##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 o
    
    Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
 OR
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 For the Fiscal Year Ended: March 31, 2006
 Commission File Number: 0-26448
 
 (DESWELL INDUSTRIES, INC. LOGO)
    
    DESWELL INDUSTRIES, INC.
    
  
     o þ
 o þ
 þ o
  o þ o
 o þ
 o þ




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##### 



TABLE OF CONTENTS
 PageFINANCIAL STATEMENTS AND CURRENCY PRESENTATION
    
    
    2PART I
    
    
    3ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    12ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    26ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    27ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    37ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    41ITEM 8. FINANCIAL INFORMATION
    
    
    44ITEM 9. THE OFFER AND LISTING
    
    
    45ITEM 10. ADDITIONAL INFORMATION
    
    
    46ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    55ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    56PART II
    
    
    56ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    56ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
    
    
    56ITEM 15. CONTROLS AND PROCEDURES
    
    
    56ITEM 16. [RESERVED]
    
    
    57ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    57ITEM 16B. CODE OF ETHICS
    
    
    57ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    57ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR THE AUDIT COMMITTEE
    
    
    58ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATE PURCHASERS
    
    
    58PART III
    
    
    58ITEM 17. FINANCIAL STATEMENTS
    
    
    58ITEM 18. FINANCIAL STATEMENTS
    
    
    58ITEM 19. EXHIBITS
    
    
    75SIGNATURES
    
    
    77EXHIBIT 4.3EXHIBIT 4.4EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 14.1
  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
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 and the Companys three-for-two stock split
effected in March 2005.
 
 FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
  2




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 Selected Financial Data (1)
  (In thousands, except per share and percentage data)Year ended March 31,Income Statement Data
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006Net sales
    
    $
    83,320
    
    
    $
    90,905
    
    
    $
    97,195
    
    
    $
    125,590
    
    
    $
    115,276Cost of sales
    
    
    54,448
    
    
    
    61,006
    
    
    
    66,105
    
    
    
    92,072
    
    
    
    89,850Gross profit
    
    
    28,872
    
    
    
    29,899
    
    
    
    31,090
    
    
    
    33,518
    
    
    
    25,426Selling, general and administrative expenses
    
    
    14,939
    
    
    
    15,354
    
    
    
    14,718
    
    
    
    15,759
    
    
    
    15,052Operating income
    
    
    13,933
    
    
    
    14,545
    
    
    
    16,372
    
    
    
    17,759
    
    
    
    10,374Interest expense
    
    
    (26
    )
    
    
    (6
    )
    
    
    (16
    )
    
    
    (12
    )
    
    
    (6
    )Other income (expenses), net
    
    
    877
    
    
    
    818
    
    
    
    910
    
    
    
    342
    
    
    
    (376
    )Income before income taxes
    
    
    14,784
    
    
    
    15,357
    
    
    
    17,266
    
    
    
    18,089
    
    
    
    9,992Income taxes
    
    
    535
    
    
    
    3,826
    
    
    
    589
    
    
    
    576
    
    
    
    (27
    )Income before minority interests
    
    
    14,249
    
    
    
    11,531
    
    
    
    16,677
    
    
    
    17,513
    
    
    
    10,019Minority interests
    
    
    925
    
    
    
    1,288
    
    
    
    1,957
    
    
    
    2,330
    
    
    
    1,240Net income
    
    $
    13,324
    
    
    $
    10,243
    
    
    
    14,720
    
    
    
    15,183
    
    
    
    8,779Basic earnings per share (2)(3)
    
    $
    1.06
    
    
    $
    0.79
    
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.59Average number of shares outstandingbasic (2)(3)
    
    
    12,605
    
    
    
    13,008
    
    
    
    13,664
    
    
    
    14,656
    
    
    
    14,908Diluted earnings per share (3)
    
    $
    1.05
    
    
    $
    0.77
    
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    0.59Average number of shares outstandingdiluted
(2)(3)
    
    
    12,699
    
    
    
    13,278
    
    
    
    14,160
    
    
    
    14,933
    
    
    
    14,936Statistical Data:Gross margin
    
    
    34.7
    %
    
    
    32.9
    %
    
    
    32.0
    %
    
    
    26.7
    %
    
    
    22.1
    %Operating margin
    
    
    16.7
    %
    
    
    16.0
    %
    
    
    16.8
    %
    
    
    14.1
    %
    
    
    9.0
    %Dividends per share (3)
    
    $
    0.57
    
    
    $
    0.51
    
    
    $
    0.63
    
    
    $
    0.65
    
    
    $
    0.63At March 31,Balance Sheet Data
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006Working capital
    
    $
    54,922
    
    
    $
    58,223
    
    
    $
    52,876
    
    
    $
    57,576
    
    
    $
    55,114Total assets
    
    
    94,744
    
    
    
    106,172
    
    
    
    113,534
    
    
    
    136,976
    
    
    
    130,670Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    69,651
    
    
    
    81,846
    
    
    
    89,730
    
    
    
    104,767
    
    
    
    106,768
 
 (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 splits effected in July 2002 and March 2005 (see Note 12 of Notes to Consolidated
Financial Statements). 3




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Risk Factors
  We face numerous risks as a result of our operations in China.
  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.
  There may be a lack of remedies and impartiality under the Chinese legal system that prevents
us from enforcing the agreements under which we operate our factories.
  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
  4




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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.
  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
  Changes to Chinese tax laws and heightened efforts by the Chinese tax authorities to increase
revenues could subject us to greater taxes.
  We could suffer losses from corrupt or fraudulent business practices. Conducting business in
China is inherently risky.
  Controversies affecting Chinas trade with the United States could harm our operations or
depress our stock price.
  5




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Changes in currency rates involving the Hong Kong dollar could increase our expenses or cause
economic or political problems affecting our business. Changes in currency rates involving the RMB
implemented in July 2005 increased our expenses in the year ended March 31, 2006.
  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.
  Any future outbreak of severe acute respiratory syndrome or other diseases may have a negative
impact on our business and operating results.
  6




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Political and economic instability of Hong Kong and Macao could harm our operations.
  A recent labor shortage in southern China could adversely affect our gross margins or
decrease revenue.
  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.
  7




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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.
  Year ended March 31,2004
    
    2005
    
    2006Resins cost as a % of plastic products sold
    
    
    52
    %
    
    
    58
    %
    
    
    53
    %Resins cost as a % of total cost of goods sold
    
    
    25
    %
    
    
    24
    %
    
    
    21
    %
  We are facing increasing competition, which has had an adverse effect on our gross profit margins.
  
    
    17.2% from 26.7% during the year ended March 31, 2005, to 22.1% during the year ended
March 31, 2006,
    
    16.6% from 32.0% during the year ended March 31, 2004, to 26.7% during the year ended
March 31, 2005, and
    
    2.7%, from 32.9% during the year ended March 31, 2003, to 32.0% during the year ended
March 31, 2004,
  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.
  Because our operations are international, we are subject to significant worldwide political,
economic, legal and other uncertainties.
  8




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
    
    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.
  Our loss of certain members of our senior management could cause disruptions in our business and
harm our customer relationships thereby adversely affecting sales.
  
