing company, located
in Hong Kong.

Eliza Y. P. Pang. Ms. Pang, a registered fellow member of The Association
of Chartered Certified Accountants, joined the Company as Financial Controller
in January 1995. Prior to joining the Company, Ms. Pang worked for three and
one-half years as Accounting Officer and Accountant in the Open Learning
Institute and a textile manufacturing company in Hong Kong. She also worked for
six years in the audit department of two multinational accounting firms, KPMG
and Ernst & Young in Hong Kong. Ms. Pang received her Professional Diploma in
Accountancy and her MBA degree from The Hong Kong Polytechnic University in
1985 and 1996, respectively.

Hung-Hum Leung.Mr. Leung has been a director of the Company and member
of the Audit Committee since December 1999. Mr. Leung has over 25 years of
experience in the manufacture of electronic products. Mr. Leung was the founder
of Sharp Brave Holdings Ltd., a Hong Kong public company listed on the Hong
Kong Stock Exchange, and from 1991 to 1995 served as the Chairman of Sharp
Brave Holdings Ltd. Since 1995, Mr. Leung has been an independent consultant to
the electronics industry. He received his Bachelor of Science degree in Physics
from the National Taiwan University in 1971.

Allen Yau-Nam Cham. Mr. Cham has been a director of the Company and member
of the Audit Committee since August 2003. Mr. Cham has been the Managing
Director and shareholder of Kwong Fat Hong (Securities) Limited since 1995. He
has over 20 years of experience in the securities industry. He is a Certified
General Accountant in Canada. He obtained his Bachelor of Science degree from
St. Marys University, Halifax, Canada, Bachelor of Engineering (Electrical)
degree from Nova Scotia Technical College, Halifax, Canada and Master of
Business Administration degree from University of British Columbia, Canada.

No family relationship exists among any of the named directors, executive
officers or key employees. No arrangement or understanding exists between any
director or officer and any other persons pursuant to which any director or
executive officer was elected as a director or executive officer of the
Company.

Compensation of Directors and Senior Managers

Executive Officers

The aggregate amount of compensation (including non-cash benefits) paid by
the Company and its subsidiaries during the year ended March 31, 2003 to all
directors and officers as a group for services in all capacities was
approximately $2,879,000. This excludes amounts paid by the Company to
shareholders as dividends during the year ended March 31, 2003.

Directors

Effective August 1, 2003, directors who are not employees of the Company
or any of its subsidiaries are paid $2,500 per month for services as a
director, respectively, and are reimbursed for all reasonable expenses incurred
in connection with services as a director.

Board Practices

The directors of the Company are elected at its annual meeting of
shareholders and serve until their successors take office or until their death,
resignation or removal. The executive officers serve at the pleasure of the
Board of Directors of the Company.

The Audit Committee meets from time to time to review the financial
statements and matters relating to the audit and has full access to management
and the Companys auditors in this regard. The Audit Committee recommends the
engagement or discharge of the Companys independent accountants, consults on
the adequacy of

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the Companys internal controls and accounting procedures and reviews and
approves financial statements and reports. Deswells audit committee consists
of Messrs. Hung-Hum Leung and Allen Yau-Nam Cham.

The Company does not have a compensation or remuneration committee.

Employees

At March 31, 2003, the Company employed 4,065 persons on a full-time
basis, of which 22 were located in Hong Kong and 4,043 in China. Of the
Companys employees 2,681, 903 and 481 were engaged in plastic injection
molding manufacturing, contract electronic manufacturing and metal molds and
parts manufacturing, respectively, at March 31, 2003. The Company has not
experienced significant labor stoppages. Management believes that relations
with the Companys employees are satisfactory.

Share Ownership

Share Ownership of Directors and Senior Management

For information concerning the beneficial ownership of the Companys
common shares by Directors and Senior Management and major shareholders, see
Item 7 of this Report.

Employee Stock Option Plans

In 1995, the Company adopted its 1995 Stock Option Plan permitting the
Company to grant options to purchase up to 675,000 common shares to employees,
officers, directors and consultants of the Company. On September 29, 1997, the
Companys Board of Directors and shareholders approved an increase of 366,000
shares in the number of shares that can be optioned and sold under the Option
Plan bringing to a total of 1,041,000 shares the number of common shares that
can be optioned and sold under the 1995 Stock Option Plan. On August 15, 2001
the Board approved the adoption of the 2001 Stock Option Plan permitting the
Company to grant options to purchase up to an additional 750,000 common shares
to employees, officers, directors and consultants of the Company. On January
7, 2002 shareholders approved the 2001 plan. The Companys option plans are
administered by the Board of Directors, which determines the terms of options
granted, including the exercise price, the number of shares subject to the
option and the options exercisability. The exercise price of all options
granted under the option plans must be at least equal to the fair market value
of such shares on the date of grant. The maximum term of options granted under
the option plans is 10 years.

At August 28, 2003, options to purchase an aggregate of 1,791,000 Common
Shares had been granted under the option plans, options to purchase an
aggregate of 595,500 Common Shares were outstanding and no options to purchase
Common Shares were available for future grant under the option plans.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Except as disclosed in the footnotes to the table below with respect to
Leesha Holdings Limited (Leesha), the Company is not directly owned or
controlled by another corporation or by any foreign government. The following
table sets forth, as of August 28, 2003, the beneficial ownership of the
Companys Common Shares by each person known by the Company to beneficially own
5% or more of the Common Shares of the Company and by each of the Directors and
Senior Management of the Company who beneficially own in excess of one percent
of the Companys Common Shares.

|                                    |  |                        |           |         |  |  |      |  
|----------------------------------- |  | ---------------------- | --------- | ------- |  |  | ---- | -
|                                    |  | Number of shares      
|                                    |  | beneficially
owned (1)
|                                    |  |                       
|Name of beneficial owner            |  |                        |           |         |  |  |      |  
|or identity of group                |  | Amount                 |           | Percent
|                                    |  |                        |           |        
|Richard Lau                         |  |                        | 2,764,815 | (2)     |  |  | 29.7 | %
|C. P. Li                            |  |                        | 2,761,215 | (3)     |  |  | 29.6 | %
|C. W. Leung                         |  |                        | 2,644,565 | (4)     |  |  | 28.5 | %
|Leesha Holdings Ltd.                |  |                        | 2,302,500 | (5)     |  |  | 25.3 | %
|Micropower Enterprises Limited      |  |                        | 682,500   |         |  |  | 7.5  | %
|Royce & Associates, Inc. (6)        |  |                        | 842,150   | (6)     |  |  | 9.3  | %
|FMR Corp./ Edward C. Johnson 3d (7) |  |                        | 840,150   | (7)     |  |  | 9.2  | %
|S. K. Lee                           |  |                        | 125,940   |         |  |  | 1.4  | %
|M. C. Tam                           |  |                        | 125,940   |         |  |  | 1.4  | %
|Dickson Lam                         |  |                        | *         |         |  |  | *    |  
|Eliza Y. P. Pang                    |  |                        | *         |         |  |  | *    |  
|Hung-Hum Leung                      |  |                        | *         |         |  |  | *    |  
|Allen Yau-Nam Cham                  |  |                        | *         |         |  |  | *    |  



---

|* |  | Less than 1%.
|- |  | -------------

(1)  Based on 9,103,085 Common Shares outstanding on August 28, 2003. However,
in accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934,
Common Shares not outstanding but which are the subject of currently
exercisable options have been considered outstanding for the purpose of
computing the percentage of outstanding Common Shares owned by the listed
person holding such options, but are not considered outstanding for the purpose
of computing the percentage of Common Shares owned by any of the other listed
persons.

(2)  Consists of 2,302,500 Common Shares held of record by Leesha, 252,315
Common Shares held of record by Mr. Lau and options to purchase 210,000 Common
Shares granted to Mr. Lau under the Companys stock option plans. Mr. Laus
options are exercisable at a weighted average exercise price of $11.33 per
share until January 9, 2012. As a director of Leesha, Mr. Lau shares the voting
and investment power of the Common Shares held by Leesha.

(3)  Consists of 2,302,500 Common Shares held of record by Leesha, 248,715
Common Shares held of record by Mr. Li and options to purchase 210,000 Common
Shares granted to Mr. Li under the Companys stock option plans. Mr. Lis
options are exercisable at a weighted average exercise price of $11.33 per
share until January 9, 2012. As a director of Leesha, Mr. Li shares the voting
and investment power of the Common Shares held by Leesha.

(4)  Consists of 2,302,500 Common Shares held of record by Leesha, 177,065
Common Shares held of record by Mr. Leung and options to purchase 165,000
Common Shares granted to Mr. Leung under the Companys stock option plans. Mr.
Leungs options are exercisable at a weighted average exercise price of $11.33
per share until January 9, 2012. As a director of Leesha, Mr. Leung shares the
voting and investment power of the Common Shares held by Leesha.

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(5)  Leesha is an investment holding company organized as an International
Business Company under the laws of the British Virgin Islands. Messrs. Lau, Li
and Leung, who are its directors, wholly own Leesha in equal shares. Among
other investments, Leesha owns the 2,302,500 Common Shares of Deswell, which
were transferred to Leesha by Messrs. Lau, Li and Leung after Deswells initial
public offering.

(6)  Based on a Schedule 13G/A filed with the SEC on February 11, 2003.

(7)  Based on a Schedule 13G filed with the SEC on August 12, 2002.

The following table reflects the percentage ownership of Deswells common
shares by its major shareholders during the past three years:

|                                                    |  |                             |      |               |  |               |      |   |  |  |      |  
|--------------------------------------------------- |  | --------------------------- | ---- | ------------- |  | ------------- | ---- | - |  |  | ---- | -
|                                                    |  | Percentage Ownership (1) at
|                                                    |  |                            
|                                                    |  | June 30, 2001               |      | June 28, 2002 |  | Aug. 28, 2003
|                                                    |  |                             |      |               |  |              
|Richard Lau                                         |  |                             | 32.1 | %             |  |               | 33.2 | % |  |  | 29.7 | %
|C. P. Li                                            |  |                             | 32.1 | %             |  |               | 33.4 | % |  |  | 29.6 | %
|C. W. Leung                                         |  |                             | 31.4 | %             |  |               | 33.0 | % |  |  | 28.5 | %
|Leesha Holdings Ltd.                                |  |                             | 27.4 | %             |  |               | 27.2 | % |  |  | 25.3 | %
|Nam Tai Electronics, Inc.                           |  |                             | 8.9  | %             |  |               |     |   |  |  |     |  
|Micropower Enterprises Limited                      |  |                             | 8.1  | %             |  |               | 8.1  | % |  |  | 7.5  | %
|Royce & Associates, Inc.                            |  |                             | 5.2  | %             |  |               | 6.3  | % |  |  | 9.3  | %
|FMR Corp./ Edward C. Johnson
3d/ Abigail P. Johnson |  |                             |     |               |  |               |     |   |  |  | 9.2  | %



---

|(1)      Based on 8,396,896, 8,470,246 and 9,103,085 common shares outstanding on
June 30, 2001, June 28, 2002 and June 30, 2003, respectively. However, in
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934,
common shares not outstanding but which are the subject of currently
exercisable options have been considered outstanding for the purpose of
computing the percentage of outstanding common shares owned by the listed
person holding such options, but are not considered outstanding for the purpose
of computing the percentage of common shares owned by any of the other listed
persons.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All of the holders of the Companys common shares (including Deswells
major shareholders) have equal voting rights with respect to the common shares
held. As of June 30, 2003, approximately 30 holders of record, who, management
believes, held for more than 3,000 beneficial owners, held Deswells common
shares. According to information supplied to the Company by its transfer agent,
23 holders of record with addresses in the United States held approximately 5.2
million of our outstanding common shares.

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Related Party Transactions

During the years ended March 31, 2001 and 2002, sales to Nam Tai
Electronic (Shenzhen) Co. Limited (Namtai Shenzhen) amounted to less than 10%
of the Companys total sales. Namtai Shenzhen is an indirect wholly owned
subsidiary of Nam Tai Electronics, Inc. (Nam Tai), which, in September 2000,
purchased an aggregate of 750,000 Common Shares of the Company, equal to
approximately 9% of the Companys then outstanding Common Shares. During the
year ended March 31, 2002, Nam Tai sold its shares of the Company in the open
market.

In the past, the Company rented staff quarters in China from Mr. S. K.
Lee and Mr. M. C. Tam, who are executive officers of the Company and minority
shareholders of Integrated International Limited, the parent holding company of
the Companys electronic and metallic subsidiaries. The charges for these
premises approximate the amount negotiable, in managements opinion, on an arms
length basis. Rentals charged by these parties to the Company are summarized
as follows:

|                                                |  |                      |        |      |  |      |        |  |  |     |  | 
|----------------------------------------------- |  | -------------------- | ------ | ---- |  | ---- | ------ |  |  | --- |  | 
|                                                |  | Year ended March 31,
|                                                |  |                     
|                                                |  | 2001                 |        | 2002 |  | 2003
|                                                |  |                      |        |      |  |     
|Rent charged by Mr. S. K. Lee and Mr. M. C. Tam |  | $                    | 12,000 |      |  | $    | 12,000 |  |  | Nil

In January 2003, the Company issued to each of Messrs. Lee and Tam 125,940
of its Common Shares, or an aggregate of 251,880 Common Shares, to acquire an
additional 20% (10% from each of Messrs. Lee and Tam) shareholding interest in
Integrated raising the Companys interest in Integrated to 71% of its
outstanding shares. Messrs. Lee and Tam continue as minority shareholders of
Integrated each owning 12% (together 24%) of its outstanding shares and
continue to serve as the executives in charge of administrative and
manufacturing operations for the Companys contract manufacturing operations
for electronic products and subassemblies. At the time of the closing of this
transaction on January 20, 2003, the market value of the 251,880 Deswell shares
issued to Messrs. Lee and Tam was $4,423,000, based on the closing price on
that date of $17.56 per share as reported on The Nasdaq Stock Market. During
the years ended March 31, 2001, 2002 and 2003, Integrated made distributions to
its shareholders, including Deswell, aggregating $nil, $nil and $1,609,000,
respectively, with Messrs. Lee and Tams share of these distributions
aggregating $nil, $nil and $708,000, respectively.

During the year ended March 31, 2002, the Company organized Jetcrown &
Kwanasia (OEM) Specialist Limited (J&K OEM), a limited liability Hong Kong
Company, to conduct marketing for Deswells plastic and electronics businesses.
The capital stock of J&K OEM is owned 51% by Deswell, 39% by Dickson Lam,
Deswells Director of Marketing for plastic and electronic products, and 10% by
two other individuals, who are employees of J&K OEM. During the years ended
March 31, 2002 and 2003, J&K OEM made distributions to its shareholders,
including Deswell, aggregating $nil and $129,000, respectively, with Mr. Lams
share of these distributions amounting to $nil and $50,000, respectively.

During the year ended March 31, 2001, the Company acquired an automobile
from Unicrown Limited for $206,000, which, management believes, approximated
its fair value. Mr. Richard Lau, a director of the Company, has a beneficial
interest in that company.

Since the Company completed its initial public offering in the United
States, it has been the policy of the Company that all transactions between the
Company and any interested director or executive officer be approved by a
majority of the disinterested directors and be on terms that are no more
favorable than would be available from an independent third party.

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ITEM 8. FINANCIAL INFORMATION

Financial Statements

Our Consolidated Financial Statements are set forth under Item 18.
Financial Statements.

Legal Proceedings

The Company is not involved in any material legal proceedings.

Exports Sales

Information regarding our export sales is provided in Item 4. Information
on the Company  Business Overview  Customers and Marketing.

Dividend Policy

Dividends paid under Hong Kong law are tax free to the recipient. While
the Company had paid dividends to its shareholders prior to its IPO, it
discontinued payment of dividends after the IPO until its new dividend policy
was announced in July 1996. At that time, the Company announced that it planned
to pay cash dividends semi-annually in the form of an interim and final
dividend based on the Companys growth during the preceding year. The Company
announced that dividends would be 25% to 35% of the net earnings of the
preceding year limited, however, by the net cash flow available for future
development. The interim dividend would be based upon the Companys first six
months operating results and would be paid between November and December and
the final dividend would be based upon the Companys second six months of
operations and would be declared and paid between July and August. Under this
dividend policy, the Company declared and paid dividends during the two-year
period ended March 31:



| |  |  | 2001 aggregating $4,710,000, $2,942,000 of which was based on
results for the second six months of the year ended March 31, 2000 and
$1,768,000 of which was based on results for the first six months of
the year ended March 31, 2001; 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 2002 aggregating $7,229,000, $3,193,000 of which was based on
results for the second six months of the year ended March 31, 2001 and
$4,036,000 of which was based on results for the first nine months of
the year ended March 31, 2002.

