##### Table of Contents



UNITED STATES
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
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
           to            ;
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition period from ______ to ______
 Commission File Number: 001-33900
 (DESWELL INDUSTRIES, INC. LOGO) DESWELL INDUSTRIES, INC.
   17B, Edificio Comercial Rodrigues, 
599 Avenida da Praia Grande, Macao 
Special Administrative Region, PRC
    
    Betty
Lam, Chief Financial Officer,Telephone: 853-28-322096; fax: 853-28-323265
E-mail: bettylam@jetcrown.com.mo
17B, Edificio Comercial Rodrigues,
599 Avenida da Praia Grande, Macao
Special Administrative Region, PRC(Address of Principal Executive Offices)
    
    (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
    o þ
 o þ
  þ o
 þ (1) o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ  þ o o
  o o
  o þ
 
 (1)
    
    Interactive data filing is not required of registrant until its Annual Report on Form 20-F
for the year ending March 31, 2012




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##### 



TABLE OF CONTENTS
 PageINTRODUCTION
    
    
    3FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
    
    
    3PART 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
    
    
    18Item 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    
    28Item 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    28Item 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38Item 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    41Item 8.
    
    FINANCIAL INFORMATION
    
    
    43Item 9.
    
    THE OFFER AND LISTING
    
    
    44Item 10.
    
    ADDITIONAL INFORMATION
    
    
    45Item 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    52Item 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    53PART II
    
    
    
    
    53Item 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    53Item 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    53Item 15.
    
    CONTROLS AND PROCEDURES
    
    
    54Item 16.
    
    RESERVED
    
    
    56Item 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    56Item 16B.
    
    CODE OF ETHICS
    
    
    56Item 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    56Item 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR THE AUDIT COMMITTEE
    
    
    56Item 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATE PURCHASERS
    
    
    56Item 16F.
    
    CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    56Item 16G.
    
    CORPORATE GOVERNANCE
    
    
    57PART III
    
    
    57Item 17.
    
    FINANCIAL STATEMENTS
    
    
    57Item 18.
    
    FINANCIAL STATEMENTS
    
    
    57Item 19.
    
    EXHIBITS
    
    
    58SIGNATURES
    
    
    59EX-1.1EX-12.1EX-12.2EX-13.1EX-14.1
  Certification Of Chief Executive Officer Required By Rule 13a-14(A)
Or Rule 15d-14(A) Under The Securities Exchange Act Of 1934
    
    Exhibit 12.1Certification Of Chief Financial Officer Required By Rule 13a-14(A) Or
Rule 15d-14(A) Under The Securities Exchange Act Of 1934
    
    Exhibit 12.2Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
    
    Exhibit 13.1Consent Of Independent Registered Public Accounting Firm
    
    Exhibit 14.1
 2




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INTRODUCTION
 Item
   
    
    we, us, our company, our, the Company or Deswell refers to Deswell
Industries, Inc. and, in the context of describing our operations, also include our
operating subsidiaries;
    
    shares refer to our common shares, no par value;
    
    China or PRC refers to the Peoples Republic of China, excluding Taiwan,
Hong Kong and Macao;
    
    Hong Kong refers to the Hong Kong Special Administrative Region of the
Peoples Republic of China;
    
    Macao refers to the Macao Special Administrative Region of the Peoples
Republic of China;
    
    all references to renminbi, RMB or yuan are to the legal currency of China,
of which the yuan is the base unit;
    
    all references to HK dollars or HK$ are to the legal currency of Hong Kong;
and
    
    all references to U.S. dollars, dollars, $ or US$ are to the legal
currency of the United States.
 
 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
  3




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Selected Financial Data (1)
 (in thousands except per share and statistical data)Year ended March 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Income Statement Data:Net sales
    
    $
    115,276
    
    
    $
    136,779
    
    
    $
    143,806
    
    
    $
    131,738
    
    
    $
    81,614Cost of sales
    
    
    89,850
    
    
    
    105,506
    
    
    
    117,373
    
    
    
    111,570
    
    
    
    68,958Gross profit
    
    
    25,426
    
    
    
    31,273
    
    
    
    26,433
    
    
    
    20,168
    
    
    
    12,656Selling, general and administrative expenses
    
    
    15,052
    
    
    
    18,957
    
    
    
    19,601
    
    
    
    19,291
    
    
    
    15,505Other income (expenses), net
    
    
    (823
    )
    
    
    1,376
    
    
    
    1,838
    
    
    