    
    Richard Lau, our Chairman of the Board and Chief Executive Officer;
    
    C. P. Li, our Executive Director, General Manager in charge of manufacturing and
administrative operations for plastic products;
    
    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 administrative and marketing operations for electronic and metallic
products; and
    
    M. C. Tam, our Director of Engineering and Manufacturing, in charge of
manufacturing and operations for electronic and metallic products.
  Our results could be adversely affected if we have to comply with new environmental regulations.
  Power shortages in China could affect our business.
  9




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The concentration of share ownership in our senior management allows them to control or
substantially influence the outcome of matters requiring shareholder approval
  If we do not receive an unqualified opinion on the adequacy of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (currently required for our
fiscal year ending March 31, 2007 and thereafter), investors could lose confidence in the
reliability of our financial statements, which could result in a decrease in the value of our
shares.
  Legislative actions and potential new accounting pronouncements are likely to impact our future
financial position and results of operations and in the case of FASBs new pronouncement regarding
the expensing of stock options will adversely impact our financial results.
  10




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Our boards ability to amend our charter without shareholder approval could have anti-takeover
effects that could prevent a change in control.
  Our exemptions from certain of the reporting requirements under the Exchange Act limits the
protections and information afforded to investors.
  
    
    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;
    
    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); and
    
    Regulation FD, the SECs rules regulating disclosure of information by publicly
traded companies and other issuers and requiring that when an issuer discloses
material nonpublic information to certain individuals or entities such as stock
analysts, or holders of the issuers securities who may trade on the basis of the
information, the issuer must make public disclosure of that information.
  
    
    Rule 4350(c)(1): A majority of our Board of Directors are not independent
directors within the definition of independent director in Nasdaq Marketplace Rule
4200(a)(15);
    
    Rule 4350(c)(2): Our independent directors do not meet in executive session;
    
    Rule 4350(c)(3): Our board does not have a compensation committee;
    
    Rule 4350(c)(4): Nominees for appointment as our directors are not selected or
recommended by (i) a majority of our independent directors, or a nominating committee
composed solely of independent directors.
 11




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We may not pay dividends in the future.
  
 ITEM 4. INFORMATION ON THE COMPANY
 History and Development of Deswell
     12




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13




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14




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Organizational Structure
  Chart on following page
 15




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16




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Capital Expenditures
  2004
    
    2005
    
    2006Purchase of property, plant and equipment
    
    $
    19,862,000
    
    
    $
    17,003,000
    
    
    $
    6,940,000Proceeds from the sale of property, plant and equipment
    
    
    430,000
    
    
    
    36,000
    
    
    
    50,000
       17




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Business Overview
 Introduction to Deswell
   
    
    cases and key tops for personal organizers and remote controls;
    
    cases for flashlights, telephones, paging machines, projectors and alarm clocks;
    
    grips and rods for fishing tackle;
    
    toner cartridges and cases for photocopy and printer machines;
    
    parts for electrical products such as air-conditioning and ventilators;
    
    parts for audio equipment;
    
    double injection caps and baby products;
    
    laser key caps; and
    
    automobile components.
  
    
    complex printed circuit board assemblies using surface mount (SMT), ball grip
assembly (BGA) 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 (IPBX), a network terminal and an
internet platform etc.,Ø
    
    IP switches, routers, andØ
    
    sophisticated professional audio equipment such as power amplifiers,
digital mixers, digital signal processors, etc.
   18




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Industry Overview
   Operations
 Plastic Injection Molding
   Mold design and production.
   19




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Plastic Injection.
  20




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Finishing.
 Electronic Products and Assemblies
       Metal Parts Manufacturing
  21




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Quality Control
       Raw Materials, Component Parts and Suppliers
 Plastic Resins.
  22




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Component Parts and Supplies.
 Raw Metal
 Transportation
  Customers and Marketing
  23




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Year ended March 31,Geographic areas
    
    2004
    
    2005
    
    2006United States
    
    
    38.4
    %
    
    
    40.5
    %
    
    
    49.0
    %China
    
    
    51.6
    
    
    
    44.8
    
    
    
    37.5Europe
    
    
    5.9
    
    
    
    10.9
    
    
    
    7.0Hong Kong
    
    
    2.3
    
    
    
    0.8
    
    
    
    3.0Others
    
    
    1.8
    
    
    
    3.0
    
    
    
    3.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Modern Plastics
International Injection Molding
 Major Customers
  Year ended March 31,Customer
    
    Product
    
    2004
    
    2005
    
    2006Digidesign, Inc.
    
    Professional audio equipments
    
    
    17.8
    %
    
    
    19.1
    %
    
    
    17.4
    %Epson Precision (H.K.) Limited
    
    Plastic components
    
    
    15.4
    
    
    
    18.5
    
    
    
    14.6Line 6 Manufacturing
    
    Professional audio equipments
    
    
    
    *
    
    
    14.9
    
    
    
    14.5
 
 *
    
    Less than 10%.   24




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Competition
   Patents, Licenses and Trademarks
  Seasonality
  Property, Plants and Equipment
 Macao
  Hong Kong
  Southern China
   25




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ITEM 4A. UNRESOLVED STAFF COMMENTS
  26




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  Operating Results
  General
      27




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Year ended March 31, 2004
    
    Year ended March 31, 2005
    
    Year ended March 31, 2006Plastic
    
    
    
    
    
    
    
    
    
    Plastic
    
    
    
    
    
    
    
    
    
    PlasticInjection-
    
    Electronic
    
    
    
    
    
    Injection-
    
    Electronic
    
    
    
    
    
    Injection-
    
    ElectronicMolding
    
    & Metallic
    
    
    
    
    
    Molding
    
    & Metallic
    
    
    
    
    
    Molding
    
    & MetallicSegment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    Total100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %60.4
    
    
    
    77.2
    
    
    
    68.0
    
    
    
    65.2
    
    
    
    80.6
    
    
    
    73.3
    
    
    
    72.5
    
    
    
    81.9
    
    
    
    77.939.6
    
    
    
    22.8
    
    
    
    32.0
    
    
    
    34.8
    
    
    
    19.4
    
    
    
    26.7
    
    
    
    27.5
    
    
    
    18.1
    
    
    
    22.118.5
    
    
    
    11.1
    
    
    
    15.2
    
    
    
    16.6
    
    
    
    8.9
    
    
    
    12.5
    
    
    
    17.7
    
    
    
    9.7
    
    
    
    13.121.1
    
    
    
    11.7
    
    
    
    16.8
    
    
    
    18.2
    
    
    
    10.5
    
    
    
    14.1
    
    
    
    9.9
    
    
    
    8.4
    
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    (0.5
    )
    
    
    (0.2
    )
    
    
    (0.3
    )22.1
    
    
    
    12.6
    
    
    
    17.8
    
    
    
    18.4
    
    
    
    10.8
    
    
    
    14.4
    
    
    
    9.4
    
    
    
    8.2
    
    
    
    8.70.5
    
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    (0.6
    )
    
    
    0.4
    
    
    
    21.6
    
    
    
    11.8
    
    
    
    17.2
    
    
    
    18.1
    
    
    
    10.2
    
    
    
    13.9
    
    
    
    10.0
    
    
    
    7.8
    
    
    
    8.70.9
    
    
    
    3.4
    
    
    
    2.0
    
    
    
    0.7
    
    
    
    2.9
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9
    
    
    