Commencing with the fiscal year ended March 31, 2003, the Company
announced it would pay cash dividends on a quarterly basis based upon the
Companys quarterly results. Under this dividend policy, the Company declared
and paid dividends during the year ended March 31, 2003 aggregating $6,687,000,
$1,578,000 of which was based on results for the last quarter of the year ended
March 31, 2002 and $5,109,000 of which was based on results for the first three
quarters of the year ended March 31, 2003.

The Company currently plans to continue its quarterly dividend policy as
announced, but such plans and policy for future dividends consist of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Whether
future dividends will be declared will be depended upon the Companys future
growth and earnings, of which there can be no assurance, and the Companys cash
flow needs for future development, which growth, earning or cash flow needs may
be adversely affected by one or more of the factors discussed in Item 3. Key
Information  Risk Factors. Accordingly, there can be no assurance that future
cash dividends on the Companys common shares will be declared, what the
amounts of such dividends will be or whether such dividends, once declared for
a specific period will continue for any future period or at all.

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ITEM 9. THE LISTING

The Companys common shares are traded exclusively on The Nasdaq National
Market under the symbol DSWL.

The following table sets forth the high and low sale prices as reported by
The Nasdaq National Market for each of the last five years ended March 31
(adjusted for the Companys three-for-two stock split effected in July 2002):

|               |  |      |        |     |  |   |       | 
|-------------- |  | ---- | ------ | --- |  | - | ----- | 
|Year Ended     |  | High |        | Low
|               |  |      |        |    
|March 31, 2003 |  |      | $18.15 |     |  | $ | 11.00 | 
|March 31, 2002 |  |      | 14.75  |     |  |   | 8.75  | 
|March 31, 2001 |  |      | 12.00  |     |  |   | 8.17  | 
|March 31, 2000 |  |      | 12.33  |     |  |   | 5.29  | 
|March 31, 1999 |  |      | 14.46  |     |  |   | 4.00  | 

The following table sets forth the high and low sale prices as reported by
The Nasdaq National Market during each of the quarters in the two-year period
ended March 31, 2003 and the average daily trading volume during each of the
quarters (adjusted for the Companys three-for-two stock split effected in July
2002)

|                   |  |      |       |     |  |           |       |  |  |         |        | 
|------------------ |  | ---- | ----- | --- |  | --------- | ----- |  |  | ------- | ------ | 
|                   |  |      |       |     |  |           |       |  |  | Average
|                   |  |      |       |     |  |           |       |  |  | Daily  
|                   |  |      |       |     |  |           |       |  |  | Trading
|Quarter ended      |  | High |       | Low |  | Volume(1)
|                   |  |      |       |     |  |          
|March 31, 2003     |  | $    | 18.15 |     |  | $         | 14.40 |  |  |         | 6,905  | 
|December 31, 2002  |  |      | 14.75 |     |  |           | 12.65 |  |  |         | 9,882  | 
|September 30, 2002 |  |      | 15.00 |     |  |           | 11.00 |  |  |         | 9,686  | 
|June 30, 2002      |  |      | 15.77 |     |  |           | 12.34 |  |  |         | 8,498  | 
|March 31, 2002     |  |      | 14.75 |     |  |           | 11.33 |  |  |         | 26,516 | 
|December 31, 2001  |  |      | 13.08 |     |  |           | 9.20  |  |  |         | 6,262  | 
|September 30, 2001 |  |      | 11.47 |     |  |           | 9.01  |  |  |         | 3,957  | 
|June 30, 2001      |  |      | 11.57 |     |  |           | 8.75  |  |  |         | 4,119  | 



---

|(1) |  | Determined by dividing the sum of the reported daily volume for the
quarter by the number of trading days in the quarter.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

The following table sets forth the high and low sale prices as reported by
The Nasdaq National Market during each of the most recent six months and the
average daily trading volume during each of the months.

|                |  |      |       |     |  |           |       |  |  |         |        | 
|--------------- |  | ---- | ----- | --- |  | --------- | ----- |  |  | ------- | ------ | 
|                |  |      |       |     |  |           |       |  |  | Average
|                |  |      |       |     |  |           |       |  |  | Daily  
|                |  |      |       |     |  |           |       |  |  | Trading
|Month ended     |  | High |       | Low |  | Volume(1)
|                |  |      |       |     |  |          
|August 31, 2003 |  | $    | 25.75 |     |  | $         | 19.50 |  |  |         | 7,626  | 
|July 31, 2003   |  |      | 20.68 |     |  |           | 17.89 |  |  |         | 14,142 | 
|June 30, 2003   |  |      | 21.52 |     |  |           | 16.62 |  |  |         | 15,401 | 
|May 31, 2003    |  |      | 17.80 |     |  |           | 15.90 |  |  |         | 5,739  | 
|April 30, 2003  |  |      | 17.80 |     |  |           | 15.64 |  |  |         | 5,929  | 
|March 31, 2003  |  |      | 17.49 |     |  |           | 15.18 |  |  |         | 4,899  | 



---

|(1) |  | Determined by dividing the sum of the reported daily volume for the
month by the number of trading days in the month.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

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ITEM 10. ADDITIONAL INFORMATION

Share Capital

Not applicable.

Memorandum and Articles of Association

Objects and Purposes

Our objects and purposes are described in Clause 4 of our Memorandum of
Association and are generally to engage in any act or activity that is not
prohibited under the laws of the British Virgin Islands.

Directors

British Virgin Islands law and our Articles of Association provide that no
agreement or transaction between Deswell and one or more of its directors or
any entity in which any director has a financial interest or to whom any
director is related (including as a director of that other entity) is void or
voidable for this reason only or by reason only that the director is present at
the meeting of directors, or at the meeting of the committee of directors, that
approves the agreement or transaction or that the vote or consent of the
director is counted for the purpose if the material facts of the interest of
each director in the agreement or transaction and his or her interest in or
relationship to any other party to the agreement or transaction are disclosed
in good faith or are known by the other directors and a majority of the
Companys directors (at least one whom is an Independent Director) approve
such transaction. Alternatively, the interest in the transaction may be
disclosed or known to or ratified by the shareholders.* In addition, a director
who has an interest in any particular business to be considered at a meeting of
directors or shareholders may be counted for the purposes of determining
whether the meeting is duly constituted. An Independent Director is defined
in our Articles of Association as a director other than an officer or employee
of Deswell or any of its subsidiaries, a person related to an officer or
employee of Deswell or any of its subsidiaries, a person representing family or
concentrated (more than 10%) holdings of Deswells outstanding voting shares or
any other individual having a relationship which, in the opinion of the
directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.

Our Articles of Association provide that the directors may by a resolution
of directors, fix the emoluments of directors with respect to services to be
rendered in any capacity to the Company.

British Virgin Islands law and our Articles of Association provide that
the management of the business and the control of Deswell shall be vested in
the directors, who in addition to the powers and authorities expressly
conferred by the Articles of Association, may also exercise all such powers,
and do all such acts and things, as may be done by Deswell and are not by the
Articles of Association or British Virgin Islands law expressly directed or
required to be exercised or done by a meeting of shareholders. Our Articles of
Association provide that the directors may by resolution exercise all the
powers of Deswell to borrow money and to mortgage or charge its undertakings
and property or any part thereof, to issue debentures, debenture stock and
other securities whenever money is borrowed or as security for any debt,
liability or obligation of Deswell or of any third party.

British Virgin Islands law and our Memorandum of Association and Articles
of Association do not contain an age limit requirement for our directors. Under
our Articles of Association, no shares are required for directors
qualification.



---

     British
Virgin Islands law does not use the term shareholder or
stockholder but rather refers to holders of shares of a company, like
Deswell, organized under the International Business Companies Act as members.
In this Report, for the convenience of our U.S. holders, we use the term
shareholders rather than members.


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Rights, Preferences and Restrictions of Authorized and Outstanding Shares and
Changes to Rights of Shareholders

Deswell has one class and series of shares authorized or outstanding:
common shares, no par value per share. Our authorized capital consists of
30,000,000 common shares, no par value per share, of which 9,103,085 common
shares were outstanding on August 28, 2003.

Holders of our common shares are entitled to one vote for each whole share
on all matters to be voted upon by shareholders, including the election of
directors. Holders of our common shares do not have cumulative voting rights
in the election of directors. All of our common shares are equal to each other
with respect to liquidation and dividend rights. Holders of our common shares
are entitled to receive dividends if and when declared by our board of
directors out of funds legally available under British Virgin Islands law. In
the event of our liquidation, all assets available for distribution to the
holders of our common shares are distributable among them according to their
respective holdings. Holders of our common shares have no preemptive rights to
purchase any additional, unissued common shares.

Calling Annual General Meetings and Extraordinary General Meetings of
Shareholders.

British Virgin Islands law does not require an international business
company, such as Deswell, to have an annual meeting. Our Articles of
Association do, however, require an annual meeting of shareholders for the
election of directors and for such other business as may come before the
meeting.

Under British Virgin Islands law, unless otherwise provided by a companys
Memorandum of Association or Articles of Association, the directors may call
meetings of shareholders at any time. Our Memorandum and Articles of
Association do not provide otherwise. Under British Virgin Islands law, unless
otherwise provided by a companys Memorandum of Association or Articles of
Association, directors are required to call meetings upon a written request
from shareholders holding more than 50% of outstanding voting shares. Our
Articles of Association provide that meetings of shareholders may be called
only upon a written request from shareholders holding 10% or more of the
outstanding voting shares.

British Virgin Islands law and our Articles of Association state that the
directors may fix the date that notice is given of a meeting of shareholders,
whether extraordinary or annual, as the record date for determining those
shares that are entitled to vote at the meeting.

British Virgin Islands law and our Articles of Association provide that
notice of all meetings of shareholders, stating the time, place and purposes
thereof, shall be given not fewer than seven days before the date of the
proposed meeting to those persons whose names appear as shareholders in our
share register on the date of the notice and are entitled to vote at the
meeting.

Limitations on Share Ownership

British Virgin Islands law and our Memorandum of Association and Articles
of Association do not impose any limitations on the right of anyone to own,
hold or exercising voting rights to our common shares.

Potential Anti-Takeover Deterrence

Neither our Articles of Association nor Memorandum of Association contain
provisions that would have an effect of delaying, deferring or preventing a
change in control of Deswell and that would operate only with respect to a
merger, acquisition or corporate restructuring involving Deswell or any of its
subsidiaries. However, pursuant to our Memorandum and Articles of Association
and pursuant to the laws of the British Virgin Islands, our board of directors
without shareholder approval may amend our Memorandum and Articles of
Association (provided that a majority of our independent directors do not vote
against the amendment). This includes amendments to increase or reduce our
authorized capital stock. Our ability to amend our Memorandum and Articles of
Association without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of Deswell, including a tender
offer to purchase our common shares at a premium over the then current market
price.

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Ownership Information

Neither our Articles of Association nor Memorandum of Association provide
that information about our shareholders, even those owning significant
percentages of our shares, must be disclosed.

Differences from United States Law

The laws of the British Virgin Islands governing the provisions of our
Articles of Association and Memorandum of Association discussed above are not
significantly different than the laws governing similar provisions in the
charter documents of Delaware companies, other than with respect to amending
our Memorandum of Association without shareholder approval. Delaware law
requires shareholders to approve any amendments to a corporations Certificate
of Incorporation.

Material Contracts

The following summarizes each material contract, other than contracts
entered into in the ordinary course of business, to which Deswell or any
subsidiary of Deswell is a party for the two years immediately preceding the
filing of this report. The Reference to an Exhibit is to the exhibits appearing
in Item 19 of this report.

Banking Facilities (Exhibit 4.1)

Date:December 13, 2001

Parties:UFJ Bank Limited (previously known as The Sanwa Bank Limited) (UFJ)
and Jetcrown Industrial Limited (Jetcrown)

Nature of Contract:Renewal of Facility Letter dated December 27, 2000 and
October 27, 2000 whereby Sanwa made available to Jetcrown various uncommitted
banking facilities.

Terms and Conditions:(A) A joint line facility of up to HK$22,000,000
consisting of the following facilities: (i) uncommitted short-term
multi-currency revolving loan facility (ii) overdraft facility (iii) import
facility (provided that the aggregate principal amounts outstanding under the
loan facility and the overdraft facility shall not at any one time exceed
HK$7,800,000); (B) Shipping guarantee facility (under the letter of credit) of
up to HK$8,000,000; (C) Bills negotiation facility (under the letter of credit)
of up to HK$30,000,000; (D) Forward foreign exchange facility of up to
HK$16,000,000.

Consideration: The interest and commissions set forth in the agreement dated
December 13, 2001.

Banking Facilities (Exhibit 4.2)

Date:April 16, 2002

Parties:Standard Chartered Bank (Standard) and Jetcrown

Nature of Contract:Standard made available to Jetcrown various working capital
facilities.

Terms and Conditions:Working Capital Facilities (1) Current Account Overdraft
is HK$3,500,000; (2) Trade Finance Group 1 is HK$10,000,000; (3) Trade Finance
Group 2 is HK$5,000,000; (4) Trade Finance Group 3 HK$5,000,000 (the trade
finance groups are complementary and combined amounts outstanding are not to
exceed HK$10,000,000; combined amounts outstanding of Trade Finance Groups 2
and 3 are not to exceed HK$5,000,000); (5) Treasury Facilities to quote rates
for foreign exchange spot transactions and forward transactions; (6) Corporate
Visa Cards with limits of HK$450,000. The interest rate on all sums advanced
will be payable monthly at the prime rate or HIBOR (the Hong Kong Inter Bank
Offered Rate), whichever is higher. The default rate is 8% per annum over the
prime rate or HIBOR, whichever is higher. The Letters of Credit Opening
Commission, Commission in lieu of Exchange and Commission in lieu of
negotiation of discrepant bills is 1/8% on the first $100,000 and 1/32% on the
balance.

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Consideration:The interest and commissions set forth above.

Banking Facilities (Exhibit 4.3)

Date:May 2, 2003

Parties:Standard and Kwanasia Electronics Co. Ltd. (Kwanasia)

Nature of Contract:Standard to provide Kwanasia with working capital
facilities.

Terms and Conditions:Working Capital Facilities (1) Current Account Overdraft
is HK$1,000,000 ; (2) Trade Finance Group All 9 Discrepant Credit Bills
Negotiated  with recourse) is HK$5,000,000; (3) Trade Finance Group 1 is
HK$5,000,000; (4) Trade Finance Group 2 is HK$4,000,000; (5) Trade Finance
Group 3 HK$4,000,000 (the trade finance groups all, 1, 2 and 3 are
complementary and combined amounts outstanding are not to exceed HK$5,000,000;
combined amounts outstanding of Trade Finance Groups 2 and 3 are not to exceed
HK$4,000,000) (6) Treasury Facilities to quote rates for foreign exchange spot
transactions and forward transactions;. Interest rate on all sums advanced
will be payable monthly in arrears at Prime or HIBOR, whichever is higher.
Default rate of 8% per annum over Prime or HIBOR, whichever is higher will
apply to amounts not paid when due or in excess of agreed facility amounts.
Export bills will be discounted and import bills will be financed at Banks
standard bills finance rate minus 0.25% per annum for Hong Kong Dollar Bills
and at Banks standard bills finance rate for foreign currency bills. All past
due bills shall bear interest at 4% per annum above the rates charged on
regular bills outstanding. Commission on Letters of Credit Opening is 1/4%
on the first $50,000, 1/12% on $50,001-$100,000 and 1/24% on the balance.
Commission in Lieu of Exchange is 1/8%. Commission on Import Acceptance is
1/8% per month.

Consideration:An arrangement fee of HK$20,000. A handling fee in an amount
to be mutually agreed upon will be payable annually if the facilities are
continuing.

Banking Facilities (Exhibit 4.4)

Date:February 10, 2003

Parties:Fortis Bank Asia HK (Fortis) and Kwanasia

Nature of Contract:Fortis to provide Kwanasia with various general banking
facilities.

Terms and Conditions:(1) Current Account Overdraft and/or standby letter of
credit issued on Kwanasias behalf of limit HK$5,000,000; Short-term loan
facilities of HK$3,000,000 with sublimit of the aforementioned OD and standby
LC limit of HK$5,000,000; (2) Import facilities against 100% sales contracts
and/or invoice discounting facilities of limit HK$5,000,000.

Consideration:The interest and commissions set forth in the agreement dated
February 10, 2003. An annual facilities fee of HK$8,000 per annum.