    (132
    )
    
    
    4,594Operating income (2)
    
    
    9,551
    
    
    
    13,692
    
    
    
    8,670
    
    
    
    745
    
    
    
    1,745Interest expense
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-operating income, net
    
    
    447
    
    
    
    547
    
    
    
    521
    
    
    
    168
    
    
    
    444Income before income taxes
    
    
    9,992
    
    
    
    14,239
    
    
    
    9,191
    
    
    
    913
    
    
    
    2,189Income taxes
    
    
    (27
    )
    
    
    1,239
    
    
    
    104
    
    
    
    (282
    )
    
    
    690Net income
    
    
    10,019
    
    
    
    13,000
    
    
    
    9,087
    
    
    
    1,195
    
    
    
    1,499Net income attributable to non-controlling interests
    
    
    1,240
    
    
    
    833
    
    
    
    228
    
    
    
    
    
    
    
    Net income attributable to Deswell Industries, Inc.
    
    $
    8,779
    
    
    $
    12,167
    
    
    $
    8,859
    
    
    $
    1,195
    
    
    $
    1,499Basic earnings per share (3)
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57
    
    
    $
    0.08
    
    
    $
    0.09Average number of shares outstandingbasic (3)
    
    
    14,908
    
    
    
    14,956
    
    
    
    15,517
    
    
    
    15,791
    
    
    
    15,965Diluted earnings per share (3)
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57
    
    
    $
    0.08
    
    
    $
    0.09Average number of shares outstandingdiluted (3)
    
    
    14,936
    
    
    
    15,048
    
    
    
    15,566
    
    
    
    15,805
    
    
    
    16,039Statistical Data:Gross margin
    
    
    22.1
    %
    
    
    22.9
    %
    
    
    18.4
    %
    
    
    15.3
    %
    
    
    15.5
    %Operating margin (2)
    
    
    8.3
    %
    
    
    10.0
    %
    
    
    6.0
    %
    
    
    0.6
    %
    
    
    2.1
    %Dividends per share
    
    $
    0.63
    
    
    $
    0.65
    
    
    $
    0.61
    
    
    $
    0.24
    
    
    $
    0.10
 At March 31,2006
    
    2007
    
    2008
    
    2009
    
    2010Balance Sheet Data:Working capital
    
    $
    55,114
    
    
    $
    58,672
    
    
    $
    54,751
    
    
    $
    52,605
    
    
    $
    59,848Total assets
    
    
    130,670
    
    
    
    141,210
    
    
    
    140,407
    
    
    
    137,482
    
    
    
    134,011Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    106,768
    
    
    
    111,655
    
    
    
    121,257
    
    
    
    120,307
    
    
    
    121,015
 
 (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)
    
    Other operating income was reclassified in the consolidated statement of income for the year
ended March 31, 2007 for a comparable presentation. Comparative figures for the years ended
March 31, 2006 were reclassified accordingly. The reclassification of operating income had no
impact on the net income on the consolidated statements of income for the year ended March 31,
2006.(3)
    
    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. 4




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Risk Factors
  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.
These risks have become particularly acute in the current adverse economic environment.
   The global economic weakness has adversely affected our earnings, liquidity and financial condition
and, until global economic conditions improve, is expected to continue to do so.
  
    
    the demand for our customers products,
    
    the amount, timing and stability of their orders to us,
    
    the financial strength of our customers and suppliers,
    
    their ability or willingness to do business with us,
    
    our willingness to do business with them,
    
    our suppliers and customers ability to fulfill their obligations to us,
    
    the ability of our customers, our suppliers or us to obtain credit, secure
funds or raise capital, and
    
    the prices at which we can sell our products and services.
 5




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Our exposure to financially troubled customers or suppliers may adversely affect our financial
results.
  Our gross margins fluctuate from year to year and may be adversely affected by a number of factors.
  Gross Margins Percentage
 
  
    
    increasing competition in our market segments, which has forced us to maintain
or reduce unit prices or attempt to pass on our costs of materials and components on to
customers;
    
    our cost of raw materials, especially our cost of plastic resins;
    
    costs of labor, particularly in recent years, which such costs have increased
substantially as consequence of increasing governmental regulation directed at labor
practices and policies;
    
    changes in the prices or the availability of components needed to manufacture
our electronic products;
 6




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
    
    changes in our customer mix or the mix of higher and lower margin products, or
a combination of both in any year;
    
    increases in value-added taxes as result of changes in the value-added tax
policy of the Chinese government for various categories of export products; and
    
    increased costs of conforming our products to consumer and product safety laws
and regulations of the various countries in which our products are sold.
  If OEMs stop or reduce their manufacturing outsourcing, our business could suffer.
  Our industry is extremely competitive, with aggressive pricing dynamics, and; if we are not able to
continue to provide competitive products and services, we may lose business.
   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.
  