    1.120.7
    %
    
    
    8.4
    %
    
    
    15.1
    %
    
    
    17.4
    %
    
    
    7.3
    %
    
    
    12.1
    %
    
    
    10.0
    %
    
    
    5.9
    %
    
    
    7.6
    %
 Year ended March 31, 2006 Compared to Year Ended March 31, 2005
 Net Sales
    28




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Gross Profit
   Selling, General and Administrative Expenses
   Operating Income
   29




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Other income(expenses)
   Income Taxes
   Minority Interest
 Net Income
 30




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##### Table of Contents



Year ended March 31, 2005 Compared to Year Ended March 31, 2004
 Net Sales
   Gross Profit
   Selling, general and administrative expenses
   31




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Operating income
   Other income
  Income Taxes
  Minority Interest
 Net Income
  32




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Seasonality
  Year ended March 31,2004
    
    2005
    
    2006Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Net sales
    
    $
    26,075
    
    
    $
    25,079
    
    
    $
    24,784
    
    
    $
    21,257
    
    
    $
    28,788
    
    
    $
    31,924
    
    
    $
    36,185
    
    
    $
    28,693
    
    
    $
    30,075
    
    
    $
    29,046
    
    
    $
    29,972
    
    
    $
    26,183Gross profit
    
    
    8,411
    
    
    
    7,980
    
    
    
    8,401
    
    
    
    6,298
    
    
    
    8,318
    
    
    
    8,461
    
    
    
    9,402
    
    
    
    7,337
    
    
    
    7,640
    
    
    
    6,209
    
    
    
    6,561
    
    
    
    5,016Operating
income
    
    
    4,646
    
    
    
    4,511
    
    
    
    4,403
    
    
    
    2,812
    
    
    
    4,812
    
    
    
    4,499
    
    
    
    4,837
    
    
    
    3,611
    
    
    
    3,986
    
    
    
    2,766
    
    
    
    2,689
    
    
    
    933Net income
    
    
    4,354
    
    
    
    4,121
    
    
    
    3,535
    
    
    
    2,710
    
    
    
    3,995
    
    
    
    3,628
    
    
    
    4,207
    
    
    
    3,353
    
    
    
    3,151
    
    
    
    2,795
    
    
    
    2,380
    
    
    
    453
  Impact of Inflation
  Exchange Rates
    33




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Liquidity and Capital Resources
      34




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##### Table of Contents



Payments due by period(In thousands)Period from
    
    Period from
    
    PeriodYear ending
    
    April 1, 2007
    
    April 1, 2009
    
    afterMarch 31,
    
    to March 31,
    
    to March 31,
    
    March 31,Contractual obligations
    
    Total
    
    2007
    
    2009
    
    2011
    
    2011Long-term bank borrowing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital (finance) lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    783
    
    
    
    571
    
    
    
    212
    
    
    
    
    
    
    
    Capital expenditures
    
    
    974
    
    
    
    895
    
    
    
    79
    
    
    
    
    
    
    
    Purchase obligations
    
    
    10,582
    
    
    
    10,582
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    12,339
    
    
    
    12,048
    
    
    
    291
    
    
    
    
    
    
    
    
 Off Balance Sheet Arrangements
  Critical Accounting Policies
   Inventories
 Valuation of long-lived assets
 35




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Foreign currency translation
   Allowance for doubtful account
 Recent Changes in Accounting Standards
    36




---



##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Name
    
    Age
    
    Position(s) with CompanyLau Pui Hon (Richard Lau)
    
    
    61
    
    
    Chief Executive Officer and Chairman of the
Board of DirectorsLi Chin Pang (C. P. Li)
    
    
    60
    
    
    Executive Director and General Manager of
Manufacturing and Administration for Plastic
Operations, Secretary and Member of the Board of
DirectorsLeung Chi Wai (C. W. Leung)
    
    
    51
    
    
    Executive Director of Engineering for Plastic
Operations and Member of the Board of DirectorsHung-Hum Leung
    
    
    60
    
    
    Member of Board of Directors and Audit CommitteesAllen Yau-Nam Cham
    
    
    59
    
    
    Member of Board of Directors and Audit CommitteesWing-Ki Hui
    
    
    60
    
    
    Member of Board of Directors and Audit CommitteesEliza Y. P. Pang
    
    
    44
    
    
    Chief Financial OfficerLee Shu Kwan (S. K. Lee)
    
    
    60
    
    
    Director of Administration and Marketing for
Electronic OperationsTam Man Chi (M. C. Tam)
    
    
    56
    
    
    Director of Engineering and Manufacturing for
Electronic Operations
 Richard Lau
 C. P. Li.
 C. W. Leung.
 Hung-Hum Leung.
 Allen Yau-Nam Cham
 37




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##### Table of Contents



Wing-Ki Hui.
 Eliza Y. P. Pang
 S. K. Lee
 M. C. Tam.
  Compensation of Directors and Senior Managers
 Executive Officers
  Directors
  38




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##### Table of Contents



Board Practices
  Audit Committee
  Other Committees; Nasdaq Compliance
  Employees
  Share Ownership
 Share Ownership of Directors and Senior Management
  Employee Stock Option Plans
   39




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40




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##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 ,
 Number of sharesbeneficially owned (1)Name of beneficial owner or identity of group
    
    Amount
    
    PercentRichard Lau
    
    
    3,942,125
    
    
    
    26.0
    %C. P. Li
    
    
    3,818,901
    
    
    
    25.2
    %C. W. Leung
    
    
    3,688,750
    
    
    
    24.3
    %Leesha Holdings Ltd.
    
    
    3,453,750
    
    
    
    23.1
    %Royce & Associates, Inc. (6)
    
    
    1,552,423
    
    
    
    10.4
    %Wellington Management Company, LLP (7)
    
    
    1,436,478
    
    
    
    9.6
    %Micropower Enterprises Limited
    
    
    1,143,750
    
    
    
    7.7
    %FMR Corp./ Edward C. Johnson 3d (8)
    
    
    937,403
    
    
    
    6.3
    %M. C. Tam
    
    
    
    *
    
    
    
    *S. K. Lee
    
    
    
    *
    
    
    
    *Eliza Y. P. Pang
    
    
    
    *
    
    
    
    *Hung-Hum Leung
    
    
    
    *
    
    
    
    *Allen Yau-Nam Cham
    
    
    
    *
    
    
    
    *Wing-Ki Hui
    
    
    
    *
    
    
    
    *
 
 *
    
    Less than 1%.     41




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##### Table of Contents



Percentage Ownership (1) atJune 30,
    
    June 28,
    
    June 30,2004
    
    2005
    
    2006Richard Lau
    
    
    29.0
    %
    
    
    25.9
    %
    
    
    26.0
    %C. P. Li
    
    
    28.9
    %
    
    
    25.6
    %
    
    
    25.2
    %C. W. Leung
    
    
    27.2
    %
    
    
    24.1
    %
    
    
    24.3
    %Leesha Holdings Ltd.
    
    
    25.2
    %
    
    
    23.2
    %
    
    
    23.1
    %Royce & Associates, Inc.
    