Banking Facilities (Exhibit 4.5)

Date:November 29, 2002

Parties:UFJ Bank Limited (UFJ) and Kwanasia

Nature of Contract:UFJ to provide Kwanasia with various general banking
facilities.

Terms and Conditions:(1) A joint line facility of up to HK$10,000,000
consisting of : (a) uncommitted short-term multi-currency revolving loan
facility of up to HK$7,000,000; (b) overdraft facility of up to HK$3,000,000;
and (c) import facility; provided the aggregate of (i) the total principal
amounts outstanding under the RMB short-term

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##### Table of Contents



revolving loan facility of RMB7,000,000 granted to Dongguan Kwan Hong
Electronics Co., Ltd. by UFJ Bank Limited, Shenzhen Branch and (ii) the total
principal amounts outstanding under the above joint line facility shall not at
any one time exceed HK$10,000,000. (2) Shipping guarantee facility of up to
HK$10,000,000; (3) Bills negotiation facility of up to HK$8,000,000; provided
that house bills from the related companies of Deswell Industries, Inc. and
Jetcrown Industrial Limited are not allowed. (4) Forward foreign exchange
facility of up to HK$8,000,000.

Consideration:The interest and commissions set forth in the agreement dated
November 29, 2002. An arrangement fee of HK$10,000.

Revolving Short-term Renminbi Loan Facility (Exhibit 4.6)

Date:November 28, 2002

Parties:UFJ Bank Limited, Shenzhen Branch (UFJ Shenzhen) and Dongguan Kwan
Hong Electronics Co. Ltd. (Kwan Hong)

Nature of Contract:UFJ Shenzhen to provide Kwan Hong with short-term revolving
RMB loan facility.

Terms and Conditions:Resolving short term Renminbi loan facility of
RMB7,000,000 as daily operating funds to Kwan Hong

Consideration:The interest set forth in the agreement dated November 28,
2002.

Revolving Short-term Renminbi Loan Facility (Exhibit 4.7)

Date:May 6, 2003

Parties:Standard Chartered Bank, Shenzhen Branch (Standard Shenzhen) and
Kwan Hong

Nature of Contract:Standard Shenzhen to provide Kwan Hong with short-term
revolving RMB loan facility to partial finance acquisition of existing factory.

Terms and Conditions:Revolving short-term loan facility of RMB21,000,000.
Tenor is up to 1 year. The loan interest is payable monthly in arrears at the
interest rate permitted by the Peoples Bank of China (i.e. 10% below base
rate announced by PBOC, currently base rate is 5.04% for tenor up to 6 months
and 5.31% for tenor from 6 months up to one year).

Consideration:The bank loan shall be secured by corporate guarantee for
HK$20,000,000 issued by Deswell Industries, Inc.

Tenancy Agreement (Exhibit 4.8)

Date:May 29, 2002

Parties:Shenzhen Shekou Yu Yi Shareholding Company Ltd. (Lessor) and Jetcrown
Industrial (Shenzhen) Limited.

Nature of Contract:Rental of property located at 1/F and 2/F, of Block A, Wing
Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area of the property is 2,051 square
meters. Three-year term, commencing June 1, 2002 to May 30, 2005. Lessor is
responsible for property tax, land use fees and rental housing management fees.
A deposit in the amount of RMB118,668 is required. Lessee can only sublet
with Lessors approval. Lessee should inform Lessor of desire to renew lease
one month before expiration.

Consideration:Rent is RMB45,094 per month.

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Tenancy Agreement (Exhibit 4.9)

Date: May 30, 2003

Parties: Shenzhen Shekou NanShui Enterprises Shareholding (Lessor) and
Jetcrown Industrial (Shenzhen) Ltd. (Lessee)

Nature of Contract: Lease of property located at 2/F to 5/F, Block E, Wing
Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area of 2/F to 5/F is 4,094 square
meters. The rental period is four years, commencing June 1, 2003 to May 31,
2007. Rent for the total property is RMB61,410 per month. The Lessor is
responsible to pay for property tax, land use fees and the rental housing
management fee of the property. The Lessee is responsible for the water,
electricity, cleansing and management charges. A deposit of RMB87,000 is
required. Lessee is not allowed to sublet the property without the Lessors
written agreement. Lessee should inform Lessor of its desire to renew the
lease one month before expiration and Lessee should be given first priority to
renew under the same conditions offered by any third party. The delay charge
on Lessees payment of rent is 3% of the monthly rent multiplied by the number
of days the rent is overdue.

Consideration: Rent of RMB61,410 per month.

Tenancy Agreement (Exhibit 4.10)

Date: April 9 and 11, 2001 (Extension is from May 1 2003 to April 30, 2004)

Parties: Shenzhen Shekou East Empire Industrial Co. Ltd. (Lessor) and Jetcrown
Industrial (Shenzhen) Limited (Lessee).

Nature of Contract: Lease of property located at 2/F-5/F, Block H, Wing
Village Industrial Estate, Shenzhen.

Terms and Conditions: The construction area is 4,120 square meters. The
rental period is two years, commencing May 1, 2001 to April 30, 2003 and
extended further for one year from May 1, 2003 to April 30, 2004. The total
rent for the property is RMB63,860 per month. A deposit of RMB121,540 is
required. The Lessor is responsible to pay for the property tax, land use fees
and the rental housing management fees. The Lessee is responsible for the
water, electricity, cleansing and management charges. The Lessee may not
sublease the property without the written approval of the Lessor. Lessee
should inform Lessor in writing of its desire to renew the lease three months
before the expiration of the lease. Lessee should be given first priority to
rent the property under the same terms and conditions as offered by any third
party. The delay charge on Lessees payment of rent is 5% of the monthly rent
multiplied by the number of days the rent is overdue.

Consideration: Rent of RMB63,860 per month.

Tenancy Agreement (Exhibit 4.11)

Date: December 31, 2002

Parties: Shenzhen Shekou Tai Shen Enterprises Shareholding Co. Ltd. (Lessor)
and Jetcrown Industrial (Shenzhen) Limited (Lessee).

Nature of Contract: Lease of property located at Block D (five floors total),
Wing Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area is 5,442 square meters. The
rental period is five years, commencing January 1, 2002 to December 31, 2007.
The total rent for the property is HK$108,840 per month. A deposit of
HK$300,000 is required. The Lessor is responsible to pay for the property tax,
land use fees and the rental housing

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management fees. The Lessee is responsible for the water, electricity,
cleansing and management charges. The Lessee may not sublease the property
without the written approval of the Lessor. Lessee should inform Lessor in
writing of its desire to renew the lease three months before the expiration of
the lease. Lessee should be given first priority to rent the property under
the same terms and conditions as offered by any third party. The delay charge
on Lessees payment of rent is 3% of the monthly rent multiplied by the number
of days the rent is overdue.

Consideration: Rent of HK$108,840 per month.

Tenancy Agreement (Exhibit 4.12)

Date: January 2, 2003

Parties: Shekou District Yu Yee Shareholding Co. Ltd. (Lessor) and Jetcrown
Industrial (Shenzhen) Limited (Lessee).

Nature of Contract: Lease of property located at 1/F to 5/F, Block F, Wing
Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area is 5,442 square meters. The
rental period is four years, commencing January 1, 2003 to December 31, 2007.
The total rent for the property is HK$108,840 per month. The Lessor is
responsible to pay for the property tax, land use fees and the rental housing
management fees. The Lessee is responsible for the water, electricity,
cleansing and management charges. The Lessee may not sublease the property
without the written approval of the Lessor. Lessee should inform Lessor in
writing of its desire to renew the lease three months before the expiration of
the lease. Lessee should be given first priority to rent the property under
the same terms and conditions as offered by any third party. The delay charge
on Lessees payment of rent is 3% of the monthly rent multiplied by the number
of days the rent is overdue.

Consideration: Rent of HK$108,840 per month.

Tenancy Agreement (Exhibit 4.13)

Date: December 27, 2002

Parties: Shekou Wan Ha Enterprises Shareholding Co. Ltd. (Lessor) and Jetcrown
Industrial (Shenzhen) Limited (Lessee).

Nature of Contract: Lease of Rooms 203, 205-208, 210-212, 214, 216-217,
302-305, 307, 309-310, 312-317, 401, 403-405, 407-416 of the Complex Building,
Wan Ha Village, Shekou, Shenzhen and Room 201-203, 205-208, 210-214, 305,
307-310, 402-405, 407, 409, 413-414, 416, 502-504, 506-507, 510, 513-516, 601,
603-607, 609-616, 701-716, Block C1, New Wing Village, Shekou. for use as a
dormitory.

Terms and Conditions: The total construction area for all the rooms is
5,126.38 square meters. The rental period is one year, commencing January 1,
2003 to December 31, 2003. The total rent for the property is RMB80,043 per
month. A deposit of RMB80,848 is required. The Lessee is responsible for the
water, electricity and garbage cleaning charges. If any delay of rental
payment exceeds 5 days, a late charge penalty of 2% shall be levied on the
rental.

Consideration: Rent of RMB80,043 per month.

Sale Contract on Land and Factory and Attestation Deed (Exhibit 4.14)

Dates:February 28, 2003 and May 14, 2003, respectively

Parties: Dongguan City Cheung On Town Siu Bin Estate Committee (Transferor) and
Dongguan Kwan Hong Electronics Co. Ltd. (Transferee).

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Nature of Contract: Sale of Land and factory and dormitory buildings located at
the area between Siu Bin Reservoir and Sai Cheong Road, the Second Industrial
Zone, Siu Bin Estate, Cheung On Town, Dongguan City for use as factory
premises.

Terms and Conditions: The construction area is 22,410 square meters of land and
38,538 square meters of buildings. The period of right of land use is 50
years, from February 1, 2003 to 31 January 2053. The purchase consideration is
HK$650 per square meter for the building premises and HK$330 per square meter
for the land. The total consideration is HK$32,445,000.

Consideration: Purchase consideration of HK$32,445,000 in total.

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Taxation

United States Federal Income Tax Consequences

General

This section is a general summary of the material U.S. federal income tax
consequences of the ownership and disposition of our common shares as of the
date of this Report. The summary applies to you only if you hold our common
shares as a capital asset for tax purposes (that is, for investment purposes),
and it does not purport to be a comprehensive description of all the tax
considerations that may be relevant to the ownership of our common shares. The
summary is based on current law. Changes in the law may alter your tax
treatment of holding our common shares, possibly on a retroactive basis. There
can be no assurance that the U.S. Internal Revenue Service (IRS) will not
challenge the tax consequences described below, and we have not requested, nor
will we request, a ruling from the IRS or an opinion of counsel with respect to
the U.S. federal income tax consequences of acquiring, holding or disposing of
our common shares. The discussion below does not cover tax consequences that
depend upon your particular tax circumstances and it does not address any
aspect of U.S. federal tax law other than U.S. federal income taxation.
Specifically, it does not cover any state, local or foreign law, or the
possible application of U.S. federal estate or gift tax. You are urged to
consult your own tax advisors regarding the application of the U.S. federal
income tax laws to your particular situation as well as any state, local,
foreign and the U.S. federal estate and gift tax consequences of the ownership
and disposition of the common shares. In addition, this summary does not take
into account any special U.S. federal income tax rules that apply to a
particular holder of our common shares, including, without limitation, the
following:



| |  |  | a dealer in securities or currencies;                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | a trader in securities that elects to use a market-to-market method
of accounting for your securities holdings;     
|
| |  |  | a financial institution;                                                                                            
|
| |  |  | a life insurance company;                                                                                           
|
| |  |  | a tax-exempt organization;                                                                                          
|
| |  |  | a person that holds our common shares in a hedging transaction or
as part of a straddle or a conversion transaction;
|
| |  |  | a person whose functional currency for tax purposes is not the U.S. dollar;                                         
|
| |  |  | a person liable for alternative minimum tax;                                                                        
|
| |  |  | a person that owns, or is treated as owning, 10% or more of our common shares; or                                   
|
| |  |  | a person who receives our shares pursuant to the exercise of
employee stock options or otherwise as compensation.   

Tax Consequences to U.S. Holders

For purposes of the discussion below, you are a U.S. Holder if you are a
beneficial owner of our common shares who or which is:



| |  |  | an individual U.S. citizen or resident alien of the United States
(as specifically defined for tax purposes);              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a corporation created or organized in or under the laws of the
United States or any State or political subdivision thereof;

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| |  |  | an estate whose income is subject to U.S. federal income tax
regardless of its source;                                                                                                                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a trust (x) if a U.S. court can exercise primary supervision over
the trusts administration and one or more U.S. persons are authorized
to control all substantial decisions of the trust or (y) if it was in
existence on August 20, 1996, was treated as a U.S. person prior to
that date and has a valid election in effect under applicable treasury
regulations to be treated as a U.S. person; or
|
| |  |  | any other person or entity that would be subject to U.S. federal
income tax on a net income basis in respect of our common shares.                                                                                                                                                                                                                                                                      

If a partnership holds our common shares, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner of a partnership holding our common
shares, you should consult your tax advisor.

Distributions

Subject to the passive foreign investment company rules discussed below,
for cash dividends, the gross amount of any such distribution (other than in
liquidation) that you receive with respect to our common shares generally will
be taxed to you as dividend income to the extent such distribution does not
exceed our current or accumulated earnings and profits (E&P), as calculated
for U.S. federal income tax purposes. Such income will be includable in your
gross income as ordinary income on the date of receipt. Under the tax law
recently enacted in the United States, dividends received by individuals in
their tax years beginning on January 1, 2003 from qualified foreign
corporations are taxed at the rate of 5% (zero, in 2008) or 15%, depending
upon the particular taxpayers U.S. federal income tax bracket. This law
sunsets after December 31, 2008, at which time dividends will be taxed at the
ordinary income tax rates of up to 35%. A foreign corporation is a qualified
foreign corporation with respect to its stock that is traded on an established
securities market in the United States, provided that the foreign corporation
is not a foreign personal holding company, a foreign investment company or
a passive foreign investment company, as defined under the U.S federal income
tax law. Our stock is traded on an established securities market in the United
States; we believe that we should not be considered a foreign personal holding
company, or a foreign investment company, but we have not made a specific
determination as to whether or not we are in fact a passive foreign investment
company.

To the extent any distribution exceeds our E&P, the distribution will
first be treated as a tax-free return of capital to the extent of your adjusted
tax basis in our common shares and will be applied against and reduce such
basis on a dollar-for-dollar basis (thereby increasing the amount of gain and
decreasing the amount of loss recognized on a subsequent disposition of such
shares). To the extent that such distribution exceeds your adjusted tax basis,
the distribution will be taxed as gain recognized on a sale or exchange of our
common shares. See Sale or Other Disposition of Our Common Shares, below.
Because we are not a U.S. corporation, no dividends-received deduction will be
allowed to corporations with respect to dividends paid by us.

Sale or Other Disposition of Our Common Shares

Subject to the passive foreign investment company rules discussed below,
generally, in connection with the sale or other taxable disposition of our
common shares:



| |  |   | you will recognize gain or loss equal to the difference (if any) between:                                                                                                                                  
| | - | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | the amount realized on such sale or other taxable disposition and                                                                                                                                          
|
| |   |  | your adjusted tax basis in such common shares (your
adjusted tax basis in the shares you hold generally will equal
your U.S. dollar cost of such shares);                                                  
|
| |  |   | such gain or loss will be capital gain or loss and will be
long-term capital gain or loss if your holding period for our common
shares is more than one year at the time of such sale or other
disposition;

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| |  |  | under the new tax law described above, net long-term capital gains
derived by individual U.S. Holders from sales or other taxable
dispositions of our shares after May 5, 2003 and before January 1,
2009, will generally be taxed at the rate of 5% (zero, in 2008) or 15%,
depending upon the particular taxpayers U.S. federal income tax
bracket.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | such gain or loss will generally be treated as having U.S. source
for U.S. foreign tax credit purposes; and                                                                                                                                                                                                                                           
|
| |  |  | your ability to deduct capital losses is subject to limitations.                                                                                                                                                                                                                                                                                      

Passive Foreign Investment Company

U.S. Holders generally would be subject to a special, adverse tax regime
(that would differ in certain material respects from that described above) if
we are or were to be classified as a passive foreign investment company
(PFIC) for U.S. federal income tax purposes as to our U.S. Holders.

An actual determination of PFIC status is factual in nature and generally
cannot be made until the close of the applicable tax year. The Company has not
made a specific determination as to whether or not it is in fact a PFIC. We
will be a PFIC if either:



| |  |  | 75 percent or more of our gross income in a taxable year is passive
income (including our pro-rata share of the gross income of any company
in which we own, or are treated as owning, 25 percent or more of the
shares by value), which includes dividends, interests, royalties,
rents, annuities, and some types of gains; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the average percentage of the value of our assets in a taxable year
(including our pro-rata share of the assets of any company in which we
own, or are treated as owning, 25 percent or more of the shares by
value) that produce or are held for the production of passive income is
at least 50 percent.                      