  We have no written agreements with suppliers to obtain components and our profit margins and net
income could suffer from an increase in component prices and our results of operations could suffer
from shortages of required electronic components.
   8




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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.
  Our
insurance coverage may not be adequate to cover losses related to major accidents, forces of
nature or product liability risks.
   9




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Payment of dividends by our subsidiaries in the PRC to us is subject to restrictions under PRC law.
The new PRC tax law could force us to reduce the amount of dividends we have historically paid to
our shareholders or possibly eliminate them or we may decide not pay dividends in the future.
   Under the Chinas EIT Law, we may be classified as a resident enterprise for PRC tax purposes,
which may subject us to PRC enterprise income tax for any dividends we receive from our Chinese
subsidiaries and to PRC income tax withholding for any dividends we pay to our non-PRC
stockholders.
   If the United States Internal Revenue Service does not agree with our determination regarding our
PFIC status under US income tax laws and seeks to treat us as a PFIC, US holders of our shares
could be subject to potentially adverse tax consequences.
  10




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Item
 Controversies affecting Chinas trade with the United States could harm our operations or depress
our stock price.
  Changes in currency exchange rates have and could continue to significantly affect our financial
results.
    
 11




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(1)
    
    RMB (yuan) to US dollar data presented in this chart were derived from the historical
currency converter available at http://forex-history.net.(2)
    
    If the end of a quarter fell on a Saturday or Sunday, datum is provided as of the previous
Friday.   Exchange ratio of RMB to US$1.00 at March 31,2006
    
    2007
    
    2008
    
    2009
    
    2010Ratio
    
    % change(1)
    
    Ratio
    
    % change(2)
    
    Ratio
    
    % change(2)
    
    Ratio
    
    % change(2)
    
    Ratio
    
    % change(2)1:8.017
    
    1.16%
    
    1:7.730
    
    3.58%
    
    1:7.012
    
    9.29%
    
    1:6.834
    
    2.54%
    
    1:6.826
    
    0.11%
 
 (1)
    
    From ratio at July 22, 2005.(2)
    
    From ratio at preceding March 31.   Restrictions on the convertibility of RMB into foreign currency may limit our ability to transfer
excess funds or dividends to the companys subsidiaries outside China.
  Political and economic instability of Hong Kong and Macao could harm our operations.
  12




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Changes in 2007 to the PRCs labor law restrict our ability to reduce our workforce if the economic
downturn continues.
  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.
  Protecting, seeking licenses for or asserting claims over, intellectual property could be costly.
   13




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We are dependent on customers operating in highly competitive markets and the inability of our
customers to succeed in their markets can adversely impact our business, operating results and
financial condition.
  We could suffer losses from corrupt or fraudulent business practices. Conducting business in China
is inherently risky.
  Because our operations are international, we are subject to significant worldwide political,
economic, legal and other uncertainties.
  
    
    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.
  We depend on our executive officers, senior managers and skilled personnel.
  14




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Compliance with current and future environmental regulations may be costly which could impact our
future earnings. Our results could be adversely affected if we have to comply with new
environmental regulations.
   Power shortages in China could affect our business.
  A material failure of internal control over financial reporting could materially impact the
Companys financial results.
 Item
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Potential new accounting pronouncements are likely to impact our future financial position and
results of operations and in the case of FASBs pronouncement regarding the expensing of stock
options have adversely impacted, and will in the future, adversely impact our financial results.
  The concentration of share ownership in our senior management allows them to control or
substantially influence the outcome of matters requiring shareholder approval.
  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.
  16




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et. seq
 
    
    Rule5605(b)(2): Our independent directors do not meet in executive session;
    
    Rule 5605(d): Our board does not have a compensation committee and compensation
of our Chief Executive Officer and other executive officers is neither determined nor
recommended to the board by a majority of our independent directors; and
    
    Rule 5605(e): Nominees for appointment as our directors are not selected or
recommended by either a majority of our independent directors, or a nominating
committee composed solely of independent directors.
   17