    
    10.3
    %
    
    
    9.3
    %
    
    
    10.4
    %Wellington Management Company, LLP
    
    
    6.5
    %
    
    
    8.4
    %
    
    
    9.6
    %Micropower Enterprises Limited
    
    
    7.5
    %
    
    
    7.7
    %
    
    
    7.7
    %FMR Corp./ Edward C. Johnson 3d/
Abigail P. Johnson
    
    
    9.6
    %
    
    
    7.6
    %
    
    
    6.3
    %
 
 (1)
    
    Based on 13,723,627, 14,908,730 and 14,923,730 common shares outstanding on June 30,
2004, June 28, 2005 and June 30, 2006, 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.  Related Party Transactions
  42




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43




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
 Financial Statements
  Legal Proceedings
  Exports Sales
  Dividend Policy
  
    
    2004 aggregating $8,569,000, $2,002,000 of which was based on results for the last
quarter of the year ended March 31, 2003 and $6,567,000 of which was based on results for
the first three quarters of the year ended March 31, 2004;
    
    2005 aggregating $9,234,000, $2,196,000 of which was based on results for the last
quarter of the year ended March 31, 2004 and $7,038,000 of which was based on results for
the first three quarters of the year ended March 31, 2005; and
    
    2006 aggregating $9,400,000, $2,535,000 of which was based on results for the last
quarter of the year ended March 31, 2005 and $6,865,000 of which was based on results for
the first three quarters of the year ended March 31, 2006.
  44




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ITEM 9. THE OFFER AND LISTING
   Year Ended
    
    High
    
    LowMarch 31, 2006
    
    $
    16.48
    
    
    $
    9.000March 31, 2005
    
    
    18.167
    
    
    
    12.867March 31, 2004
    
    
    20.40
    
    
    
    10.43March 31, 2003
    
    
    27.23
    
    
    
    7.33March 31, 2002
    
    
    9.83
    
    
    
    5.83
  AverageDailyTradingQuarter ended
    
    High
    
    Low
    
    Volume(1)March 31, 2006
    
    $
    12.671
    
    
    $
    9.000
    
    
    
    32,085December 31, 2005
    
    
    14.850
    
    
    
    10.200
    
    
    
    21,447September 30, 2005
    
    
    16.000
    
    
    
    14.090
    
    
    
    20,852June 30, 2005
    
    
    16.480
    
    
    
    13.670
    
    
    
    18,033March 31, 2005
    
    
    18.167
    
    
    
    14.213
    
    
    
    22,529December 31, 2004
    
    
    17.327
    
    
    
    13.007
    
    
    
    26,420September 30, 2004
    
    
    16.313
    
    
    
    12.867
    
    
    
    13,692June 30, 2004
    
    
    18.147
    
    
    
    14.340
    
    
    
    6,469
 
 (1)
    
    Determined by dividing the sum of the reported daily volume for the quarter by the
number of trading days in the quarter (adjusted for the Companys three-for-two stock split
effected in March 2005).  AverageDailyTradingMonth ended
    
    High
    
    Low
    
    Volume(1)June 30, 2006
    
    $
    9.220
    
    
    $
    8.100
    
    
    
    23,688May 31, 2006
    
    
    9.900
    
    
    
    8.750
    
    
    
    12,487April 30, 2006
    
    
    9.780
    
    
    
    9.050
    
    
    
    18,969March 31, 2006
    
    
    10.220
    
    
    
    9.000
    
    
    
    25,938February 29, 2006
    
    
    11.050
    
    
    
    10.150
    
    
    
    28,224January 31, 2006
    
    
    12.671
    
    
    
    10.370
    
    
    
    42,822
 
 (1)
    
    Determined by dividing the sum of the reported daily volume for the month by the number
of trading days in the month. 45




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##### Table of Contents



ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
 Objects and Purposes
  Directors
     
 *
    
    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. 46




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##### Table of Contents



Rights, Preferences and Restrictions of Authorized and Outstanding Shares and Changes to Rights
of Shareholders
   Calling Annual General Meetings and Extraordinary General Meetings of Shareholders
     Limitations on Share Ownership
  Potential Anti-Takeover Deterrence
  47




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Ownership Information
  Differences from United States Law
  Material Contracts
  Banking Facilities (Exhibit 4.1)
 Date:
 Parties:
 Nature of Contract:
 Terms and Conditions:
 Consideration
 Tenancy Agreement (Exhibit 4.2)
 Date:
 Parties:
 Nature of Contract:
 Terms and Conditions
 Consideration:
 48




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Tenancy Agreement (Exhibit 4.3)
 Date:
 Parties:
 Nature of Contract:
 Terms and Conditions
 Consideration:
 Tenancy Agreement (Exhibit 4.4)
 Date
 Parties
 Nature of Contract
 Terms and Conditions
 Consideration
 Stock Purchase Agreement (Exhibit 4.5)
     49




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Taxation
 United States Federal Income Tax Consequences
 General
  
    
    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 percent 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
  
    
    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;
 50




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##### Table of Contents




    
    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.
  Distributions
   Sale or Other Disposition of Our Common Shares
  
    
    you will recognize gain or loss equal to the difference (if any) between:
 51




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##### Table of Contents



o
    
    the amount realized on such sale or other taxable disposition ando
    
    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;
    
    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, 2011 will
generally be taxed at the rate of 5 percent (zero, in 2008, 2009 and 2010) or 15 percent,
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
   
    
    75 percent or more of our gross income in that 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 that 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.
   
    
    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.
  
    
    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,
 52




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##### Table of Contents




    
    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, as if the tax had been due for the tax year to which such amounts were
allocated under these rules.
    Tax Consequences to Non-U.S. Holders
  Distributions
  
    
    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).
  Sale or Other Disposition of Our Common Shares
  53




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##### Table of Contents




    
    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.
  Backup Withholding and Information Reporting
  
    
    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.
   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
 British Virgin Islands Tax Consequences
   54




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##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Exchange Controls
    Foreign Currency Risk
   EquivalentU.S. DollarHoldingsUnited States dollars
    
    $
    13,748,000Hong Kong dollars
    
    
    6,914,000Euro
    
    
    24,000Chinese RMB
    
    
    4,815,000Japanese yen
    
    
    491,000Macao dollars
    
    
    26,000
  Interest Rate Risk
  55




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##### Table of Contents



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
    Changes in Internal Controls
   56




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ITEM 16. [RESERVED]
 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Year ended March 31,2005
    
    2006(US $ (in thousands))Audit Fees(1)
    
    
    100
    
    
    
    115Audit-related Fees(2)
    
    
    
    
    
    
    Tax Fees(3)
    
    
    
    
    
    
    All Other Fees(4)
    
    
    
    
    
    
    100
    
    
    
    115
 
 (1)
    
    Audit Fees consist of fees billed for the annual audit of our consolidated financial
statements and the statutory financial statements of our subsidiaries. They also include fees
billed for other audit services, 57




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##### Table of Contents



which are those services that only the external auditor reasonably can provide, and include
the provision for consents relating to the review of documents filed with the SEC.(2)
    
    There were no other audit-related fees billed by the principal accountant during the last two
fiscal years for assurance and related services that were reasonably related to the
performance of the audit not reported under Audit Fees above.(3)
    
    There were no tax fees billed by the principal accountant during the last two fiscal years.(4)
    
    There were no other fees billed by the principal accountant during the last two fiscal years
for products and services provided by BDO. Audit Committee Pre-approval Policies and Procedures
  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR THE AUDIT COMMITTEE.
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATE PURCHASERS.
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    
    59Consolidated Balance Sheets
    