The application of the above tests could result in our classification as a
PFIC even in a year in which we have substantial gross revenues from product
sales. If we determine that we are a PFIC, we will endeavor to notify you.
If you own common shares during any year in which we are a PFIC, you must file
IRS Form 8621.

If we are or were classified as a PFIC during the time you hold our
shares, unless you timely make one of specific available elections, a special
tax regime would apply to both:



| |  |  | any excess distribution, which would be your share of
distributions in any year that are greater than 125 percent of the
average annual distributions received by you in the three preceding
years before the current taxable year (or during your holding period
for the shares, if shorter), and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | any gain realized on the sale or other disposition of our common
shares.                                                                                                                                                                                                                            

Under this regime, any excess distribution and realized gain would be
treated as ordinary income and would be subject to tax generally in the
following manner:



| |  |  | the excess distribution or gain would be allocated ratably to each
day that you have held our common shares,                                                                                                                                                                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the amount allocated to the taxable year in which you realize the
excess distribution or gain would be taxed as ordinary income,                                                                                                                                                                               
|
| |  |  | the amount allocated to the taxable years prior to the first
taxable year in which we are a PFIC would be taxed as ordinary income
for the taxable year in which you realize the excess distribution or
gain, and                                                                                              
|
| |  |  | the amounts allocated to each of the prior taxable years for which
we were a PFIC would be taxed as ordinary income at the highest
applicable tax rate in effect for that year, and, in addition, an
interest charge generally applicable to underpayments of tax would be
imposed on you for the tax deferred.

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Subject to certain limitations, if you own common shares in a PFIC that
are treated as marketable stock, you may make a mark-to-market election. If
you make this election, for all taxable years during which you held common
shares and we were a PFIC, you would not be subject to the PFIC rules described
above. Instead, in general, you would include as ordinary income each year the
excess, if any, of the fair market value of your shares at the end of the
taxable year over the adjusted tax basis in your shares. You would also be
allowed to take an ordinary loss in respect of the excess, if any, of the
adjusted basis of your shares over their fair market value at the end of the
taxable year, but only to the extent of the net amount of income previously
included as a result of the mark-to-market election. Your basis in the shares
would be adjusted to reflect any such income or loss amounts. Any gain
realized upon disposition would be taxed as ordinary income. If we are or
become a PFIC, we believe our shares would be treated as marketable stock for
purposes of the mark-to-market election but we can give you no assurance that
they in fact will be so treated.

In lieu of making a mark-to-market election, you may make a qualifying
electing fund election. In many situations, it would be desirable to make this
election. However, even if your tax advisor determines that this election is
beneficial to you, if we are or were to become a PFIC, we may not be able or
willing to satisfy the record-keeping and other requirements that would enable
you to make a qualified electing fund election.

You are urged to consult your own tax advisor concerning the potential
application of the PFIC rules to your ownership and disposition of our common
shares.

Tax Consequences to Non-U.S. Holders

If you are not a U.S. Holder, you are a Non-U.S. Holder.

Distributions

You generally will not be subject to U.S. federal income tax, including
withholding tax, on distributions made on our common shares unless:



| |  |  | you conduct a trade or business in the United States and                                                                                                                                                                                                                                                                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the distributions are effectively connected with the conduct of
that trade or business (and, if an applicable income tax treaty so
requires as a condition for you to be subject to U.S. federal income
tax on a net income basis in respect of income from our common shares,
such distributions are attributable to a permanent establishment that
you maintain in the United States).

If you meet the two tests above, you generally will be subject to tax in
respect of such dividends in the same manner as a U.S. Holder, as described
above. In addition, any effectively connected dividends received by a non-U.S.
corporation may also, under certain circumstances, be subject to an additional
branch profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.

Sale or Other Disposition of Our Common Shares

Generally, you will not be subject to U.S. federal income tax, including
withholding tax, in respect of gain recognized on a sale or other taxable
disposition of our common shares unless:



| |  |  | your gain is effectively connected with a trade or business that
you conduct in the United States (and, if an applicable income tax
treaty so requires as a condition for you to be subject to U.S. federal
income tax on a net income basis in respect of gain from the sale or
other disposition of our common shares, such gain is attributable to a
permanent establishment maintained by you in the United States), or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | you are an individual Non-U.S. Holder and are present in the United
States for at least 183 days in the taxable year of the sale or other
disposition, and certain other conditions exist.                                                                                                                                                                                                                                 

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You will be subject to tax in respect of any gain effectively connected
with your conduct of a trade or business in the United States generally in the
same manner as a U.S. holder, as described above. Effectively connected gains
realized by a non-U.S. corporation may also, under certain circumstances, be
subject to an additional branch profits tax at a rate of 30% or such lower
rate as may be specified by an applicable income tax treaty.

Backup Withholding and Information Reporting

Payments (or other taxable distributions) in respect of our common shares
that are made in the United States or by a U.S. related financial intermediary
will be subject to U.S. information reporting rules. In addition, such payments
may be subject to U.S. federal backup withholding at a rate of 28%. You will
not be subject to backup withholding provided that:



| |  |  | you are a corporation or other exempt recipient, or                                                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | you provide your correct U.S. federal taxpayer identification
number and certify that no loss of exemption from backup withholding
has occurred.

If you are a Non-U.S. Holder, you generally are not subject to information
reporting and backup withholding, but you may be required to provide a
certification of your non-U.S. status in order to establish that you are
exempt.

Amounts withheld under the backup withholding rules may be credited
against your U.S. federal income tax liability, and you may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.

The discussion above is for general information only. It does not cover
tax consequences that depend upon your particular tax circumstances. You
should consult your own tax advisors regarding the application of the U.S.
federal income tax laws to your particular situation as well as any state,
local, foreign and the U.S. federal estate and gift tax consequences of the
ownership and disposition of the common shares

The discussions above are for general information only. You should
consult your own tax advisors regarding the application of the U.S. federal
income tax laws to your particular situation as well as any state, local,
foreign tax and the U.S. federal estate and gift tax consequences of the
ownership and disposition of our common shares and the stock split.

British Virgin Islands Tax Consequences

Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common equity, such as our common
shares, who is not a resident of the British Virgin Islands is exempt from
British Virgin Islands income tax on dividends paid with respect to the common
equity and all holders of common equity are not liable to the British Virgin
Islands for income tax on gains realized on sale or disposal of such shares:
The British Virgin Islands does not impose a withholding tax on dividends paid
by a company incorporated under the International Business Companies Act.

There are no capital gains, gift or inheritance taxes levied by the
British Virgin Islands on companies incorporated under the International
Business Companies Act. In addition, our common shares are not subject to
transfer taxes, stamp duties or similar charges. There is no income tax treaty
or convention currently in effect between the United States and the British
Virgin Islands.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Exchange Controls

There are no exchange control restrictions on payments of dividends on the
Companys common shares or on the conduct of the Companys operations either in
Hong Kong, where the Companys principal executive offices are located, or the
British Virgin Islands, where the Company is incorporated. Other jurisdictions
in which the Company conducts operations may have various exchange controls.
There are no material British Virgin Islands laws which impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest or other payments to nonresident holders of the Companys common
shares. British Virgin Islands law and the Companys Memorandum and Articles
of Association impose no limitations on the right of nonresident or foreign
owners to hold the Companys Securities or vote the Companys common shares.

Chinas laws and regulations regulate dividend distribution and
repatriation by the Companys China subsidiaries. To date these controls have
not had and are not expected to have a material impact on the Companys
financial results. To the extent that the Company may decide to pay cash
dividends in the future, such dividends will be declared from the retained
earnings, i.e., surplus, as determined by resolution of the directors of the
Company. As the Company is a holding company, the amount of its retained
earnings will be limited by the amount of dividends that can be declared by its
subsidiaries. Dividends declared by subsidiaries will be based on the profits
reported in their statutory accounts prepared in accordance with generally
accepted accounting principles in the relevant countries, primarily Hong Kong
and China, which differ from U.S. GAAP. See Note 1 of Notes to Consolidated
Financial Statements. Further, the Company intends that portions of the profits
earned by Jetcrown Shenzhen will be reinvested and therefore such profits will
not be available for the declaration of dividends. See Notes 1 and 7 of Notes
to Consolidated Financial Statements.

Foreign Currency Risk

At March 31, 2001, 2002 and 2003 the Company had no open forward exchange
contracts or option contracts.

Cash on hand at March 31, 2003 of $36,766,000 held in the following
currencies:

|                      |  |             |            | 
|--------------------- |  | ----------- | ---------- | 
|                      |  | Equivalent 
|                      |  | U.S. Dollar
|                      |  | Holdings   
|                      |  |            
|United States dollars |  | $           | 24,063,000 | 
|Hong Kong dollar      |  |             | 9,569,000  | 
|Euro dollar           |  |             | 5,000      | 
|Chinese renminbi      |  |             | 3,129,000  | 

See discussion of Exchange Rate Fluctuation in Item 5. Operating and Financial
Review and Prospects.

Interest Rate Risk

Our interest expenses and income are sensitive to changes in interest
rates, as all of our cash reserves and borrowings are subject to interest rate
changes. Cash on hand of $30,220,000 as at March 31, 2003 was invested in
short-term interest bearing investments. As such, interest income will
fluctuate with changes in short term interest rates. As of March 31, 2003 we
had no long-term debt or short-term bank loans outstanding on our credit
facilities.




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

Not Applicable.




ITEM 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the Companys fiscal year ended March 31, 2003, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the Companys fiscal year ended March 31, 2003, the
Companys disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the reports that the
Company files or submits under the Exchange Act.

Changes in Internal Controls

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls during the year
ended March 31, 2003, nor were there any significant deficiencies or material
weaknesses in the Companys internal controls requiring corrective actions.




ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Not Applicable until the report covering the year ending March 31, 2004.




ITEM 16B. CODE OF ETHICS

Not Applicable until the report covering year ending March 31, 2004.




ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not Applicable until the report covering year ending March 31, 2004.




PART III




ITEM 17. FINANCIAL STATEMENTS

Not Applicable.

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ITEM 18. FINANCIAL STATEMENTS

The following financial statements are filed as part of this Report:

|                                                                                                                      |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                      |  | Page
|                                                                                                                      |  | No. 
|                                                                                                                      |  |     
|Independent Auditors Reports                                                                                         |  |      | F-1 | 
|Consolidated Balance Sheets as of March 31, 2002 and March 31, 2003                                                   |  |      | F-3 | 
|Consolidated Statements of Income for the years ended March 31, 2001,
March 31, 2002 and March 31, 2003               |  |      | F-4 | 
|Consolidated Statements of Shareholders Equity for the years
ended March 31, 2001, March 31, 2002 and March 31, 2003 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the years ended March 31, 2001,
March 31, 2002 and March 31, 2003           |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                            |  |      | F-7 | 

All other schedules for which provisions are made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.

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[Letterhead of BDO International]

INDEPENDENT AUDITORS REPORT

To the Shareholders and the Board of Directors of
Deswell Industries, Inc.

We have audited the accompanying consolidated balance sheet of Deswell
Industries, Inc. and subsidiaries (the Company) as of March 31, 2003, and the
related consolidated statements of income, shareholders equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides 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 Deswell
Industries, Inc. and subsidiaries as of March 31, 2003 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States
of America.

As discussed in note 2 to the consolidated financial statements, effective
April 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.



/s/ BDO International

BDO
International


Hong Kong, July 25, 2003

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##### Table of Contents



[Letterhead of Deloitte Touche Tohmatsu]

INDEPENDENT AUDITORS REPORT

To the Shareholders and the Board of Directors of
Deswell Industries, Inc.

We have audited the accompanying consolidated balance sheets of Deswell
Industries, Inc. and subsidiaries as of March 31, 2002, and the related
consolidated statements of income, shareholders equity and cash flows for each
of the two years in the period ended March 31, 2002 before the inclusion of the
transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, included in Note 2
and the revisions to related per share and number of shares information as a
result of the three-for-two stock split described in Note 11. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Deswell Industries, Inc. and
subsidiaries at March 31, 2002, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 2002 in
conformity with accounting principles generally accepted in the United States
of America.

/s/ Deloitte Touche Tohmatsu
June 28, 2002

Hong Kong


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DESWELL INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)

|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |        |         |  |  | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | ------ | --------- | ------ | ------ | ------- |  |  | 
|                                        |                                                                                                                                                          |                                            |        |        |        | March 31,
|                                        |                                                                                                                                                          |                                            |        |        |        | 2002      |        | 2003  
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|ASSETS                                  |                                                                                                                                                          |                                            |        |        |        |           |        |       
|Current assets:                         |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        | Cash and cash equivalents                                                                                                                                |                                            | $      | 31,534 |        |           | $      | 34,400 |        
|                                        | Restricted cash (note 6)                                                                                                                                 |                                            |        | 2,861  |        |           |        | 2,366  |        
|                                        | Marketable securities (note 3)                                                                                                                           |                                            |        | 1,115  |        |           |        | 4,821  |        
|                                        | Accounts receivable                                                                                                                                      |                                            |        | 16,888 |        |           |        | 16,727 |        
|                                        | Inventories (note 4)                                                                                                                                     |                                            |        | 13,225 |        |           |        | 14,784 |        
|                                        | Prepaid expenses and other current assets                                                                                                                |                                            |        | 3,421  |        |           |        | 2,648  |        
|                                        | Income taxes receivable (note 8)                                                                                                                         |                                            |        | 428    |        |           |        | 323    |        
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        |                                                                                                                                                          | Total current assets                       |        |        | 69,472 |           |        |        | 76,069  | 
|                                        | Property, plant and equipment-net (notes 5 and 6)                                                                                                        |                                            |        | 24,794 |        |           |        | 29,623 |        
|                                        | Other investments                                                                                                                                        |                                            |        |       |        |           |        | 2      |        
|                                        | Goodwill                                                                                                                                                 |                                            |        | 478    |        |           |        | 478    |        
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        |                                                                                                                                                          | Total assets                               |        | $      | 94,744 |           |        | $      | 106,172 | 
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY    |                                                                                                                                                          |                                            |        |        |        |           |        |       
|Current liabilities:                    |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        | Short-term bank loans (note 6)                                                                                                                           |                                            | $      | 482    |        |           | $      |       |        
|                                        | Accounts payable                                                                                                                                         |                                            |        | 7,583  |        |           |        | 9,643  |        
|                                        | Accrued payroll and employee benefits                                                                                                                    |                                            |        | 1,877  |        |           |        | 1,312  |        
|                                        | Customer deposits                                                                                                                                        |                                            |        | 2,694  |        |           |        | 494    |        
|                                        | Other accrued liabilities (note 7)                                                                                                                       |                                            |        | 1,749  |        |           |        | 2,451  |        
|                                        | Income taxes payable                                                                                                                                     |                                            |        | 165    |        |           |        | 3,946  |        
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        |                                                                                                                                                          | Total current liabilities                  |        |        | 14,550 |           |        |        | 17,846  | 
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|Deferred income taxes (note 8)          |                                                                                                                                                          |                                            | 15     |        |        |           | 15     |       
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|Commitments and contingencies (note 10) |                                                                                                                                                          |                                            |       |        |        |           |       |       
|Minority interests                      |                                                                                                                                                          |                                            | 10,528 |        |        |           | 6,465  |       
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|Shareholders equity:                   |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        | Common shares nil par value-authorized 30,000,000 shares,
shares issued and outstanding March 31, 2002 - 8,370,496;
March 31, 2003  9,030,835 (note 11) |                                            |        | 19,608 |        |           |        | 28,247 |        
|Additional paid-in capital              |                                                                                                                                                          |                                            | 6,970  |        |        |           | 6,970  |       
|Retained earnings                       |                                                                                                                                                          |                                            | 43,073 |        |        |           | 46,629 |       
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        |                                                                                                                                                          | Total shareholders equity                 |        |        | 69,651 |           |        |        | 81,846  | 
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       
|                                        |                                                                                                                                                          | Total liabilities and shareholders equity |        | $      | 94,744 |           |        | $      | 106,172 | 
|                                        |                                                                                                                                                          |                                            |        |        |        |           |        |       

See accompanying notes to consolidated financial statements.