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Item 4. INFORMATION
ON THE COMPANY
 Corporate Information
  Important Events in Deswells Development that Have Occurred since April 1, 2009
    [Continued on Page 19]
 18




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Organizational Structure
  
 19




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Capital Expenditures
  Year ended March 31,2008
    
    2009
    
    2010Purchase of property, plant and equipment
    
    $
    7,288
    
    
    $
    7,402
    
    
    $
    1,606Proceeds from the sale of property, plant and
equipment, net of transaction costs
    
    
    333
    
    
    
    345
    
    
    
    5,528Acquisition
of non-controlling interest in a subsidiary
    
    
    414
    
    
    
    
    
    
    
    
  
    
    $0.5 million for land and buildings, and leasehold improvements;
    
    $0.6 million for furniture, fixtures and equipment;
    
    $0.5 million for motor vehicles.
  
    
    $1.1 million for land and buildings, and leasehold improvements;
    
    $3.7 million for plant and machinery for production of plastic and electronic products;
    
    $2.6 million for furniture, fixtures and equipment.
  
    
    $1.3 million for land and buildings mainly used as dormitory for management;
    
    $2.7 million for plant and machinery for production of plastic and electronic products;
    
    $2.0 million for furniture, fixtures and equipment;
    
    $0.3 million for motor vehicles;
    
    $1.0 million for leasehold improvements.
    Business Overview
   
    
    Plastic component of electronic entertainment products;
    
    cases for flashlights, telephones, paging machines, projectors and alarm clocks;
 20




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
    
    toner cartridges and cases for photocopy and printer machines;
    
    parts for electrical products such as air-conditioning and ventilators;
    
    parts for audio equipment;
    
    cases and key tops for personal organizers and remote controls;
    
    double injection caps and baby products;
    
    parts for medical products such as apparatus for blood tests;
    
    laser key caps; and
    
    automobile components.
  
    
    sophisticated professional audio equipment including digital audio workstation,
digital or analogue mixing consoles, instrument amplifiers, signal processors,
firewire/USB audio interfaces, keyboard controllers and speaker enclosures;
    
    high end home theatre audio products, such as 7.1-channel audio-visual Hi-Fi
stereo receivers-amplifiers;
    
    complex printed circuit board assemblies using surface mount technology
(SMT), automatic insertion (AI) and pin-through-hole (PTH) interconnection
technologies and
    
    telecommunication products, such as VoIP keysets for business communications.
   Industry Overview
   21




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Operations
 Plastic Injection Molding
   Mold design and production
     Plastic Injection
   22




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Finishing
  Electronic Products and Assemblies
       Metal Parts Manufacturing
  Quality Control
   23




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Raw Materials, Component Parts and Suppliers
 Plastic Resins.
  
   24




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Component Parts and Supplies
  Raw Metal
  Transportation
  Customers and Marketing
  Year ended March 31,Geographic Areas
    
    2008
    
    2009
    
    2010China
    
    
    37.0
    %
    
    
    52.8
    %
    
    
    52.5
    %United States
    
    
    46.8
    
    
    
    32.0
    
    
    
    44.3Europe
    
    
    10.7
    
    
    
    12.4
    
    
    
    2.0Hong Kong
    
    
    1.7
    
    
    
    1.3
    
    
    
    0.7Others
    
    
    3.8
    
    
    
    1.5
    
    
    
    0.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  25




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Modern Plastics International Injection Molding
 Major Customers
  Year ended March 31,Customer
    
    Product
    
    2008
    
    2009
    
    2010N&J Company Limited
    
    Plastic Component
    
    
    11.8
    %
    
    
    28.6
    %
    
    
    19.2
    %Digidesign, Inc.
    
    Professional audio equipment
    
    
    17.0
    
    
    
    12.7
    
    
    
    12.0Vtech Telecommunications Limited
    
    Plastic component
    
    
    *
    
    
    
    *
    
    
    
    10.8
 
 *
    
    Less than 10%. 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. These risks have become particularly acute in
the current adverse economic environment Item
  Competition
  26




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Patents, Licenses and Trademarks
  Seasonality
 Item
 Property, Plants and Equipment
 Macao
  Southern China
  
    
    1,070,000 square feet of factory space,
    
    91,000 square feet of amenity space,
    
    133,000 square feet of office building space, and
    
    470,000 square feet of dormitory space.
 Item Item
      27




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Item 4A. UNRESOLVED STAFF COMMENTS
  
 Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 Item
 Operating Results
 Item
 General
    28