    
    60Consolidated Statements of Income
    
    
    61Consolidated Statements of Shareholders Equity
    
    
    62Consolidated Statements of Cash Flows
    
    
    63Notes to Consolidated Financial Statements
    
    
    64
  58




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     BDO McCabe Lo Limited
  59




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (U.S. dollars in thousands)
 March 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,073
    
    
    $
    25,369Restricted cash (note 7)
    
    
    1,040
    
    
    
    649Marketable securities (note 3)
    
    
    244
    
    
    
    164Accounts receivable, less allowances for doubtful amounts of $28 and $970
at March 31, 2005 and 2006, respectively
    
    
    25,091
    
    
    
    18,318Inventories (note 4)
    
    
    21,136
    
    
    
    21,845Prepaid expenses and other current assets (note 5)
    
    
    4,761
    
    
    
    5,035Income taxes receivable (note 10)
    
    
    20
    
    
    
    Total current assets
    
    
    80,365
    
    
    
    71,380Property, plant and equipment-net (notes 6 and 7)
    
    
    56,133
    
    
    
    58,286Deferred income tax assets (note 10)
    
    
    
    
    
    
    294Goodwill (note 8)
    
    
    478
    
    
    
    710Total assets
    
    $
    136,976
    
    
    $
    130,670LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,449
    
    
    $
    10,886Dividend payable
    
    
    
    
    
    
    2,089Accrued payroll and employee benefits
    
    
    2,020
    
    
    
    1,415Customer deposits
    
    
    868
    
    
    
    674Other accrued liabilities (note 9)
    
    
    3,127
    
    
    
    1,018Income taxes payable
    
    
    325
    
    
    
    184Total current liabilities
    
    
    22,789
    
    
    
    16,266Commitments and contingencies (note 11)
    
    
    
    
    
    
    Minority interests
    
    
    9,420
    
    
    
    7,636Shareholders equity:Common shares nil par value-authorized 30,000,000 shares,
shares issued and outstanding March 31, 2005 - 14,778,730;
March 31, 2006  14,923,730 (note 12)
    
    
    39,068
    
    
    
    41,254Additional paid-in capital
    
    
    6,970
    
    
    
    6,970Accumulated other comprehensive income
    
    
    
    
    
    
    436Retained earnings
    
    
    58,729
    
    
    
    58,108Total shareholders equity
    
    
    104,767
    
    
    
    106,768Total liabilities and shareholders equity
    
    $
    136,976
    
    
    $
    130,670
  60




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DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 (U.S. dollars in thousands, except per share data)
 Year ended March 31,2004
    
    
    2005
    
    
    2006Net sales
    
    $
    97,195
    
    
    $
    125,590
    
    
    $
    115,276Cost of sales
    
    
    66,105
    
    
    
    92,072
    
    
    
    89,850Gross profit
    
    
    31,090
    
    
    
    33,518
    
    
    
    25,426Selling, general and administrative expenses
    
    
    14,718
    
    
    
    15,759
    
    
    
    15,052Operating income
    
    
    16,372
    
    
    
    17,759
    
    
    
    10,374Interest expense
    
    
    (16
    )
    
    
    (12
    )
    
    
    (6
    )Other income (expenses), net
    
    
    910
    
    
    
    342
    
    
    
    (376
    )Income before income taxes and minority interests
    
    
    17,266
    
    
    
    18,089
    
    
    
    9,992Income taxes (note 10)
    
    
    589
    
    
    
    576
    
    
    
    (27
    )Income before minority interests
    
    
    16,677
    
    
    
    17,513
    
    
    
    10,019Minority interests
    
    
    1,957
    
    
    
    2,330
    
    
    
    1,240Net income
    
    
    14,720
    
    
    
    15,183
    
    
    
    8,779Other comprehensive incomeForeign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    436Comprehensive income
    
    $
    14,720
    
    
    $
    15,183
    
    
    $
    9,215Net income per share (note 2)Basic:Net income per share
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.59Weighted average common shares outstanding
    
    
    13,664
    
    
    
    14,656
    
    
    
    14,908Diluted:Net income per share
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    0.59Weighted average common and potential common shares
    
    
    14,160
    
    
    
    14,933
    
    
    
    14,936
  61




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (U.S. dollars in thousands, except share and per share data)
 AccumulatedCommon stock
    
    Additional
    
    otherShares
    
    
    
    
    
    paid-in
    
    comprehensive
    
    Retained
    
    Shareholdersoutstanding
    
    Amount
    
    capital
    
    income
    
    earnings
    
    equityBalance at March 31, 2003
    
    
    13,546,252
    
    
    
    28,247
    
    
    
    6,970
    
    
    
    
    
    
    
    46,629
    
    
    
    81,846Exercise of stock options
    
    
    177,375
    
    
    
    1,733
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,733Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,720
    
    
    
    14,720Dividends ($0.63 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,569
    )
    
    
    (8,569
    )Balance at March 31, 2004
    
    
    13,723,627
    
    
    
    29,980
    
    
    
    6,970
    
    
    
    
    
    
    
    52,780
    
    
    
    89,730Exercise of stock options
    
    
    1,055,250
    
    
    
    9,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,092Odd share redemption upon stock split
    
    
    (147
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,183
    
    
    
    15,183Dividends ($0.65 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,234
    )
    
    
    (9,234
    )Balance at March 31, 2005
    
    
    14,778,730
    
    
    
    39,068
    
    
    
    6,970
    
    
    
    
    
    
    
    58,729
    
    
    
    104,767Exercise of stock options
    
    
    25,000
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352Issue of common stock for acquisition of
additional interest in a subsidiary
    
    
    120,000
    
    
    
    1,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,834Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    436Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,779
    
    
    
    8,779Dividends ($0.63 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,400
    )
    
    
    (9,400
    )Balance at March 31, 2006
    
    
    14,923,730
    
    
    
    41,254
    
    
    
    6,970
    
    
    
    436
    
    
    
    58,108
    
    
    
    106,768
  62




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (U.S. dollars in thousands)
 Year ended March 31,2004
    
    
    2005
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    14,720
    
    
    $
    15,183
    
    
    $
    8,779Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    4,402
    
    
    
    4,970
    
    
    
    5,299Loss on sale of property, plant and equipment
    
    
    392
    
    
    
    125
    
    
    
    45Realized gain on disposal of other investments
    
    
    
    
    
    
    (295
    )
    
    
    Net realized (gain) and unrealized holding loss on marketable securities
    
    
    (533
    )
    
    
    53
    
    
    
    80Minority interests
    
    
    1,901
    
    
    
    2,330
    
    
    
    1,215Deferred tax
    
    
    
    
    
    
    (15
    )
    
    
    (294
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,230
    )
    
    
    (6,134
    )
    
    
    6,773Inventories
    
    
    (1,390
    )
    
    
    (4,962
    )
    
    
    (709
    )Prepaid expenses and other current assets
    
    
    (304
    )
    
    
    (1,809
    )
    
    
    (274
    )Income taxes receivable
    
    
    196
    
    
    
    107
    
    
    
    20Accounts payable
    
    
    1,525
    
    
    
    5,281
    
    
    
    (5,563
    )Accrued payroll and employee benefits
    
    
    954
    
    
    
    (246
    )
    
    
    (605
    )Customer deposits
    
    
    265
    
    
    