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##### Table of Contents



DESWELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except per share data)

|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |       | 
|------------------------------------------------- | --------------------------------------------------- | - | -------------------- | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                  |                                                     |   | Year ended March 31,
|                                                  |                                                     |   |                     
|                                                  |                                                     |   | 2001                 |       | 2002 |   | 2003  
|                                                  |                                                     |   |                      |       |      |   |       
|Net sales                                         |                                                     | $ | 80,847               |       |      | $ | 83,320 |       |  | $ | 90,905 |      
|Cost of sales                                     |                                                     |   | 52,596               |       |      |   | 54,448 |       |  |   | 61,006 |      
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Gross profit                                      |                                                     |   | 28,251               |       |      |   | 28,872 |       |  |   | 29,899 |      
|Selling, general and administrative expenses      |                                                     |   | 15,414               |       |      |   | 14,939 |       |  |   | 15,354 |      
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Operating income                                  |                                                     |   | 12,837               |       |      |   | 13,933 |       |  |   | 14,545 |      
|Interest expense                                  |                                                     |   | (6                   | )     |      |   | (26    | )     |  |   | (6     | )    
|Other income, net                                 |                                                     |   | 915                  |       |      |   | 877    |       |  |   | 818    |      
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Income before income taxes and minority interests |                                                     |   | 13,746               |       |      |   | 14,784 |       |  |   | 15,357 |      
|Income taxes (note 8)                             |                                                     |   | 315                  |       |      |   | 535    |       |  |   | 3,826  |      
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Income before minority interests                  |                                                     |   | 13,431               |       |      |   | 14,249 |       |  |   | 11,531 |      
|Minority interests                                |                                                     |   | 621                  |       |      |   | 925    |       |  |   | 1,288  |      
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Net income                                        |                                                     | $ | 12,810               |       |      | $ | 13,324 |       |  | $ | 10,243 |      
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Net income per share (note 2)                     |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Basic:                                            |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|                                                  | Net income per share                                |   | $                    | 1.59  |      |   | $      | 1.59  |  |   | $      | 1.18  | 
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|                                                  | Weighted average common shares outstanding          |   |                      | 8,064 |      |   |        | 8,403 |  |   |        | 8,672 | 
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|Diluted:                                          |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|                                                  | Net income per share                                |   | $                    | 1.57  |      |   | $      | 1.57  |  |   | $      | 1.16  | 
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      
|                                                  | Weighted average common and potential common shares |   |                      | 8,153 |      |   |        | 8,466 |  |   |        | 8,852 | 
|                                                  |                                                     |   |                      |       |      |   |        |       |  |   |        |      

See accompanying notes to consolidated financial statements.

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DESWELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(U.S. dollars in thousands, except per share data)

|                                                                                    |  |              |           |            |  |         |        |          |  |          |       |               |  |  |        |   |  |  |        |  
|----------------------------------------------------------------------------------- |  | ------------ | --------- | ---------- |  | ------- | ------ | -------- |  | -------- | ----- | ------------- |  |  | ------ | - |  |  | ------ | -
|                                                                                    |  | Common stock |           |            |  |         |        |          |  |          |       |               |  | 
|                                                                                    |  |              |           | Additional |  |         |        |          |  |          |       |              
|                                                                                    |  | Shares       |           |            |  |         |        | paid-in  |  | Retained |       | Shareholders
|                                                                                    |  | outstanding  |           | Amount     |  | capital |        | earnings |  | equity  
|                                                                                    |  |              |           |            |  |         |        |          |  |         
|Balance at March 31, 2000                                                           |  |              | 8,021,896 |            |  |         | 17,183 |          |  |          | 6,970 |               |  |  | 28,878 |   |  |  | 53,031 |  
|Exercise of stock options                                                           |  |              | 375,000   |            |  |         | 2,746  |          |  |          |      |               |  |  |       |   |  |  | 2,746  |  
|Net income                                                                          |  |              |          |            |  |         |       |          |  |          |      |               |  |  | 12,810 |   |  |  | 12,810 |  
|Dividends ($0.59 per share)                                                         |  |              |          |            |  |         |       |          |  |          |      |               |  |  | (4,710 | ) |  |  | (4,710 | )
|                                                                                    |  |              |           |            |  |         |        |          |  |          |       |               |  |  |        |   |  |  |        |  
|Balance at March 31, 2001                                                           |  |              | 8,396,896 |            |  |         | 19,929 |          |  |          | 6,970 |               |  |  | 36,978 |   |  |  | 63,877 |  
|Exercise of stock options                                                           |  |              | 24,750    |            |  |         | 243    |          |  |          |      |               |  |  |       |   |  |  | 243    |  
|Repurchase and cancellation of common stock                                         |  |              | (51,150   | )          |  |         | (564   | )        |  |          |      |               |  |  |       |   |  |  | (564   | )
|Net income                                                                          |  |              |          |            |  |         |       |          |  |          |      |               |  |  | 13,324 |   |  |  | 13,324 |  
|Dividends ($0.86 per share)                                                         |  |              |          |            |  |         |       |          |  |          |      |               |  |  | (7,229 | ) |  |  | (7,229 | )
|                                                                                    |  |              |           |            |  |         |        |          |  |          |       |               |  |  |        |   |  |  |        |  
|Balance at March 31, 2002                                                           |  |              | 8,370,496 |            |  |         | 19,608 |          |  |          | 6,970 |               |  |  | 43,073 |   |  |  | 69,651 |  
|Exercise of stock options                                                           |  |              | 408,500   |            |  |         | 4,217  |          |  |          |      |               |  |  |       |   |  |  | 4,217  |  
|Odd share redemption upon stock split                                               |  |              | (41       | )          |  |         | (1     | )        |  |          |      |               |  |  |       |   |  |  | (1     | )
|Issuance of common stock for acquisition
of additional 20% interest in a subsidiary |  |              | 251,880   |            |  |         | 4,423  |          |  |          |      |               |  |  |       |   |  |  | 4,423  |  
|Net income                                                                          |  |              |          |            |  |         |       |          |  |          |      |               |  |  | 10,243 |   |  |  | 10,243 |  
|Dividends ($0.77 per share)                                                         |  |              |          |            |  |         |       |          |  |          |      |               |  |  | (6,687 | ) |  |  | (6,687 | )
|                                                                                    |  |              |           |            |  |         |        |          |  |          |       |               |  |  |        |   |  |  |        |  
|Balance at March 31, 2003                                                           |  |              | 9,030,835 |            |  |         | 28,247 |          |  |          | 6,970 |               |  |  | 46,629 |   |  |  | 81,846 |  
|                                                                                    |  |              |           |            |  |         |        |          |  |          |       |               |  |  |        |   |  |  |        |  

See accompanying notes to consolidated financial statements.

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DESWELL INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)

|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------- | ------- | -------------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                  |                                                                                                        |                                           |         | Year ended March 31,
|                                                                                  |                                                                                                        |                                           |         |                     
|                                                                                  |                                                                                                        |                                           |         | 2001                 |        | 2002 |        | 2003  
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |       
|Cash flows from operating activities                                              |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Net income                                                                        |                                                                                                        | $                                         | 12,810  |                      |        | $    | 13,324 |        |        | $ | 10,243 |       
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|                                                                                  | Depreciation and amortization                                                                          |                                           |         | 5,039                |        |      |        | 4,918  |        |   |        | 4,692  |       
|                                                                                  | Loss (gain) on sale of property, plant and equipment                                                   |                                           |         | (52                  | )      |      |        | 7      |        |   |        | 6      |       
|                                                                                  | Minority interests                                                                                     |                                           |         | 609                  |        |      |        | 925    |        |   |        | 1,288  |       
|                                                                                  | Changes in operating assets and liabilities:                                                           |                                           |         |                      |        |      |        |        |        |   |        |        |       
|                                                                                  |                                                                                                        | Accounts receivable                       |         |                      | (5,170 | )    |        |        | (1,111 | ) |        |        | 161    |  
|                                                                                  |                                                                                                        | Marketable securities                     |         |                      | 1,308  |      |        |        | (1,115 | ) |        |        | (3,706 | )
|                                                                                  |                                                                                                        | Inventories                               |         |                      | (1,102 | )    |        |        | (1,191 | ) |        |        | (1,559 | )
|                                                                                  |                                                                                                        | Prepaid expenses and other current assets |         |                      | 462    |      |        |        | (1,588 | ) |        |        | 773    |  
|                                                                                  |                                                                                                        | Income taxes receivable                   |         |                      | (264   | )    |        |        |       |   |        |        | 105    |  
|                                                                                  |                                                                                                        | Accounts payable                          |         |                      | (1,127 | )    |        |        | 3,309  |   |        |        | 2,060  |  
|                                                                                  |                                                                                                        | Accrued payroll and employee benefits     |         |                      | 420    |      |        |        | 40     |   |        |        | (565   | )
|                                                                                  |                                                                                                        | Customer deposits                         |         |                      | 105    |      |        |        | 844    |   |        |        | (2,200 | )
|                                                                                  |                                                                                                        | Other accrued liabilities                 |         |                      | 576    |      |        |        | (27    | ) |        |        | 702    |  
|                                                                                  |                                                                                                        | Income taxes payable                      |         |                      | 196    |      |        |        | (132   | ) |        |        | 3,781  |  
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Net cash provided by operating activities                                         |                                                                                                        |                                           | 13,810  |                      |        |      | 18,203 |        |        |   | 15,781 |       
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Cash flows from investing activities                                              |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|                                                                                  | Purchase of property, plant and equipment                                                              |                                           |         | (13,926              | )      |      |        | (4,397 | )      |   |        | (9,731 | )     
|                                                                                  | Proceeds from sale of property, plant and equipment                                                    |                                           |         | 113                  |        |      |        | 276    |        |   |        | 127    |       
|                                                                                  | Acquisition of other investments                                                                       |                                           |         |                     |        |      |        |       |        |   |        | (2     | )     
|                                                                                  | (Increase) decrease in restricted cash                                                                 |                                           |         | 141                  |        |      |        | (873   | )      |   |        | 495    |       
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Net cash used in investing activities                                             |                                                                                                        |                                           | (13,672 | )                    |        |      | (4,994 | )      |        |   | (9,111 | )     
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Cash flows from financing activities                                              |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|                                                                                  | Dividends paid                                                                                         |                                           |         | (4,710               | )      |      |        | (7,229 | )      |   |        | (6,687 | )     
|                                                                                  | Dividends paid to minority shareholders of a subsidiary                                                |                                           |         |                     |        |      |        |       |        |   |        | (851   | )     
|                                                                                  | Repurchase of common stock                                                                             |                                           |         |                     |        |      |        | (564   | )      |   |        |       |       
|                                                                                  | Increase (decrease) in bank loans                                                                      |                                           |         |                     |        |      |        | 482    |        |   |        | (482   | )     
|                                                                                  | Exercise of stock options                                                                              |                                           |         | 2,746                |        |      |        | 243    |        |   |        | 4,217  |       
|                                                                                  | Odd shares redemption                                                                                  |                                           |         |                     |        |      |        |       |        |   |        | (1     | )     
|                                                                                  | Contribution from minority shareholders of a subsidiary                                                |                                           |         |                     |        |      |        | 63     |        |   |        |       |       
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Net cash used in financing activities                                             |                                                                                                        |                                           | (1,964  | )                    |        |      | (7,005 | )      |        |   | (3,804 | )     
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Net (decrease) increase in cash and cash equivalents                              |                                                                                                        |                                           | (1,826  | )                    |        |      | 6,204  |        |        |   | 2,866  |       
|Cash and cash equivalents, beginning of year                                      |                                                                                                        |                                           | 27,156  |                      |        |      | 25,330 |        |        |   | 31,534 |       
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Cash and cash equivalents, end of year                                            |                                                                                                        | $                                         | 25,330  |                      |        | $    | 31,534 |        |        | $ | 34,400 |       
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Supplementary disclosures of cash flow information:                               |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|                                                                                  | Cash paid (refunded) during the year for:                                                              |                                           |         |                      |        |      |        |        |        |   |        |        |       
|                                                                                  |                                                                                                        | Interest                                  |         | $                    | 6      |      |        | $      | 26     |   |        | $      | 6      |  
|                                                                                  |                                                                                                        | Income taxes                              |         | $                    | 383    |      |        | $      | 669    |   |        | $      | (60    | )
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|Supplementary disclosures of significant non-cash transactions:                   |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       
|                                                                                  | Issuance of common stock in connection with acquisition of
additional 20% shareholding in a subsidiary |                                           | $       |                     |        |      | $      |       |        |   | $      | 4,423  |       
|                                                                                  |                                                                                                        |                                           |         |                      |        |      |        |        |        |   |        |       

See accompanying notes to consolidated financial statements.

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##### Table of Contents



DESWELL INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

1. Organization and Basis of Financial Statements

Deswell Industries, Inc. was incorporated in the British Virgin Islands on
December 2, 1993.

The principal activities of the Company comprise the manufacture and sale
of injection-molded plastic parts and components, electronic products
assembling and metallic parts manufacturing. The selling and administrative
activities are performed in the Hong Kong Special Administrative Region (Hong
Kong) of the Peoples Republic of China (China) and the manufacturing
activities are subcontracted to subsidiaries operating in China.

As the Company is a holding company, the amount of any dividends declared
by the Company will be dependent upon the amount which can be dividended up
from its subsidiaries. Dividends from subsidiaries will be declared based on
profits as reported in their statutory accounts. Such profits will differ from
the amounts reported under U.S. GAAP. At March 31, 2003, the retained earnings
available for distribution as reflected in the statutory books of the
subsidiaries were $75,751 of which $3,801 relates to a subsidiary in China,
certain of whose retained earnings are intended to be reinvested rather than
used to fund dividends in order to obtain favorable tax concessions (note 8).

On January 20, 2003, the Company acquired a further 20% of outstanding
stock of Integrated International Limited (Integrated), a subsidiary of the
Company, from the minority shareholders. After the acquisition, the Company
increased its ownership in Integrated to 71% of the outstanding stock. The
purchase consideration for the 20% of outstanding stock of Integrated is
251,880 common shares of the Company. The value of the purchase consideration
is based on the market price of the stocks issued which is lower than the fair
value of net assets acquired by $115. The excess has been allocated as a pro
rata reduction of the amounts that would have been assigned to certain acquired
assets.

2. Summary of Significant Accounting Policies

Principles of consolidation-The consolidated financial statements,
prepared in accordance with generally accepted accounting principles in the
United States of America, include the assets, liabilities, revenues, expenses
and cash flows of all subsidiaries. Intercompany balances, transactions and
cash flows are eliminated on consolidation.

Goodwill-The excess purchase price over the fair value of net assets
acquired is recorded on the balance sheet as goodwill. Prior to April 1, 2002,
goodwill was amortized to expense on a straight line basis over 20 years. On
April 1, 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and other Intangible Assets, which established new
standards for goodwill acquired in a business combination, eliminates the
amortization of goodwill and requires the carrying value of goodwill to be
evaluated for impairment on an annual basis.

Had goodwill amortization been discontinued effective April 1, 2000 and
2001 respectively, net income for the financial year ended March 31, 2001 and
2002 would have been increased by $36 and $35 to $12,846 and $13,359,
respectively. After adjusting for the impact of discontinued goodwill
amortization, net income per common share for the financial years ended March
31, 2001 and 2002 would remain the same, and diluted net income per share for
the years ended March 31, 2001 and 2002 would have been higher by $0.01 and
$0.01, respectively.

In accordance with SFAS No. 142, goodwill is evaluated to determine if
fair value of the asset has decreased below its carrying value. At March 31,
2003, the Company completed its annual impairment evaluation and determined
that there was no impairment in goodwill.

Cash and cash equivalents-Cash and cash equivalents include cash on hand,
cash accounts, interest bearing savings accounts and time certificates of
deposit with a maturity of three months or less when purchased.

Marketable securities-All marketable securities are classified as trading
securities and are stated at fair market value. Market value is determined by
the most recently traded price of the security at the balance sheet date. Net
realized and unrealized gains and losses on trading securities are included in
other income. The cost of investments sold is based on the average cost method
and interest earned is included in other income.

Inventories-Inventories are stated at the lower of cost, determined by the
first-in, first-out method, or market. Work-in-progress and finished goods
inventories consist of raw materials, direct labour and overhead associated
with the manufacturing process.

Prepaid expenses and other current assets-Prepaid expenses and other
current assets consist principally of rental deposits, prepaid expenses and
other miscellaneous receivables.