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Rate under EIT for enterprises previously subject to tax rate ofTax Year (Calendar)
    
    15 percent
    
    24 percent2010
    
    
    22
    %
    
    
    25
    %2011
    
    
    24
    %
    
    
    25
    %2012
    
    
    25
    %
    
    
    25
    %
   Year ended March 31, 2008
    
    Year ended March 31, 2009
    
    Year ended March 31, 2010Plastic
    
    Electronic
    
    
    
    
    
    Plastic
    
    Electronic
    
    
    
    
    
    Plastic
    
    ElectronicInjection
    
    &
    
    
    
    
    
    Injection
    
    &
    
    
    
    
    
    Injection
    
    &Molding
    
    Metallic
    
    
    
    
    
    Molding
    
    Metallic
    
    
    
    
    
    Molding
    
    MetallicSegment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    TotalNet sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    74.4
    
    
    
    86.6
    
    
    
    81.6
    
    
    
    82.4
    
    
    
    87.6
    
    
    
    84.7
    
    
    
    79.1
    
    
    
    91.9
    
    
    
    84.5Gross profit
    
    
    25.6
    
    
    
    13.4
    
    
    
    18.4
    
    
    
    17.6
    
    
    
    12.4
    
    
    
    15.3
    
    
    
    20.9
    
    
    
    8.1
    
    
    
    15.5Selling, general
and
administrative
expenses
    
    
    18.4
    
    
    
    10.3
    
    
    
    13.6
    
    
    
    16.3
    
    
    
    12.6
    
    
    
    14.6
    
    
    
    22.5
    
    
    
    14.2
    
    
    
    19.0Other income, net
    
    
    4.0
    
    
    
    (0.6
    )
    
    
    1.3
    
    
    
    0.5
    
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    9.0
    
    
    
    1.0
    
    
    
    5.6Operating income
    
    
    11.2
    
    
    
    2.5
    
    
    
    6.1
    
    
    
    1.8
    
    
    
    (1.0
    )
    
    
    0.6
    
    
    
    7.4
    
    
    
    (5.1
    )
    
    
    2.1Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-operating
income, net
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    0.6Income before
income taxes
    
    
    12.0
    
    
    
    2.6
    
    
    
    6.5
    
    
    
    2.1
    
    
    
    (1.1
    )
    
    
    0.7
    
    
    
    7.9
    
    
    
    (4.5
    )
    
    
    2.7Income taxes
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (0.4
    )
    
    
    (0.2
    )
    
    
    0.6
    
    
    
    1.1
    
    
    
    0.9Net income
    
    
    11.5
    
    
    
    2.8
    
    
    
    6.4
    
    
    
    2.2
    
    
    
    (0.7
    )
    
    
    0.9
    
    
    
    7.3
    
    
    
    (5.6
    )
    
    
    1.8Net income
attributable to
non-controlling
interest
    
    
    
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
attributable
to Deswell
Industries,
Inc.
    
    
    11.5
    %
    
    
    2.5
    %
    
    
    6.2
    %
    
    
    2.2
    %
    
    
    (0.7
    )%
    
    
    0.9
    %
    
    
    7.3
    %
    
    
    (5.6
    )%
    
    
    1.8
    %
 Year ended March 31, 2010 Compared to Year Ended March 31, 2009
 Net Sales
 29




---



##### Table of Contents



Item
 Gross Profit
   Selling, general and administrative expenses
   Other operating income
  30




---



##### Table of Contents



Operating Income
   Non-operating income
 Income Taxes
   Net Income
   Year ended March 31, 2009 Compared to Year Ended March 31, 2008
 Net Sales
 31




---



##### Table of Contents



Item
 Gross Profit
   Selling, general and administrative expenses 
   32




---



##### Table of Contents



Other operating income 
   Operating Income 
   Non-operating income
 Income Taxes 
 Non-controlling Interest 
 Net Income 
   33




---



##### Table of Contents



Seasonality
  Year ended March 31,2008
    
    2009
    
    2010Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Net sales
    
    $
    38,452
    
    
    $
    38,414
    
    
    $
    35,416
    
    
    $
    31,524
    
    
    $
    35,039
    
    
    $
    32,241
    
    
    $
    37,101
    
    
    $
    27,357
    
    
    $
    22,738
    
    
    $
    20,852
    
    
    $
    21,358
    
    
    $
    16,666Gross profit
    
    
    6,762
    
    
    
    6,698
    
    
    
    7,923
    
    
    
    5,050
    
    
    