    109
    
    
    
    (194
    )Other accrued liabilities
    
    
    (857
    )
    
    
    1,533
    
    
    
    (2,109
    )Income taxes payable
    
    
    (3,816
    )
    
    
    195
    
    
    
    (141
    )Net cash provided by operating activities
    
    
    15,225
    
    
    
    16,425
    
    
    
    12,322Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (19,862
    )
    
    
    (17,003
    )
    
    
    (6,940
    )Proceeds from sale of property, plant and equipment
    
    
    430
    
    
    
    36
    
    
    
    50Acquisition of marketable securities
    
    
    (1,056
    )
    
    
    
    
    
    
    Proceeds from sale of marketable securities
    
    
    6,410
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (14,078
    )
    
    
    (16,967
    )
    
    
    (6,890
    )Cash flows from financing activitiesDividends paid
    
    
    (8,569
    )
    
    
    (9,234
    )
    
    
    (7,311
    )Dividends paid to minority shareholders of a subsidiary
    
    
    (582
    )
    
    
    (756
    )
    
    
    (1,229
    )Exercise of stock options
    
    
    1,733
    
    
    
    9,092
    
    
    
    352Odd shares redemption
    
    
    
    
    
    
    (4
    )
    
    
    (Increase) decrease in restricted cash
    
    
    1,976
    
    
    
    (650
    )
    
    
    391Contribution from (loan to) minority shareholders of subsidiaries
    
    
    88
    
    
    
    (26
    )
    
    
    (170
    )Net cash used in financing activities
    
    
    (5,354
    )
    
    
    (1,578
    )
    
    
    (7,967
    )Cash effect of exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (169
    )Net decrease in cash and cash equivalents
    
    
    (4,207
    )
    
    
    (2,120
    )
    
    
    (2,704
    )Cash and cash equivalents, beginning of year
    
    
    34,400
    
    
    
    30,193
    
    
    
    28,073Cash and cash equivalents, end of year
    
    $
    30,193
    
    
    $
    28,073
    
    
    $
    25,369Supplementary disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    16
    
    
    $
    12
    
    
    $
    6Income taxes
    
    $
    4,210
    
    
    $
    289
    
    
    $
    387Supplementary disclosures of significant non-cash transactions:Issuance of common stock in connection with acquisition of
additional 5% shareholding in a subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    1,834Excess of acquisition cost over the fair value of acquired
net assets of additional shareholding of a subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    234
  63




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (U.S. dollars in thousands, except per share data)
 1. Organization and Basis of Financial Statements
      2. Summary of Significant Accounting Policies
 Principles of consolidation
 Goodwill
  Cash and cash equivalents
 Marketable securities-
 Inventories
 Prepaid expenses and other current assets
 64




---



##### Table of Contents



2. Summary of Significant Accounting Policies  continued
 Property, plant and equipment
 Leasehold land and buildings
    
    40 - 50 yearsPlant and machinery
    
    4 - 10 yearsFurniture, fixtures and equipment
    
    4 - 5 yearsMotor vehicles
    
    3 - 4 yearsLeasehold improvements
    
    the shorter of 5 years or the lease term
 Valuation of long-lived assets
 Revenue recognition
 Comprehensive income-
 Allowance for doubtful account
 Shipping and handling cost-
 Income taxes
 Foreign currency translation
    Post-retirement and post-employment benefits
 Stock-based compensation
 65




---



##### Table of Contents



2. Summary of Significant Accounting Policies  continued
  2004
    
    
    2005
    
    
    2006Net income:As reported
    
    $
    14,720
    
    
    $
    15,183
    
    
    $
    8,779Pro forma
    
    
    11,525
    
    
    
    15,183
    
    
    
    8,779Stock-based employee compensation cost, net of tax
    
    $
    3,195
    
    
    $
    
    
    
    $
    Basic net income per share:As reported
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.59Pro forma
    
    
    0.85
    
    
    
    1.04
    
    
    
    0.59Diluted net income per share:As reported
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    0.59Pro forma
    
    
    0.81
    
    
    
    1.02
    
    
    
    0.59
  2004
    
    
    2005
    
    
    2006Risk-free interest rate  weighted average
    
    
    3.93
    %
    
    
    n/a
    
    
    
    n/aExpected life of options  weighted average
    
    10 years
    
    
    n/a
    
    
    
    n/aExpected volatility
    
    
    34.78
    %
    
    
    n/a
    
    
    
    n/aExpected dividend yield
    
    
    4.60
    %
    
    
    n/a
    
    
    
    n/a
 Net income per share
  Year ended March 31,2004
    
    
    2005
    
    
    2006Net income
    
    $
    14,720
    
    
    $
    15,183
    
    
    $
    8,779Basic net income per share
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.59Basic weighted average common shares outstanding
    
    
    13,664
    
    
    
    14,656
    
    
    
    14,908Effect of dilutive securities  Options
    
    
    496
    
    
    
    277
    
    
    
    28Diluted weighted average common and potential common
shares outstanding
    
    
    14,160
    
    
    
    14,933
    
    
    
    14,936Diluted net income per share
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    0.59
 Use of estimates-
 66




---



##### Table of Contents



2. Summary of Significant Accounting Policies  continued
 Recent changes in accounting standards 
   3. Marketable Securities
  March 31,2005
    
    
    2006Cost
    
    $
    297
    
    
    $
    297Market value
    
    $
    244
    
    
    $
    164
   4. Inventories
  March 31,2005
    
    
    2006Raw materials
    
    $
    8,329
    
    
    $
    8,782Work in progress
    
    
    8,088
    
    
    
    6,932Finished goods
    
    
    4,719
    
    
    
    6,131$
    21,136
    
    
    $
    21,845
 67




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##### Table of Contents



5. Prepaid expenses and other current assets
  March 31,2005
    
    
    2006Value added tax receivable
    
    $
    1,667
    
    
    $
    1,893Deposit for purchase of plant and equipment
    
    
    460
    
    
    
    71Rental and utility deposit
    
    
    179
    
    
    
    169Advance to suppliers
    
    
    456
    
    
    
    1,183Prepayment
    
    
    496
    
    
    
    346Others
    
    
    1,503
    
    
    
    1,373$
    4,761
    
    
    $
    5,035
 6. Property, Plant and Equipment
  March 31,2005
    
    
    2006At cost:Land and buildings
    
    $
    24,638
    
    
    $
    25,528Plant and machinery
    
    
    31,386
    
    
    
    34,708Furniture, fixtures and equipment
    
    
    17,701
    
    
    
    18,247Motor vehicles
    
    
    2,367
    
    
    
    2,383Leasehold improvements
    
    
    4,939
    
    
    
    5,237Total
    
    
    81,031
    
    
    
    86,103Less: accumulated depreciation and amortization
    
    
    (30,088
    )
    
    
    (35,116
    )Construction in progress
    
    
    5,190
    
    
    
    7,299Net book value
    
    $
    56,133
    
    
    $
    58,286Cost of land and buildings consist of the following:Leasehold land and buildings (a)
    
    $
    1,482
    
    
    $
    1,476Land use right of state-owned land and buildings erected thereon (b)
    
    
    16,144
    
    
    
    17,067Long term leased land and buildings erected thereon (c)
    
    
    4,186
    
    
    