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2. Summary of Significant
Accounting Policies - continued

Property, plant and equipment-Property, plant and equipment is stated at
cost including the cost of improvements. Maintenance and repairs are charged
to expense as incurred. Depreciation and amortization is provided on the
straight line method based on the estimated useful lives of the assets, as
follows:

|                                  |  |                                         
|--------------------------------- |  | ----------------------------------------
|Leasehold land and buildings      |  | 40 - 50 years                           
|Plant and machinery               |  | 4 - 10 years                            
|Furniture, fixtures and equipment |  | 4 - 5 years                             
|Motor vehicles                    |  | 3 - 4 years                             
|Leasehold improvements            |  | the shorter of 5 years or the lease term

Valuation of long-lived assets-The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including other
intangible assets subject to amortization, when events and circumstances
warrant such a review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost to dispose.

Revenue recognition-The Company recognizes revenue at the time the title
is passed to customers upon shipment and when collectibility is reasonably
assured.

Comprehensive income-The comprehensive income of the Company for the years
ended March 31, 2001, 2002 and 2003 was represented by the net income of the
respective years.

Shipping and handling cost-Shipping and handling costs related to the
delivery of finished goods are included in selling expenses. During the year
ended March 31, 2001, 2002 and 2003, shipping and handling costs expensed to
selling expenses were $699, $638 and $653, respectively.

Income taxes-Income taxes are provided on an asset and liability approach
for financial accounting and reporting of income taxes. Any China tax paid by
subsidiaries during the year is recorded as an amount receivable at year end
when an application for reinvestment of profits has been filed and a refund is
expected unless there is an indication from the China tax authority that the
refund will be refused. Deferred income tax liabilities or assets are recorded
to reflect the tax consequences in future years of differences between the tax
basis of assets and liabilities and the financial reporting amounts at each
year end. A valuation allowance is recognized if it is more likely than not
that some portion, or all, of a deferred tax asset will not be realized.

Foreign currency translation-The consolidated financial statements of the
Company are presented in U.S. dollars as the Company is incorporated in the
British Virgin Islands where the currency is the U.S. dollar. The Companys
subsidiaries conduct substantially all of their business in Hong Kong dollars,
the exchange rate of which has been fixed to the U.S. dollar at approximately
HK$7.80 to $1.00 since 1983. There is, however, no assurance that this rate
will continue indefinitely.

All transactions in currencies other than functional currencies during the
year are translated at the exchange rates prevailing on the transaction dates.
Related accounts payable or receivable existing at the balance sheet date
denominated in currencies other than the functional currencies are translated
at period end rates. Gains and losses resulting from the translation of
foreign currency transactions and balances are included in income.

Aggregate net foreign currency transaction losses included in income were
$644 and $306 for the years ended March 31, 2001 and 2002 and gain of $503 for
the year ended March 31, 2003, respectively.

On consolidation, the financial statements of subsidiaries are translated
from Hong Kong dollars, being the functional currency of all of the Companys
subsidiaries, into U.S. dollars in accordance with SFAS No. 52, Foreign
Currency Translation. Accordingly all assets and liabilities are translated
at the exchange rates prevailing at the balance sheet dates and all income and
expenditure items are translated at the average rates for each of the years.
The exchange rate between the Hong Kong dollar and the U.S. dollar used for the
years ended March 31, 2001, 2002 and 2003 were HK$7.75 to US$1.00.

Post-retirement and post-employmentbenefits-The Company and its
subsidiaries contribute to a state pension scheme in respect of its PRC
employees and a mandatory provident fund scheme in respect of its Hong Kong
employees. Neither the Company nor its subsidiaries provide any other
post-retirement or post-employment benefits.

Stock-basedcompensation-SFAS No. 123 Accounting for Stock-Based
Compensation allows companies which have stock-based awards to employees to
adopt a new fair value basis of accounting for stock options and other equity
instruments or to continue to apply the existing accounting rules under
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to
Employees, but with additional financial statement disclosure.

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2.     Summary
of Significant Accounting Policies - continued

The Company accounts for its stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25, SFAS No.123 requires the
disclosure of pro forma net income and net income per share as if the Company
had adopted the fair value method, as follows:

|                                                   |             |   |      |        |      |   |       |        |  |   |   |        | 
|-------------------------------------------------- | ----------- | - | ---- | ------ | ---- | - | ----- | ------ |  | - | - | ------ | 
|                                                   |             |   | 2001 |        | 2002 |   | 2003 
|                                                   |             |   |      |        |      |   |      
|Net income:                                        |             |   |      |        |      |   |       |        |  |   |   |       
|                                                   | As reported |   | $    | 12,810 |      |   | $     | 13,324 |  |   | $ | 10,243 | 
|                                                   | Pro forma   |   |      | 12,766 |      |   |       | 11,775 |  |   |   | 10,243 | 
|                                                   |             |   |      |        |      |   |       |        |  |   |   |       
|Stock-based employee compensation cost, net of tax |             | $ | 44   |        |      | $ | 1,549 |        |  | $ |  |       
|Basic net income per share:                        |             |   |      |        |      |   |       |        |  |   |   |       
|                                                   | As reported |   | $    | 1.59   |      |   | $     | 1.59   |  |   | $ | 1.18   | 
|                                                   | Pro forma   |   |      | 1.58   |      |   |       | 1.40   |  |   |   | 1.18   | 
|Diluted net income per share:                      |             |   |      |        |      |   |       |        |  |   |   |       
|                                                   | As reported |   | $    | 1.57   |      |   | $     | 1.57   |  |   | $ | 1.16   | 
|                                                   | Pro forma   |   |      | 1.56   |      |   |       | 1.39   |  |   |   | 1.16   | 

The fair value of options granted in the years ended March 31, 2001 and
2002 was estimated to be approximately $1.95 and $1.93 per share respectively
using the Black-Scholes option pricing model with the following assumptions:

|                                            |  |         |      |          |  |  |      |  
|------------------------------------------- |  | ------- | ---- | -------- |  |  | ---- | -
|                                            |  | 2001    |      | 2002    
|                                            |  |         |      |         
|Risk-free interest rate - weighted average  |  |         | 4.99 | %        |  |  | 5.42 | %
|Expected life of options - weighted average |  | 3 years |      | 10 years
|Expected volatility                         |  |         | 53   | %        |  |  | 32   | %
|Expected dividend yield                     |  |         | 6.17 | %        |  |  | 7.57 | %

Net income pershare-Basic net income per share is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted net income per share
gives effect to all dilutive potential common shares outstanding during the
period. The weighted average number of common shares outstanding is adjusted
to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. In
computing the dilutive effect of potential common shares, the average stock
price for the period is used in determining the number of treasury shares
assumed to be purchased with the proceeds from the exercise of options.

Basic net income per share and diluted net income per share calculated in
accordance with SFAS No. 128, Earnings Per Share, are reconciled as follows
(shares in thousands):

|                                                                        |  |                      |        |      |  |      |        |  |  |   |        | 
|----------------------------------------------------------------------- |  | -------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                        |  | Year ended March 31,
|                                                                        |  |                     
|                                                                        |  | 2001                 |        | 2002 |  | 2003
|                                                                        |  |                      |        |      |  |     
|Net income                                                              |  | $                    | 12,810 |      |  | $    | 13,324 |  |  | $ | 10,243 | 
|                                                                        |  |                      |        |      |  |      |        |  |  |   |        | 
|Basic net income per share                                              |  | $                    | 1.59   |      |  | $    | 1.59   |  |  | $ | 1.18   | 
|                                                                        |  |                      |        |      |  |      |        |  |  |   |        | 
|Basic weighted average common shares outstanding                        |  |                      | 8,064  |      |  |      | 8,403  |  |  |   | 8,672  | 
|Effect of dilutive securities - Options                                 |  |                      | 89     |      |  |      | 63     |  |  |   | 180    | 
|                                                                        |  |                      |        |      |  |      |        |  |  |   |        | 
|Diluted weighted average common and potential common
shares outstanding |  |                      | 8,153  |      |  |      | 8,466  |  |  |   | 8,852  | 
|                                                                        |  |                      |        |      |  |      |        |  |  |   |        | 
|Diluted net income per share                                            |  | $                    | 1.57   |      |  | $    | 1.57   |  |  | $ | 1.16   | 
|                                                                        |  |                      |        |      |  |      |        |  |  |   |        | 

Use of estimates-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Recent changes in accounting standards-In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based Compensation, Transition and
Disclosure, an amendment of FASB Statement No. 123 (SFAS 148). This Statement
provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock based
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosure about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee compensation.
Further, SFAS 148 amends Accounting Principles Board Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. SFAS 148 is effective for our financial statements
beginning April 1, 2002. The Company has not determined whether it will
voluntarily change to the fair value based method of accounting for stock-based
compensation.

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2. Summary of Significant Accounting Policies - continued

On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 changes the accounting for certain financial instruments
that, under previous guidance, could be classified as equity or mezzanine
equity, by now requiring those instruments to be classified as liabilities (or
assets in some circumstances) in the statement of financial position. Further,
SFAS 150 requires disclosure regarding the terms of those instruments and
settlement alternatives. SFAS 150 affects an entitys classification of the
following freestanding instruments: mandatory redeemable instruments, financial
instruments to repurchase an entitys own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to
settle by issuing a variable number of its shares or other equity instruments
based solely on (a) a fixed monetary amount known at inception or (b) something
other than changes in its own equity instruments. SFAS 150 is effective for
periods beginning after June 15, 2003. The Companys adoption of this
interpretation is not expected to have an effect on its consolidated financial
statements.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a guarantor to
recognize, at the inception of a qualified guarantee, a liability for fair
value of the obligation undertaken in issuing the guarantee. FIN 45 is
effective on a prospective basis for qualified guarantees issued or modified
after March 31, 2003. Management does not expect the adoption of this
Interpretation to have a material impact on the Companys financial position or
results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 explains how to
identify variable interest entities and how an enterprise assesses its interest
in a variable interest entity to decide whether to consolidate that entity.
This Interpretation requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. FIN 46 is effective
immediately for variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. Management does not expect the adoption of this Interpretation to
have a material impact on the Companys financial position or results of
operation.

3. Marketable Securities

The Company acquired equity securities listed in Hong Kong.

|             |  |           |       |      |  |   |       | 
|------------ |  | --------- | ----- | ---- |  | - | ----- | 
|             |  | March 31,
|             |  |          
|             |  | 2002      |       | 2003
|             |  |           |       |     
|Cost         |  | $         | 1,081 |      |  | $ | 5,176 | 
|             |  |           |       |      |  |   |       | 
|Market value |  | $         | 1,115 |      |  | $ | 4,821 | 
|             |  |           |       |      |  |   |       | 

Unrealized gain (loss) for the years ended March 31, 2001, 2002 and 2003
were $nil, $34 and $(355), respectively.

Net proceeds from sale of marketable securities for the year ended March
31, 2002 and 2003 were $578 and $nil, and realized gains from sale of
marketable securities for the year ended March 31, 2002 and 2003 were $85 and
$nil, respectively. For the purposes of determining realized gains and losses,
the cost of securities sold was determined based on the average cost method.

4. Inventories

Inventories by major categories are summarized as follows:

|                 |  |           |        |      |  |   |        | 
|---------------- |  | --------- | ------ | ---- |  | - | ------ | 
|                 |  | March 31,
|                 |  |          
|                 |  | 2002      |        | 2003
|                 |  |           |        |     
|Raw materials    |  | $         | 7,368  |      |  | $ | 7,432  | 
|Work in progress |  |           | 3,213  |      |  |   | 4,454  | 
|Finished goods   |  |           | 2,644  |      |  |   | 2,898  | 
|                 |  |           |        |      |  |   |        | 
|                 |  | $         | 13,225 |      |  | $ | 14,784 | 
|                 |  |           |        |      |  |   |        | 

F-10



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5.     Property, Plant and Equipment

Property, plant and equipment consists of the following:

|                                                |  |           |         |      |  |   |         |  
|----------------------------------------------- |  | --------- | ------- | ---- |  | - | ------- | -
|                                                |  | March 31,
|                                                |  |          
|                                                |  | 2002      |         | 2003
|                                                |  |           |         |     
|At cost:                                        |  |           |         |      |  |   |         |  
|Leasehold land and buildings                    |  | $         | 4,957   |      |  | $ | 4,957   |  
|Plant and machinery                             |  |           | 21,953  |      |  |   | 22,160  |  
|Furniture, fixtures and equipment               |  |           | 10,773  |      |  |   | 11,332  |  
|Motor vehicles                                  |  |           | 2,526   |      |  |   | 2,577   |  
|Leasehold improvements                          |  |           | 3,628   |      |  |   | 3,942   |  
|                                                |  |           |         |      |  |   |         |  
|Total                                           |  |           | 43,837  |      |  |   | 44,968  |  
|Less: accumulated depreciation and amortization |  |           | (23,025 | )    |  |   | (26,943 | )
|Construction in progress                        |  |           | 3,982   |      |  |   | 11,598  |  
|                                                |  |           |         |      |  |   |         |  
|Net book value                                  |  | $         | 24,794  |      |  | $ | 29,623  |  
|                                                |  |           |         |      |  |   |         |  

6. Credit facilities and pledged assets

The Company has credit lines with various banks representing trade
acceptances, loans and overdrafts. At March 31, 2002 and 2003 these facilities
totalled $19,515, and $20,839, respectively, of which short-term bank loans,
interest bearing at 5.85% per annum of $482 was utilized at March 31, 2002 and
none was utilized at March 31, 2003. The maturities of these facilities are
generally up to 90 days. Interest rates are generally based on the banks
prime lending rates and the credit lines are normally subject to annual review.
There are no significant covenants or other financial restrictions relating to
the Companys facilities except that at March 31, 2002 and 2003, cash of $2,762
and $2,366, respectively, and leasehold land and buildings of net book value
$1,348 and $1,318, respectively, have been pledged as collateral for the above
facilities. At March 31, 2002, the Company also issued standby letters of
credit of $516 and $1,936 as a guarantee for the short-term bank loans and a
guarantee to certain non-trade creditors respectively. Both letters of credit
were released during the year.

The restricted cash at March 31, 2002 and 2003 also included $99 and nil
deposited into a bank account designated by the Chinese customs department as a
guarantee for the payment of customs duties.

7. Other Accrued liabilities

Other accrued liabilities consist of the following:

|                        |  |           |       |      |  |   |       | 
|----------------------- |  | --------- | ----- | ---- |  | - | ----- | 
|                        |  | March 31,
|                        |  |          
|                        |  | 2002      |       | 2003
|                        |  |           |       |     
|Value added tax payable |  | $         | 804   |      |  | $ | 695   | 
|Accrued expenses        |  |           | 227   |      |  |   | 235   | 
|Provision for tax risks |  |           |      |      |  |   | 801   | 
|Commission expenses     |  |           | 56    |      |  |   | 109   | 
|Others                  |  |           | 662   |      |  |   | 611   | 
|                        |  |           |       |      |  |   |       | 
|                        |  | $         | 1,749 |      |  | $ | 2,451 | 
|                        |  |           |       |      |  |   |       | 

8. Income Taxes

The components of income before income taxes and minority interests are as follows:

|                 |  |                      |        |      |  |      |        |  |  |   |        | 
|---------------- |  | -------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                 |  | Year ended March 31,
|                 |  |                     
|                 |  | 2001                 |        | 2002 |  | 2003
|                 |  |                      |        |      |  |     
|Hong Kong        |  | $                    | 1,462  |      |  | $    | 1,245  |  |  | $ | 5      | 
|China and others |  |                      | 12,284 |      |  |      | 13,539 |  |  |   | 15,352 | 
|                 |  |                      |        |      |  |      |        |  |  |   |        | 
|                 |  | $                    | 13,746 |      |  | $    | 14,784 |  |  | $ | 15,357 | 
|                 |  |                      |        |      |  |      |        |  |  |   |        | 

Hong Kong

The Company is subject to Hong Kong taxation on its activities conducted
in Hong Kong. Each company in Hong Kong files a separate tax return and is
subject to tax on its taxable income arising in or derived from Hong Kong.

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8. Income Taxes - continued

China

The Companys subsidiaries incorporated in China are subject to Chinese
income taxes at the applicable tax rate (currently 10-15%) on the taxable
income as reported in their Chinese statutory accounts in accordance with the
relevant income tax laws applicable to foreign enterprises. Pursuant to the
same income tax laws, the subsidiaries are fully exempted from Chinese income
tax for two years starting from the first profit-making year, followed by a 50%
exemption for the next three years. The 50% exemption for Jetcrown Industrial
(Shenzhen) Limited (Jetcrown Shenzhen) (a subsidiary of the Company) expired
on December 31, 1995 but was further extended from 1999 to 2001. The Companys
other Chinese subsidiaries were either making losses or exempted from income
tax in the years ended March 31, 2001, 2002 and 2003.