    5,901
    
    
    
    3,524
    
    
    
    6,413
    
    
    
    4,330
    
    
    
    3,603
    
    
    
    2,907
    
    
    
    4,049
    
    
    
    2,097Operating
income (loss)
    
    
    3,304
    
    
    
    1,681
    
    
    
    3,033
    
    
    
    652
    
    
    
    1,310
    
    
    
    (1,663
    )
    
    
    878
    
    
    
    220
    
    
    
    (272
    )
    
    
    2,938
    
    
    
    296
    
    
    
    (1,218
    )Net income (loss)
    
    
    3,111
    
    
    
    1,755
    
    
    
    2,955
    
    
    
    1,038
    
    
    
    1,293
    
    
    
    (1,675
    )
    
    
    987
    
    
    
    590
    
    
    
    (253
    )
    
    
    3,124
    
    
    
    (437
    )
    
    
    (935
    )
  Three months endedJune 30,
    
    September 30
    
    December 31
    
    March 312008
    
    2009
    
    2010
    
    2008
    
    2009
    
    2010
    
    2008
    
    2009
    
    2010
    
    2008
    
    2009
    
    2010Net sales
    
    $
    38,452
    
    
    $
    35,039
    
    
    $
    22,738
    
    
    $
    38,414
    
    
    $
    32,241
    
    
    $
    20,852
    
    
    $
    35,416
    
    
    $
    37,101
    
    
    $
    21,358
    
    
    $
    31,524
    
    
    $
    27,357
    
    
    $
    16,666Gross profit
    
    
    6,762
    
    
    
    5,901
    
    
    
    3,603
    
    
    
    6,698
    
    
    
    3,524
    
    
    
    2,907
    
    
    
    7,923
    
    
    
    6,413
    
    
    
    4,049
    
    
    
    5,050
    
    
    
    4,330
    
    
    
    2,097Operating
income (loss)
    
    
    3,304
    
    
    
    1,310
    
    
    
    (272
    )
    
    
    1,681
    
    
    
    (1,663
    )
    
    
    2,938
    
    
    
    3,033
    
    
    
    878
    
    
    
    296
    
    
    
    652
    
    
    
    220
    
    
    
    (1,218
    )Net income (loss)
    
    
    3,111
    
    
    
    1,293
    
    
    
    (253
    )
    
    
    1,755
    
    
    
    (1,675
    )
    
    
    3,124
    
    
    
    2,955
    
    
    
    987
    
    
    
    (437
    )
    
    
    1,038
    
    
    
    590
    
    
    
    (935
    )
  Impact of Inflation
  Exchange Rates
    34




---



##### Table of Contents



(1)
    
    RMB (yuan) to US dollar data presented in this chart were derived from the historical
currency converter available at http://forex-history.net.(2)
    
    If the end of a quarter fell on a Saturday or Sunday, datum is provided as of the previous
Friday   Exchange ratio of RMB to US$1.00 at March 31,2006
    
    2007
    
    2008
    
    2009
    
    2010Ratio
    
    % change(1)
    
    Ratio
    
    % change(2)
    
    Ratio
    
    % change(2)
    
    Ratio
    
    % change(2)
    
    Ratio
    
    % change(2)1:8.017
    
    
    1.16
    %
    
    1:7.730
    
    
    3.58
    %
    
    1:7.012
    
    
    9.29
    %
    
    1:6.834
    
    
    2.54
    %
    
    1:6.826
    
    
    0.11
    %
 
 (1)
    
    From ratio at July 22, 2005.(2)
    
    From ratio at preceding March 31.   35




---



##### Table of Contents



2009 Change in Functional Currency
  Year ended March 31, 2008
    
    Year ended March 31, 2009
    
    Year ended March 31, 2010Plastic
    
    Electronic
    
    
    
    
    
    Plastic
    
    Electronic
    
    
    
    
    
    Plastic
    
    ElectronicInjection
    
    &
    
    
    
    
    
    Injection
    
    &
    
    
    
    
    
    Injection
    
    &Molding
    
    Metallic
    
    
    
    
    
    Molding
    
    Metallic
    
    
    
    
    
    Molding
    
    MetallicSegment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    TotalPercent of sales
denominated
in US$
    