    4,170Other buildings (d)
    
    
    2,826
    
    
    
    2,815$
    24,638
    
    
    $
    25,528
 
 (a)
    
    Leasehold land and buildings are located in Hong Kong with lease terms of 50 years expiring
in 2047.(b)
    
    The land use rights of state-owned land and buildings erected thereon represent land and
buildings located in China with lease terms of 50 years expiring in 2050.(c)
    
    Long term leased land and buildings erected thereon represent land and buildings on
collectively-owned land located in China on which an upfront lump-sum payment has been made for the
right to use the land and building for a term of 50 years to 2053. Dongguan Cheng An Xiaobian
District Co-operation, the lessor, is the entity to whom the collectively-owned land has been
granted. According to existing China laws and regulations, collectively-owned land is not freely
transferable unless certain application and approval procedures are fulfilled by the Dongguan Cheng
An Xiaobian District Co-operation to change the legal form of the land from collectively-owned to
state-owned. As of March 31, 2006, the Company is not aware of any steps being taken by the
Dongguan Cheng An Xiaobian District Co-operation for such application.(d)
    
    Other buildings represent factory premises and dormitory units located in China purchased by
the Company with lease terms from 30 to 70 years expiring from 2018 to 2063.
 7. Credit facilities and pledged assets
  68




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##### Table of Contents



8. Goodwill
  9. Other Accrued liabilities
  March 31,2005
    
    
    2006Value added tax payable
    
    $
    972
    
    
    $
    70Accrued expenses
    
    
    1,323
    
    
    
    131Commission expenses
    
    
    138
    
    
    
    217Others
    
    
    694
    
    
    
    600$
    3,127
    
    
    $
    1,018
 10. Income Taxes
  Year ended March 31,2004
    
    
    2005
    
    
    2006Hong Kong
    
    $
    216
    
    
    $
    80
    
    
    $
    4China and others
    
    
    17,050
    
    
    
    18,009
    
    
    
    9,988$
    17,266
    
    
    $
    18,089
    
    
    $
    9,992
 Hong Kong
  China
     69




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##### Table of Contents



10.
Income Taxes  continued
    Others
   Year ended March 31,2004
    
    
    2005
    
    
    2006Current tax Hong Kong
    
    $
    132
    
    
    $
    51
    
    
    $
    29 China
    
    
    457
    
    
    
    540
    
    
    
    238Deferred tax
    
    
    
    
    
    
    (15
    )
    
    
    (294
    )$
    589
    
    
    $
    576
    
    
    $
    (27
    )
  Year ended March 31,2004
    
    
    2005
    
    
    2006Provision for income taxes at statutory tax rate in China
    
    
    4,661
    
    
    
    4,884
    
    
    
    2,698Effect of different tax rate in various jurisdictions
    
    
    (210
    )
    
    
    (219
    )
    
    
    6Tax holidays and concessions
    
    
    (1,811
    )
    
    
    (666
    )
    
    
    99Effect of income for which no income tax is payable
    
    
    (1,977
    )
    
    
    (3,459
    )
    
    
    (2,853
    )Under (over) provision of income tax in previous year
    
    
    (22
    )
    
    
    34
    
    
    
    8Others
    
    
    (52
    )
    
    
    2
    
    
    
    15Effective tax
    
    $
    589
    
    
    $
    576
    
    
    $
    (27
    )
  March 31,2005
    
    
    2006Deferred tax asset:Net operating loss carryforwards
    
    $
    
    
    
    $
    294Less: Valuation allowances
    
    
    
    
    
    
    
    
    
    
    294Deferred tax liability
    
    
    
    
    
    
    Net deferred tax asset
    
    $
    
    
    
    $
    294
 70




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##### Table of Contents



11. Commitments and Contingencies
   Years ending March 312007
    
    
    5712008
    
    
    212Total minimum lease payments
    
    $
    783
   12. Shareholders Equity
  13. Employee Benefits
  14. Stock Option Plan
   71




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##### Table of Contents



14. Stock Option Plan  Continued
 Year ended March 31,2004
    
    
    2005
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    average
    
    
    Number
    
    
    average
    
    
    Number
    
    
    averageof stock
    
    
    exercise
    
    
    of stock
    
    
    exercise
    
    
    of stock
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    price
    
    
    options
    
    
    priceOutstanding at beginning of the year
    
    
    1,001,625
    
    
    $
    7.55
    
    
    
    1,724,250
    
    
    $
    10.74
    
    
    
    669,000
    
    
    $
    14.10Granted during the year
    
    
    900,000
    
    
    
    14.10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised during the year
    
    
    (177,375
    )
    
    
    9.77
    
    
    
    (1,055,250
    )
    
    
    8.61
    
    
    
    (25,000
    )
    
    
    14.10Outstanding and exercisable at the
end of the year
    
    
    1,724,250
    
    
    
    10.74
    
    
    
    669,000
    
    
    
    14.10
    
    
    
    644,000
    
    
    
    14.10Range of exercise price per share
    
    $7.55 to $14.10
    
    $
    14.10
    
    
    
    
    
    
    $
    14.10
  15. Operating Risk
 Concentrations of Credit Risk and Major Customers
 Percentage of net salesYear ended March 31,2004
    
    
    2005
    
    
    2006Digidesign, Inc.
    
    
    17.8
    %
    
    
    19.1
    %
    
    
    17.4
    %Epson Precision (H.K.) Limited
    
    
    15.4
    %
    
    
    18.5
    %
    
    
    14.6
    %Line 6 Manufacturing
    
    
    
    *
    
    
    14.9
    %
    
    
    14.5
    %VTech Telecommunications Limited
    
    
    17.6
    %
    
    
    12.1
    %
    
    
    
    *Inter-Tel Incorporated
    
    
    10.3
    %
    
    
    
    *
    
    
    
    *
 
 *
    
    Less than 10%
   Percentage ofaccountsreceivableMarch 31,2005
    
    
    2006Largest receivable balances
    
    
    53.7
    %
    
    
    59.4
    %
  Country risk
 72




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##### Table of Contents



16. Fair Value of Financial Instruments
  17. Segment Information
    Year ended March 31,2004
    
    2005
    
    2006Intersegment
    
    
    
    
    
    
    
    
    
    
    Intersegment
    
    
    
    
    
    
    
    
    
    
    IntersegmentNet sales
    
    
    sales
    
    
    Profit (loss)
    
    
    Net sales
    
    
    sales
    
    
    Profit (loss)
    
    
    Net sales
    
    
    sales
    
    
    Profit (loss)Segment:Injection molded
plastic parts
    
    $
    54,745
    
    
    $
    1,699
    
    
    $
    11,717
    
    
    $
    61,519
    
    
    $
    1,877
    
    
    $
    10,967
    
    
    $
    49,429
    
    
    $
    1,152
    
    
    $
    4,521Electronic products
    
    
    40,083
    
    
    
    3
    
    
    
    5,378
    
    
    
    60,472
    
    
    
    
    
    
    
    6,660
    
    
    
    66,563
    
    
    
    1,926
    
    
    
    7,282Metallic parts
    
    
    6,185
    
    
    
    2,116
    
    
    
    171
    
    
    
    8,200
    
    
    
    2,724
    
    
    
    462
    
    
    
    2,362
    
    
    
    
    
    
    