Pursuant to a further concession in the income tax laws, the Company, as a
foreign shareholder in a foreign enterprise in China, is eligible for a refund
of taxes paid by its Chinese subsidiaries on the proportion of the after-tax
profits of these subsidiaries which are reinvested by the Company in these
subsidiaries or in other foreign enterprises in China provided that the
reinvestment period relating to such subsidiaries or other foreign enterprises
is for at least five years from the date the reinvested funds are contributed.
If the reinvestment period is less than five years, the income tax refunded
will become payable to the Chinese tax authorities.

During the years ended March 31, 2001, 2002 and 2003, the Company recorded
a benefit relating to its decision to reinvest earnings of its Chinese
subsidiary, Jetcrown Shenzhen, totaling $428, $nil and $323, respectively.

Had these tax holidays and concessions not been available, the tax charge
would have been higher by $866, $272 and $611 and the basic net income per
share would have been lower by $0.11, $0.03 and $0.07 for the years ended March
31, 2001, 2002 and 2003 respectively, and diluted net income per share for the
years ended March 31, 2001, 2002 and 2003 would have been lower by $0.11, $0.03
and $0.07, respectively.

Others

Certain of the Companys income accrues in tax free jurisdictions and is
not subject to any income taxes.

The provision for income taxes consists of the following:

|             |  |                      |     |      |  |      |     |  |  |   |       | 
|------------ |  | -------------------- | --- | ---- |  | ---- | --- |  |  | - | ----- | 
|             |  | Year ended March 31,
|             |  |                     
|             |  | 2001                 |     | 2002 |  | 2003
|             |  |                      |     |      |  |     
|Current tax  |  |                      |     |      |  |      |     |  |  |   |       | 
|- Hong Kong  |  | $                    | 387 |      |  | $    | 251 |  |  | $ | 3,674 | 
|- China      |  |                      | (72 | )    |  |      | 284 |  |  |   | 152   | 
|Deferred tax |  |                      |    |      |  |      |    |  |  |   |      | 
|             |  |                      |     |      |  |      |     |  |  |   |       | 
|             |  | $                    | 315 |      |  | $    | 535 |  |  | $ | 3,826 | 
|             |  |                      |     |      |  |      |     |  |  |   |       | 

A reconciliation between the provision for income taxes computed by
applying the Hong Kong statutory tax rate to income before income taxes and the
actual provision for income taxes is as follows:

|                                                    |  |                      |      |      |  |      |       |   |  |  |      |  
|--------------------------------------------------- |  | -------------------- | ---- | ---- |  | ---- | ----- | - |  |  | ---- | -
|                                                    |  | Year ended March 31,
|                                                    |  |                     
|                                                    |  | 2001                 |      | 2002 |  | 2003
|                                                    |  |                      |      |      |  |     
|Statutory tax rate in Hong Kong                     |  |                      | 16.0 | %    |  |      | 16.0  | % |  |  | 16.0 | %
|Effective different tax rate in other jurisdictions |  |                      | (9.3 | )    |  |      | (1.4  | ) |  |  | (1.6 | )
|Tax holidays and concessions                        |  |                      | 0.9  |      |  |      | 3.0   |   |  |  | (4.8 | )
|Income not subject to taxation                      |  |                      | (8.2 | )    |  |      | (14.5 | ) |  |  | (6.8 | )
|Increase (decrease) in valuation allowances         |  |                      | 2.1  |      |  |      | 0.2   |   |  |  | (2.0 | )
|Under provision of income tax in previous year      |  |                      | 0.3  |      |  |      | 0.1   |   |  |  | 0.5  |  
|Additional assessments for previous years (a)       |  |                      |     |      |  |      |      |   |  |  | 23.0 |  
|Others                                              |  |                      | 0.5  |      |  |      | 0.2   |   |  |  | 0.6  |  
|                                                    |  |                      |      |      |  |      |       |   |  |  |      |  
|Effective tax rate                                  |  |                      | 2.3  | %    |  |      | 3.6   | % |  |  | 24.9 | %
|                                                    |  |                      |      |      |  |      |       |   |  |  |      |  

(a)  The Company is in the final stages of a settlement with Hong Kong Inland
Revenue Department (IRD) regarding a disagreement on whether taxes should be
assessed on profits derived from activities of certain of its subsidiaries
during the six fiscal years ended March 31, 2002, which the Company believed
were conducted outside of Hong Kong and were not subject to profits tax under
the Hong Kong Revenue Ordinance. While, based on consultations with Hong Kong
tax experts, management believes that its tax position for these years was
sound and supportable, management nevertheless concluded that it would be in
the Companys best interest to make a proposal for settlement with the IRD in
order to avoid the expenditure of substantial time, effort and expense involved
in proceedings that could extend years. A provision of $3,532 being the
directors best estimate of additional income tax assessments which are likely
to arise on settlement has been charged to the consolidated income statement
for the year ended March 31, 2003.

F-12



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##### Table of Contents



8. Income Taxes- continued

The components of deferred income tax are as follows:

|                           |                                  |   |           |      |      |   |     |     |  
|-------------------------- | -------------------------------- | - | --------- | ---- | ---- | - | --- | --- | -
|                           |                                  |   | March 31,
|                           |                                  |   |          
|                           |                                  |   | 2002      |      | 2003
|                           |                                  |   |           |      |     
|Deferred tax asset:        |                                  |   |           |      |      |   |     |    
|                           | Net operating loss carryforwards |   | $         | 342  |      |   | $   |    |  
|                           | Less: Valuation allowances       |   |           | (310 | )    |   |     |    |  
|                           |                                  |   |           |      |      |   |     |    
|                           |                                  |   | 32        |      |      |   |    |    
|Deferred tax liability:    |                                  |   |           |      |      |   |     |    
|                           | Property, plant and equipment    |   |           | (47  | )    |   |     | (15 | )
|                           |                                  |   |           |      |      |   |     |    
|Net deferred tax liability |                                  | $ | (15       | )    |      | $ | (15 | )  
|                           |                                  |   |           |      |      |   |     |    

9. Related Party Transactions

During the years ended March 31, 2001 and 2002, the Company rented
employee accommodation in China from Mr. S.K. Lee and Mr. M.C. Tam, executive
officers of the Company and minority shareholders of Kwanasia, a subsidiary of
the Company. Rentals charged by them to the Company were $12 and $12, for the
years ended March 31, 2001 and 2002, respectively. No such rental arrangement
was made in the year ended March 31, 2003.

During the year ended March 31, 2001, the Company acquired a motor car
from Unicrown Limited for $206, which approximated its fair value. Mr. Richard
Lau, a director of the Company, has a beneficial interest in that company.

10. Commitments and Contingencies

The Company leases premises under various operating leases, certain of
which contain escalation clauses. Rental expenses under operating leases
included in the statement of income were $2,262, $2,169 and $1,917 for the
years ended March 31, 2001, 2002 and 2003, respectively.

At March 31, 2003, the Company was obligated under operating leases
requiring minimum rentals as follows:

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|Years ending March 31        |  |   |       | 
|2004                         |  | $ | 1,220 | 
|2005                         |  |   | 662   | 
|2006                         |  |   | 550   | 
|2007                         |  |   | 540   | 
|2008                         |  |   | 287   | 
|                             |  |   |       | 
|Total minimum lease payments |  | $ | 3,259 | 
|                             |  |   |       | 

At March 31, 2003, the Company had capital commitments for plant and
machinery totalling $3,850 which is expected to be disbursed during the year
ending March 31, 2004.

The Company has contracted with some building contractors to construct the
companys new factory plant in Dongguan, the PRC. The budgeted costs of the
whole project are estimated to be $13,650. At March 31, 2003, a total of
$11,401 has been paid on the project and is recorded in construction in
progress.

11. Shareholders Equity

On July 8, 2002, the Company completed a three-for-two stock split. In
conjunction with this stock split, the authorized share capital has been
increased from 20,000,000 to 30,000,000 common shares. The par value of common
stock has been changed to nil at the same time. No fractional shares were
issued and 41 shares were redeemed and cancelled upon the stock split. All
financial statements have been retroactively restated to account for the
change.

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##### Table of Contents



12. Employee Benefits

The Company contributes to a state pension scheme run by the Chinese
government in respect of its employees in China. The expense related to this
plan, which is calculated at 16% of the average monthly salary, was $142, $281
and $260 for the years ended March 31, 2001, 2002 and 2003, respectively. In
December 1996, the Company established a defined contribution plan for certain
of the employees in Hong Kong. The plan provides for annual contributions by
the Company at the rate of 5% of eligible compensation of employees based on
length of service and requires contribution by employees at the rate of 5% of
eligible compensation. The plan ceased on November 30, 2000. According to the
Mandatory Provident Fund (MPF) legislation regulated by the Mandatory
Provident Fund Schemes Authority in Hong Kong, with effect from December 1,
2000, the Company is required to participate in a MPF scheme operated by
approved trustees in Hong Kong and to make contributions for its eligible
employees. The contributions borne by the Company are calculated at 5% of the
salaries and wages (monthly contribution is limited to 5% of HK$20 for each
eligible employees) as calculated under the MPF legislation. The expense
related to the MPF in the years ended March 31, 2001, 2002 and 2003 amounted to
$30, $66 and $63, respectively.

13. Stock Option Plan

On March 15, 1995, the Company adopted a stock option plan that permits
the Company to grant options to officers, directors, employees and others to
purchase up to 675,000 shares of Common Stock. On September 29, 1998, the
Company approved an increase of 366,000 shares making a total of 1,041,000
shares of common stock available under the stock option plan. On January 10,
2002, the Company adopted another stock option plan to purchase up to 750,000
shares of Common Stock. Options granted under the stock option plans will be
exercisable for a period of up to 10 years commencing on the date of grant, at
a price equal to at least the fair market value of the Common Stock at the date
of grant, and may contain such other terms as the Board of Directors or a
committee appointed to administer the plan may determine. A summary of the
option activity (with parenthetical weighted average prices per share) is as
follows:

|                                                                                                     |  |                         |               |      |  |      |                |   |  |   |           |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | ------------- | ---- |  | ---- | -------------- | - |  | - | --------- | -
|                                                                                                     |  | Number of stock options
|                                                                                                     |  |                        
|                                                                                                     |  | Year ended March 31,   
|                                                                                                     |  |                        
|                                                                                                     |  | 2001                    |               | 2002 |  | 2003
|                                                                                                     |  |                         |               |      |  |     
|Outstanding at beginning of the year ($8.39 for 2001
and $9.83 for 2002 and $10.95 for 2003)         |  |                         | 660,000       |      |  |      | 300,000        |   |  |   | 1,076,250 |  
|Granted during the year ($10.53 for 2001 and $11.33 for 2002)                                        |  |                         | 15,000        |      |  |      | 801,000        |   |  |   |          |  
|Exercised during the year ($7.32 for 2001, $9.83 for 2002
and $10.32 for 2003)                       |  |                         | (375,000      | )    |  |      | (24,750        | ) |  |   | (408,500  | )
|                                                                                                     |  |                         |               |      |  |      |                |   |  |   |           |  
|Outstanding and exercisable at end of the year
($9.83 for 2001, $10.95 for 2002 and $11.33 for 2003) |  |                         | 300,000       |      |  |      | 1,076,250      |   |  |   | 667,750   |  
|                                                                                                     |  |                         |               |      |  |      |                |   |  |   |           |  
|Range of exercise price per share                                                                    |  | $                       | 6.67 to $9.83 |      |  | $    | 9.83 to $11.33 |   |  | $ | 11.33     |  

The weighted average remaining contractual life of the share options
outstanding at March 31, 2003 was 8.83 years. At March 31, 2002 and March 31,
2003, there were nil options available for future grant under the plans.

14. Concentrations of Credit Risk and Major Customers

A substantial percentage of the Companys sales are made to a small number
of customers and are typically sold either under letter of credit or on an open
account basis. Details of customers accounting for 10% or more of total net
sales for each of the three years ended March 31, 2001, 2002 and 2003 are as
follows:

|                                           |  |                         |      |      |  |      |      |   |  |  |      |  
|------------------------------------------ |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                           |  | Percentage of net sales
|                                           |  | Year ended March 31,   
|                                           |  |                        
|                                           |  | 2001                    |      | 2002 |  | 2003
|                                           |  |                         |      |      |  |     
|Epson Precision (H.K.) Limited             |  |                         | 13.0 | %    |  |      | 17.5 | % |  |  | 22.3 | %
|Digidesign, Inc.                           |  |                         |      | *    |  |      |      | * |  |  | 13.5 | %
|Inter-Tel Incorporated                     |  |                         | 20.0 | %    |  |      | 11.6 | % |  |  | 13.0 | %
|VTech Telecommunications Limited           |  |                         | 17.6 | %    |  |      | 15.3 | % |  |  | 11.6 | %
|Kyocera Mita Industrial Co. (H.K.) Limited |  |                         | 18.7 | %    |  |      | 13.6 | % |  |  | 10.9 | %

     Less than 10%

Sales to the above customers relate to both injection-molded plastic parts
and electronic products.

F-14



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##### Table of Contents



14. Concentrations of Credit Risk
and Major Customers - Continued

Details of the amounts receivable from the five customers with the largest
receivable balances at March 31, 2002 and 2003, respectively, are as follows:

|                            |  |               |      |      |  |  |      |  
|--------------------------- |  | ------------- | ---- | ---- |  |  | ---- | -
|                            |  | Percentage of
|                            |  | accounts     
|                            |  | receivable   
|                            |  |              
|                            |  | March 31,    
|                            |  |              
|                            |  | 2002          |      | 2003
|                            |  |               |      |     
|Largest receivable balances |  |               | 67.0 | %    |  |  | 65.5 | %

The Company has not experienced any significant difficulty in collecting
its accounts receivable in the past and is not aware of any financial
difficulties being experienced by its major customers. There has been no
significant bad debt expense during each of the three years ended March 31,
2001, 2002 and 2003 and there was no provision for bad debts at the beginning
and end of the three years ended March 31, 2001, 2002 and 2003.

15. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, restricted cash,
marketable securities, accounts receivable, accounts payable and short-term
bank loans are reasonable estimates of their fair value. All the financial
instruments are for trade purposes.

16. Segment Information

The Company has three reportable segments: plastic injection molding,
electronic products assembling and metallic parts manufacturing. The Companys
reportable segments are strategic business units that offer different products
and services. They are managed separately because each business requires
different technology and marketing strategies. Most of the businesses were
acquired as a unit, and the management at the time of the acquisition was
retained.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.