    
    54.5
    %
    
    
    96.0
    %
    
    
    79.5
    %
    
    
    72.4
    %
    
    
    95.0
    %
    
    
    82.3
    %
    
    
    62.7
    %
    
    
    95.0
    %
    
    
    76.2
    %
   Liquidity and Capital Resources
     36




---



##### Table of Contents



Payments due by period (in thousands)Period from
    
    Period from
    
    PeriodYear ending
    
    April 1, 2011
    
    April 1, 2013
    
    afterMarch 31,
    
    to March 31,
    
    to March 31,
    
    March 31,Total
    
    2011
    
    2013
    
    2015
    
    2015Contractual obligationsLong-term bank borrowing
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital (finance) lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    29
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    Capital commitment
    
    
    284
    
    
    
    284
    
    
    
    
    
    
    
    
    
    
    
    Other purchase obligations
    
    
    6,806
    
    
    
    6,806
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities reflected on
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Companys balance sheet under US GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,119
    
    
    $
    7,119
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Off Balance Sheet Arrangements
  Critical Accounting Policies and Recent Changes in Accounting Standards
 Item
 37




---



##### Table of Contents



Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Name
    
    Age
    
    Position(s) with CompanyRichard Pui Hon Lau
    
    
    65
    
    
    Chairman of the Board of DirectorsFranki Shing Fung Tse
    
    
    46
    
    
    Chief Executive OfficerChin Pang Li
    
    
    64
    
    
    Executive Director of Manufacturing and
Administration for Plastic Operations and Member of
the Board of DirectorsHung-Hum Leung
    
    
    64
    
    
    Non-Executive Director and Member of Audit CommitteeAllen Yau-Nam Cham
    
    
    63
    
    
    Non-Executive Director and Chairman of Audit CommitteeWing-Ki Hui
    
    
    64
    
    
    Non-Executive Director and Member of Audit CommitteeBetty Ching Han Lam
    
    
    48
    
    
    Chief Financial Officer
 Richard Pui Hon Lau
 Franki Shing Fung Tse
 Chin Pang Li
 Hung-Hum Leung
 Allen Yau-Nam Cham
 Wing-Ki
Hui
 Betty Ching Han Lam
 38




---



##### Table of Contents



Compensation of Directors and Executive Officers
 Executive Officers
  
    
    excludes amounts paid by the Company or its subsidiaries as dividends to
directors and executive officers in their capacity as shareholders of the Company
during the year ended March 31, 2010; and
    
    includes compensation amounts paid to an executive who left the Company during
the year ended March 31, 2010.
 Item
 Directors
  Board Practices
 .
 Audit Committee
  Other Committees; NASDAQ Compliance
  39




---



##### Table of Contents



Employees
  
    
    2,586 engaged in plastic injection molding manufacturing, and
    
    888 engaged in contract electronic manufacturing, metal molds and parts manufacturing.
  Share and Option Ownership of Directors and Senior Management
 Item
 Employee Stock Option Plans
      40




---



##### Table of Contents




    
    options to purchase an aggregate of 4,269,000 shares had been granted under
all of Deswells option plans,
    
    there were options to purchase an aggregate of 690,500 common shares
outstanding, and
    
    there were options to purchase 217,500 shares available for future grant under
Deswells option plans.
 
 Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
  Number of sharesbeneficially owned(1)Name of beneficial owner or identity of group
    
    Amount
    
    PercentRichard Pui Hon Lau
    
    
    1,716,045
    (2)
    
    
    10.4Chin Pang Li
    
    
    1,520,750
    (3)
    
    
    9.2FMR LLC and Edward C. Johnson 3d
    
    
    991,999
    (4)
    
    
    6.1Franki Shing Fung Tse
    
    
    *
    
    
    
    *Betty Ching Han Lam
    
    
    *
    
    
    
    *Hung-Hum Leung
    
    
    
    
    
    
    Allen Yau-Nam Cham
    
    
    
    
    
    
    Wing-Ki Hui
    
    
    
    
    
    
    
 
 *
    
    Less than 1%.(1)
    
    Based on 16,191,810 shares outstanding on June 30, 2010. However, in accordance with Rule
13d-3(d) (1) under the Securities Exchange Act of 1934, 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 shares owned by the listed person holding such
options, but are not considered outstanding for the purpose of computing the percentage of
shares owned by any of the other listed persons.(2)
    
    Consists of 1,421,045 held of record by Mr. Lau and options to purchase 295,000 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 $10.41 per share, with terms expiring from September
30, 2013 to January 20, 2018.(3)
    
    Consists of 1,225,750 held of record by Mr. Li and options to purchase 295,000 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 $10.41 per share, with terms expiring from September 30,
2013 to January 20, 2018.(4)
    