    (1,811
    )Segment total
    
    $
    101,013
    
    
    $
    3,818
    
    
    $
    17,266
    
    
    $
    130,191
    
    
    $
    4,601
    
    
    $
    18,089
    
    
    $
    118,354
    
    
    $
    3,078
    
    
    $
    9,992Reconciliation to
consolidated totals:Sales eliminations
    
    
    (3,818
    )
    
    
    (3,818
    )
    
    
    
    
    
    
    (4,601
    )
    
    
    (4,601
    )
    
    
    
    
    
    
    (3,078
    )
    
    
    (3,078
    )
    
    
    Consolidated totals:Net sales
    
    $
    97,195
    
    
    $
    
    
    
    
    
    
    
    $
    125,590
    
    
    $
    
    
    
    
    
    
    
    $
    115,276
    
    
    $
    Income before
income taxes
and minority
interests
    
    
    
    
    
    
    
    
    
    $
    17,266
    
    
    
    
    
    
    
    
    
    
    $
    18,089
    
    
    
    
    
    
    
    
    
    
    $
    9,992
 Year ended March 31,2004
    
    2005
    
    2006Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interestincome
    
    
    expenses
    
    
    income
    
    
    expenses
    
    
    income
    
    
    expensesSegment:Injection molded
plastic parts
    
    $
    230
    
    
    $
    
    
    
    $
    128
    
    
    $
    
    
    
    $
    407
    
    
    $
    Electronic products
    
    
    17
    
    
    
    16
    
    
    
    13
    
    
    
    12
    
    
    
    64
    
    
    
    Metallic parts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Consolidated total
    
    $
    247
    
    
    $
    16
    
    
    $
    141
    
    
    $
    12
    
    
    $
    471
    
    
    $
    6
 Year ended March 31,2004
    
    2005
    
    2006Depreciation
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    
    
    
    
    DepreciationIdentifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    andassets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortizationSegment:Injection molded plastic
parts
    
    $
    83,391
    
    
    $
    14,285
    
    
    $
    2,992
    
    
    $
    94,707
    
    
    $
    15,232
    
    
    $
    3,550
    
    
    $
    89,622
    
    
    $
    6,156
    
    
    $
    3,844Electronic products
    
    
    29,182
    
    
    
    5,162
    
    
    
    949
    
    
    
    36,072
    
    
    
    1,479
    
    
    
    968
    
    
    
    33,796
    
    
    
    555
    
    
    
    993Metallic parts
    
    
    5,083
    
    
    
    414
    
    
    
    460
    
    
    
    8,628
    
    
    
    292
    
    
    
    452
    
    
    
    6,768
    
    
    
    230
    
    
    
    462Segment totals
    
    $
    117,656
    
    
    $
    19,861
    
    
    $
    4,401
    
    
    $
    139,407
    
    
    $
    17,003
    
    
    $
    4,970
    
    
    $
    130,186
    
    
    $
    6,941
    
    
    $
    5,299Reconciliation to
consolidated totals:Elimination of receivables
from intersegments
    
    
    (4,600
    )
    
    
    
    
    
    
    
    
    
    
    (2,909
    )
    
    
    
    
    
    
    
    
    
    
    (226
    )
    
    
    
    
    
    
    Goodwill not allocated to
segments
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    Consolidated totals
    
    $
    113,534
    
    
    $
    19,861
    
    
    $
    4,401
    
    
    $
    136,976
    
    
    $
    17,003
    
    
    $
    4,970
    
    
    $
    130,670
    
    
    $
    6,941
    
    
    $
    5,299
 73




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##### Table of Contents



17. Segment Information  Continued
  Year ended March 31,2004
    
    
    2005
    
    
    2006Net salesChina
    
    $
    50,095
    
    
    $
    56,311
    
    
    $
    43,220United States of America
    
    
    37,359
    
    
    
    50,837
    
    
    
    56,514Hong Kong
    
    
    2,186
    
    
    
    1,001
    
    
    
    3,409Europe
    
    
    5,778
    
    
    
    13,733
    
    
    
    8,098Others
    
    
    1,777
    
    
    
    3,708
    
    
    
    4,035Total net sales
    
    $
    97,195
    
    
    $
    125,590
    
    
    $
    115,276
  March 31,2004
    
    
    2005
    
    
    2006Hong Kong and Macau
    
    $
    43,660
    
    
    $
    49,626
    
    
    $
    41,933China
    
    
    69,396
    
    
    
    86,872
    
    
    
    88,027Total identifiable assets
    
    $
    113,056
    
    
    $
    136,498
    
    
    $
    129,960Goodwill
    
    
    478
    
    
    
    478
    
    
    
    710Total assets
    
    $
    113,534
    
    
    $
    136,976
    
    
    $
    130,670
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##### Table of Contents



ITEM 19. EXHIBITS
  Exhibit No.
    
    Description1.1
    
    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 April 13, 2005 between The Hongkong & Shanghai Banking Corporation
Limited, Macao Branch (HSBC) and Jetcrown Industrial (Macao Commercial Offshore Limited
(JIMCO) (incorporated by reference to Exhibit 4.1 to Deswells Annual Report on Form 20-F
for the year ended March 31, 2005 filed with the SEC on July 8, 2005).4.2
    
    Tenancy Agreement dated April 29, 2005 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 (incorporated by reference to Exhibit 4.3 to Deswells
Annual Report on Form 20-F for the year ended March 31, 2005 filed with the SEC on July 8,
2005).4.3
    
    Tenancy Agreement dated February 27, 2006 between Shekou Yu Yee Shareholding Co. Ltd. and
Jetcrown Industrial (Shenzhen) Limited for the 1st Floor, Block F, Wing Village Industrial
Estate, Shekou, Shenzhen.4.4
    
    Tenancy Agreement dated March 30, 2006 between Shenzhen Shekou Real Property Company
(Lessor) and Jetcrown Industrial (Shenzhen) Limited (Lessee) for 1/F-7/F, Block 13, Nanshui
Siu Village, Room 201, 202, 204, 206, 409 of Block B9, NanShui Siu Village, Shekou,
Shenzhen.4.5
    
    Stock Purchase Agreement between the Company and Microwpower Enterprises Ltd. dated April
20, 2005 (incorporated by reference to Exhibit 4.6 to Deswells Annual Report on Form 20-F
for the year ended March 31, 2005 filed with the SEC on July 8, 2005).4.6
    
    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.)4.7
    
    2003 Stock Option Plan of Deswell Industries, Inc., as amended August 1, 2005 (incorporated
by reference to Exhibit A to the Companys Proxy Statement filed with the Securities and
Exchange Commission on Form 6-K on August 29, 2005).8.1
    
    Diagram of the Companys
operating subsidiaries and affiliates  (see page 16 of this report)11.1
    
    Code of Ethics (incorporated by reference to Exhibit 11.1 of registrants Form 20-F for the
year ended March 31, 2004, filed with the SEC on July 16, 2004)
 75




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##### Table of Contents



Exhibit No.
    
    Description12.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 193412.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 193413.1
    
    Certification Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act Of 200214.1
    
    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.
 76




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##### Table of Contents



SIGNATURES
  DESWELL INDUSTRIES, INC.Date: July 14, 2006By:
    
    /s/ Richard Lau

Richard LauChairman of the Board andChief Executive Office
 77