Contributions of the major activities, profitability information and asset
information of the Companys reportable segments for the years ended March 31,
2001, 2002 and 2003 are as follows:

|                                                  |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | -------------------- | ------ | ----- |  | ------------- | ------ | --------- |  | ----- | ------ | ------------- |  | --------- | ------ | ------------ |  | ------------- | ------ | - |  | - | ------ | - |  | ------------ | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  | Year ended March 31,
|                                                  |  |                     
|                                                  |  | 2001                 |        | 2002  |  | 2003         
|                                                  |  |                      |        |       |  |              
|                                                  |  |                      |        |       |  | Intersegment  |        |           |  |       |        |               |  |           |        | Intersegment |  |               |        |   |  |   |        |   |  | Intersegment |        |   |  |  
|                                                  |  | Net sales            |        | sales |  | Profit (loss) |        | Net sales |  | sales |        | Profit (loss) |  | Net sales |        | sales        |  | Profit (loss)
|                                                  |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |              
|Segment:                                          |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|Injection molded
plastic parts                    |  | $                    | 50,531 |       |  | $             | 270    |           |  | $     | 12,360 |               |  | $         | 47,504 |              |  | $             |       |   |  | $ | 13,010 |   |  | $            | 50,975 |   |  | $ | 1,068  |   |  | $ | 12,687 |  
|Electronic products                               |  |                      | 28,647 |       |  |               | 25     |           |  |       | 3,003  |               |  |           | 33,672 |              |  |               | 15     |   |  |   | 2,067  |   |  |              | 38,221 |   |  |   | 8      |   |  |   | 3,313  |  
|Metallic parts                                    |  |                      | 5,906  |       |  |               | 3,942  |           |  |       | (1,581 | )             |  |           | 4,987  |              |  |               | 2,828  |   |  |   | (258   | ) |  |              | 5,542  |   |  |   | 2,757  |   |  |   | (643   | )
|                                                  |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|Segment total                                     |  | $                    | 85,084 |       |  | $             | 4,237  |           |  | $     | 13,782 |               |  | $         | 86,163 |              |  | $             | 2,843  |   |  | $ | 14,819 |   |  | $            | 94,738 |   |  | $ | 3,833  |   |  | $ | 15,357 |  
|Reconciliation to
consolidated totals:            |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|Sales eliminations                                |  |                      | (4,237 | )     |  |               | (4,237 | )         |  |       |       |               |  |           | (2,843 | )            |  |               | (2,843 | ) |  |   |       |   |  |              | (3,833 | ) |  |   | (3,833 | ) |  |   |       |  
|Goodwill amortization
not allocated to segment    |  |                      |       |       |  |               |       |           |  |       | (36    | )             |  |           |       |              |  |               |       |   |  |   | (35    | ) |  |              |       |   |  |   |       |   |  |   |       |  
|                                                  |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|Consolidated totals:                              |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|Net sales                                         |  | $                    | 80,847 |       |  | $             |       |           |  |       |        |               |  | $         | 83,320 |              |  | $             |       |   |  |   |        |   |  | $            | 90,905 |   |  | $ |       |   |  |   |        |  
|                                                  |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  
|Income before
income taxes
and minority
interests |  |                      |        |       |  |               |        |           |  | $     | 13,746 |               |  |           |        |              |  |               |        |   |  | $ | 14,784 |   |  |              |        |   |  |   |        |   |  | $ | 15,357 |  
|                                                  |  |                      |        |       |  |               |        |           |  |       |        |               |  |           |        |              |  |               |        |   |  |   |        |   |  |              |        |   |  |   |        |   |  |   |        |  

F-15



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##### Table of Contents



16.     Segment
Information - Continued

|                               |  |                      |       |          |  |          |   |          |  |          |     |          |  |   |    |  |  |   |     |  |  |   |   | 
|------------------------------ |  | -------------------- | ----- | -------- |  | -------- | - | -------- |  | -------- | --- | -------- |  | - | -- |  |  | - | --- |  |  | - | - | 
|                               |  | Year ended March 31,
|                               |  |                     
|                               |  | 2001                 |       | 2002     |  | 2003    
|                               |  |                      |       |          |  |         
|                               |  | Interest             |       | Interest |  | Interest |   | Interest |  | Interest |     | Interest
|                               |  | income               |       | expenses |  | income   |   | expenses |  | income   |     | expenses
|                               |  |                      |       |          |  |          |   |          |  |          |     |         
|Segment:                       |  |                      |       |          |  |          |   |          |  |          |     |          |  |   |    |  |  |   |     |  |  |   |   | 
|Injection molded
plastic parts |  | $                    | 1,136 |          |  | $        |  |          |  | $        | 719 |          |  | $ |   |  |  | $ | 396 |  |  | $ |  | 
|Electronic products            |  |                      | 139   |          |  |          | 6 |          |  |          | 70  |          |  |   | 26 |  |  |   | 26  |  |  |   | 6 | 
|Metallic parts                 |  |                      | 17    |          |  |          |  |          |  |          | 14  |          |  |   |   |  |  |   | 4   |  |  |   |  | 
|                               |  |                      |       |          |  |          |   |          |  |          |     |          |  |   |    |  |  |   |     |  |  |   |   | 
|Consolidated total             |  | $                    | 1,292 |          |  | $        | 6 |          |  | $        | 803 |          |  | $ | 26 |  |  | $ | 426 |  |  | $ | 6 | 
|                               |  |                      |       |          |  |          |   |          |  |          |     |          |  |   |    |  |  |   |     |  |  |   |   | 

|                                              |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |              |       |              |  |   |       |  |  |   |         |   |  |              |       |  |  |   |       | 
|--------------------------------------------- |  | -------------------- | ------- | ----------- |  | ------------ | ------ | ------------ |  | ------------ | ----- | ------------ |  | ------------ | ------ | ----------- |  | ------------ | ----- | ------------ |  | - | ----- |  |  | - | ------- | - |  | ------------ | ----- |  |  | - | ----- | 
|                                              |  | Year ended March 31,
|                                              |  |                     
|                                              |  | 2001                 |         | 2002        |  | 2003        
|                                              |  |                      |         |             |  |             
|                                              |  |                      |         |             |  |              |        |              |  | Depreciation |       |              |  |              |        |             |  |              |       | Depreciation |  |   |       |  |  |   |         |   |  | Depreciation
|                                              |  | Identifiable         |         | Capital     |  | and          |        | Identifiable |  | Capital      |       | and          |  | Identifiable |        | Capital     |  | and         
|                                              |  | assets               |         | expenditure |  | amortization |        | assets       |  | expenditure  |       | amortization |  | assets       |        | expenditure |  | amortization
|                                              |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |             
|Segment:                                      |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |              |       |              |  |   |       |  |  |   |         |   |  |              |       |  |  |   |       | 
|Injection molded plastic
parts                |  | $                    | 60,704  |             |  | $            | 11,817 |              |  | $            | 2,625 |              |  | $            | 68,165 |             |  | $            | 3,916 |              |  | $ | 2,921 |  |  | $ | 80,335  |   |  | $            | 8,868 |  |  | $ | 3,082 | 
|Electronic products                           |  |                      | 26,821  |             |  |              | 1,589  |              |  |              | 1,437 |              |  |              | 24,508 |             |  |              | 335   |              |  |   | 1,444 |  |  |   | 26,400  |   |  |              | 532   |  |  |   | 1,190 | 
|Metallic parts                                |  |                      | 6,149   |             |  |              | 520    |              |  |              | 941   |              |  |              | 4,477  |             |  |              | 146   |              |  |   | 518   |  |  |   | 4,563   |   |  |              | 331   |  |  |   | 420   | 
|                                              |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |              |       |              |  |   |       |  |  |   |         |   |  |              |       |  |  |   |       | 
|Segment totals                                |  | $                    | 93,674  |             |  | $            | 13,926 |              |  | $            | 5,003 |              |  | $            | 97,150 |             |  | $            | 4,397 |              |  | $ | 4,883 |  |  | $ | 111,298 |   |  | $            | 9,731 |  |  | $ | 4,692 | 
|Reconciliation to
consolidated totals:        |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |              |       |              |  |   |       |  |  |   |         |   |  |              |       |  |  |   |       | 
|Elimination of receivables
from intersegments |  |                      | (10,721 | )           |  |              |       |              |  |              |      |              |  |              | (2,884 | )           |  |              |      |              |  |   |      |  |  |   | (5,604  | ) |  |              |      |  |  |   |      | 
|Goodwill not allocated to
segments            |  |                      | 513     |             |  |              |       |              |  |              | 36    |              |  |              | 478    |             |  |              |      |              |  |   | 35    |  |  |   | 478     |   |  |              |      |  |  |   |      | 
|                                              |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |              |       |              |  |   |       |  |  |   |         |   |  |              |       |  |  |   |       | 
|Consolidated totals                           |  | $                    | 83,466  |             |  | $            | 13,926 |              |  | $            | 5,039 |              |  | $            | 94,744 |             |  | $            | 4,397 |              |  | $ | 4,918 |  |  | $ | 106,172 |   |  | $            | 9,731 |  |  | $ | 4,692 | 
|                                              |  |                      |         |             |  |              |        |              |  |              |       |              |  |              |        |             |  |              |       |              |  |   |       |  |  |   |         |   |  |              |       |  |  |   |       | 

All of the Companys sales are coordinated through the Hong Kong
subsidiaries and a breakdown of sales by destination is as follows:

|                |                          |   |                      |        |      |   |        |        |  |  |        |        | 
|--------------- | ------------------------ | - | -------------------- | ------ | ---- | - | ------ | ------ |  |  | ------ | ------ | 
|                |                          |   | Year ended March 31,
|                |                          |   |                     
|                |                          |   | 2001                 |        | 2002 |   | 2003  
|                |                          |   |                      |        |      |   |       
|Net sales       |                          |   |                      |        |      |   |        |        |  |  |        |       
|                | China                    |   | $                    | 44,078 |      |   | $      | 46,876 |  |  | $      | 53,503 | 
|                | United States of America |   |                      | 18,282 |      |   |        | 19,375 |  |  |        | 25,949 | 
|                | Hong Kong                |   |                      | 15,557 |      |   |        | 11,690 |  |  |        | 2,838  | 
|                | Europe                   |   |                      | 1,763  |      |   |        | 4,053  |  |  |        | 7,435  | 
|                | Others                   |   |                      | 1,167  |      |   |        | 1,326  |  |  |        | 1,180  | 
|                |                          |   |                      |        |      |   |        |        |  |  |        |        | 
|Total net sales |                          | $ | 80,847               |        |      | $ | 83,320 |        |  |  | 90,905 |       
|                |                          |   |                      |        |      |   |        |        |  |  |        |        | 

The location of the Companys identifiable assets is as follows:

|                          |  |           |        |      |  |      |        |  |  |   |         | 
|------------------------- |  | --------- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|                          |  | March 31,
|                          |  |          
|                          |  | 2001      |        | 2002 |  | 2003
|                          |  |           |        |      |  |     
|Hong Kong                 |  | $         | 47,520 |      |  | $    | 53,156 |  |  | $ | 58,579  | 
|China                     |  |           | 35,433 |      |  |      | 41,110 |  |  |   | 47,115  | 
|Goodwill                  |  |           | 513    |      |  |      | 478    |  |  |   | 478     | 
|                          |  |           |        |      |  |      |        |  |  |   |         | 
|Total identifiable assets |  | $         | 83,466 |      |  | $    | 94,744 |  |  | $ | 106,172 | 
|                          |  |           |        |      |  |      |        |  |  |   |         | 

17. Subsequent event

On April 2, 2003, the Company announced the purchase of its previously
leased facilities for the Company electronics and metallics operations in
Dongguan, China. The cost of the acquisition is approximately $4,100.

F-16



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ITEM 19. EXHIBITS

The following documents are filed as exhibits herewith:

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|1.1         |  | Memorandum and Articles of Association (as amended through March 7, 1995) (incorporated by
reference to Exhibit 3.1 to Deswells Registration Statement on Form F-1 filed with the SEC
on June 19, 1995).                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|1.2         |  | Amendment to Memorandum and Articles of Association filed with BVI Registry of Companies on
July 19, 1995 (incorporated by reference to Exhibit 1.2 to Deswells Annual Report on Form
20-F for the year ended March 31, 2001 filed with the SEC on July 10, 2001).                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|1.3         |  | Notice of amendment of Memorandum and Articles of Association, with Certified Extract of a
Resolution Adopted by the Directors Pursuant to the Articles of Association of the Company
on the 8th day of July 2002 (incorporated by reference to Exhibit 1.3 to Deswells Form 8A/A
(Amendment No. 1) filed with the SEC on August 14, 2002).                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|1.4         |  | Notice of amendment of Memorandum and Articles of Association (Amendment No. 2), with
Notice of Increase in Authorised Capital and Certified Extract of a Resolution Adopted by
the Directors Pursuant to the Articles of Association of the Company on the 8th day of July
2002 (incorporated by reference to Exhibit 1.4 to Deswells
Form 8A/A (Amendment No. 2)
filed with the SEC on August 14, 2002)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|2.1         |  | Form of common share certificate (incorporated by reference to Exhibit 4.1 of Amendment No.
1 to Deswells Registration Statement on Form F-1 filed with the SEC on July 13, 1995).                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.1         |  | Facility letter dated December 13, 2001 between UFJ Bank Limited (previously named The Sanwa
Bank Limited) and Jetcrown Industrial Limited (incorporated by reference to the exhibit 4.1
to Deswells Annual Report on Form 20-F for the year ended March 31, 2002 filed with the SEC
on July 9 , 2002).                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.2         |  | Facility letter dated April 16, 2002 between Standard Chartered Bank and Jetcrown Industrial
Limited                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.3         |  | Facility letter dated February 20, 2002 and May 2, 2003 between Standard Chartered Bank and
Kwanasia Electronics Company Limited (Facility letter dated February 20, 2002 incorporated
by reference to Exhibit 4.3 of registrants Form 20-F for the year ended March 31, 2002,
filed with the SEC on July 9, 2002.                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.4         |  | Facility letter dated February 10, 2003 between Fortis Bank Asia HK and Kwanasia Electronics
Company Limited.                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.5         |  | Facility letter dated November 29, 2002 between UFJ Bank Limited and Kwanasia Electronics
Company Limited.                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.6         |  | Revolving Short-term Renminbi Loan Facility letter dated November 28, 2002 between UFJ Bank
Shenzhen Branch and Dongguan Kwan Hong Electronics Co., Limited.                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.7         |  | Revolving Short-term Renminbi Loan Facility letter dated May 6, 2003 between Standard
Chartered Bank Shenzhen Branch and Dongguan Kwan Hong Electronics Company Limited.                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.8         |  | Tenancy Agreement dated May 29, 2002 between Shekou Yu Yi Shareholding Co. Ltd. and Jetcrown
Industrial (Shenzhen) Limited for the 1st and 2nd Floor, Block A, Wing Village Industrial
Estate, Shekou, Shenzhen                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.9         |  | Tenancy Agreement dated May 30, 2003 between Shekou NanShui Enterprises Shareholding Co.
Ltd. and Jetcrown Industrial (Shenzhen) Limited for the 2nd to 5th Floor, Block E, Wing
Village Industrial Estate, Shekou, Shenzhen.                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.10        |  | Extension from May 1, 2003 to April 30, 2004 of and including Tenancy Agreement dated April
9 and 11, 2001 between Shekou East Empire Industrial Company Limited and Jetcrown Industrial
(Shenzhen) Limited for the 2nd Floor to 5th Floor, Block H, Wing Village Industrial Estate,
Shekou, Shenzhen.                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|4.11        |  | Tenancy Agreement dated December 31, 2002 between Shekou Tai Shen Enterprises Shareholding
Co. Ltd. and Jetcrown Industrial (Shenzhen) Limited for Block D (five floors                                                                                                                                                                                                                                     

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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  | total) Wing Village Industrial Estate, Shekou, Shenzhen.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.12        |  | Tenancy Agreement dated January 2, 2003 between Shekou District Yu Yee Shareholding Co. Ltd.
and Jetcrown Industrial (Shenzhen) Limited for the 1st to 5th Floor, Block F, Wing Village
Industrial Estate, Shekou, Shenzhen.                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.13        |  | Tenancy Agreement dated December 27, 2002 between Shekou Wan Ha Enterprises Shareholding Co.
Ltd. and Jetcrown Industrial (Shenzhen) Limited for Room 203, 205-208, 210-212, 214,
216-217, 302-305, 307, 309, 310, 312-317, 401, 403-405, 407-416, Complex Building, Wan Sha
Village, Shekou, Shenzhen and Room 201-203, 205-208, 210-214, 305, 307-310, 402-405, 407,
409, 413-414, 416, 502-504, 506-507, 510, 513-516, 601, 603-607, 609-616, 701-716, Block C1,
New Wing Village, Shekou.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.14        |  | Contract on Land and Factory dated February 28, 2003 between Dongguan City Cheung On Town
Siu Bin Estate Member Committee and Dongguan Kwan Hong Electronics Co. Ltd. for the land and
factory and dormitory buildings on the area between Siu Bin Reservoir and Sai Cheong Road,
the second Industrial Zone, Siu Bin Estate, Cheung On Town, Dongguan City and the
Attestation Deed dated May 14, 2003                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.15        |  | 2001 Stock Option Plan (incorporated by reference to Exhibit A to the Companys Proxy
Statement for its 2001 Annual Meeting of Stockholders filed with the SEC under cover of Form
6-K on December 12, 2001.)                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.16        |  | 2003 Stock Option Plan (incorporated by reference to Exhibit A to the Companys Proxy
Statement for its 2003 Annual Meeting of Stockholders submitted to the SEC under cover of
Form 6-K on September 15, 2003.)                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|8.1         |  | Diagram of the Companys operating subsidiaries and affiliates -
(see page 20 of this report)                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|11.1        |  | Consent of BDO International to incorporation of its report on the Companys consolidated
financial statements into Registrants Registration Statements on Form S-8.                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|11.2        |  | Consent of Deloitte
Touche Tohmatsu to incorporation of its report on the Companys
consolidated financial statements into Registrants Registration
Statements on Form S-8.                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|12.1        |  | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|12.2        |  | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|13.1        |  | Certification Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act Of 2002                                                                                                                                                                                                                                                                                                                                                                       

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned thereunto duly authorized.

|                         |  |                          |  |                          
|------------------------ |  | ------------------------ |  | -------------------------
|                         |  | DESWELL INDUSTRIES, INC.
|                         |  |                          |  |                          
|Date:
September 15, 2003 |  | By:                      |  | /s/ Richard Lau          
|                         |  |                          | 
|                         |  |                          |  | Richard Lau              
|                         |  |                          |  | Chairman of the Board and
|                         |  |                          |  | Chief Executive Officer