    Based on Schedule 13G filed with the SEC on February 16, 2010. Change in the Percentage Ownership Held by Major Shareholders
  Percentage Ownership at June 30,(1)Name of beneficial owner or identity of group
    
    2008
    
    2009
    
    2010Richard Pui Hon Lau
    
    
    10.2
    
    
    
    10.6
    
    
    
    10.4Chin Pang Li
    
    
    9.0
    
    
    
    9.4
    
    
    
    9.2FMR LLC and Edward C. Johnson 3d
    
    
    5.5
    (2)
    
        
    (3)
    
    
    6.1
    (4)Wellington Management Company, LLP
    
    
    11.4
    (5)
    
    
    
    (6)
    
    
    
    (6)Royce & Associates, LLC
    
    
    8.6
    (7)
    
    
    5.3
    (8)
    
    
    
    (9)Chi Wai Leung
    
    
    8.4
    
    
    
    
    (10)
    
    
    
    (10)
 41




---



##### Table of Contents



(1)
    
    Based on 15,790,810 shares outstanding on June 30, 2008 and 2009, respectively, and
16,191,810 shares outstanding on June 30, 2010. 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)
    
    Based on Amendment No. 5 to Schedule 13G filed by the listed persons with the SEC on February
14, 2008.(3)
    
    Less than 5 percent based on Amendment No. 6 to Schedule 13G filed by the listed persons with
the SEC on February 17, 2009.(4)
    
    Based on Schedule 13G filed by the listed persons with the SEC on February 16, 2010.(5)
    
    Based on Amendment No. 5 to Schedule 13G filed by the listed persons with the SEC on February
14, 2008.(6)
    
    Less than 5 percent based on Amendment No. 7 to Schedule 13G filed by the listed person with
the SEC on January 12, 2009 and the absence of any Schedule 13D or 13G filing by the listed
person since then.(7)
    
    Based on Amendment No. 7 to Schedule 13G filed by the listed person with the SEC on February
1, 2008.(8)
    
    Based on Amendment No. 8 to Schedule 13G filed by the listed person with the SEC on January
23, 2009.(9)
    
    Less than 5 percent based on Amendment No. 9 to Schedule 13G filed by the listed person with
the SEC on January 27, 2010.(10)
    
    Mr. Leung retired as Executive Director of Engineering for Plastic Operations and a member of
Deswells Board of Directors effective on January 1, 2009. Deswell was advised in 2009 that
Mr. Leungs shareholdings at June 30, 2009 were less than 5 percent. Since there have been no
Schedule 13D or 13G filings by Mr. Leung with the SEC since then that would indicate
otherwise, Deswell believes that Mr. Leungs shareholdings remained at less than 5 percent at
June 30, 2010.  Related Party Transactions
 Item
  42




---



##### Table of Contents



Item 8 FINANCIAL INFORMATION
 Financial Statements
 Item
 Legal Proceedings
  Export Sales
 Item
 Dividend Policy
  
    
    2008 aggregating $9,523,000, $2,574,000 of which was based on results for the
last quarter of the year ended March 31, 2007 and $6,949,000 of which was based on
results for the first three quarters of the year ended March 31, 2008;
    
    2009 aggregating $3,790,000, $1,895,000 of which was based on results for the
last quarter of the year ended March 31, 2008 and $1,895,000 of which was based on
results for the first three quarters of the year ended March 31, 2009 ; and
    
    2010 aggregating $1,619,000, which was based on results for the second quarter
of the year ended March 31, 2010.
 Item
 43




---



##### Table of Contents



Item 9. THE OFFER AND LISTING
   
  
  
 44




---



##### Table of Contents



Item 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
  1 3
  
    
    our shares are eligible for a direct registration system operated by a
securities depository in accordance with Nasdaq Marketplace Rule 5210(c) (formerly Rule
4350(1)).
    
    various consequential amendments were made to our Memorandum and Articles of
Association in accordance with the advice from our US and BVI counsel so as to (a) be
consistent with the BVI Business Companies Act, 2004, as amended (the Act), the Act
having come into force on January 1, 2004 superseding in certain respects the
International Business Companies Act, 1984, the relevant legislation which had
previously governed us and (b) to make conforming changes resulting from the transition
of the NASDAQ Stock Markets operations on August 1, 2006 to that of a national
securities exchange in the United States.
    
    certain special provisions of our Memorandum and Articles of Association that
we adopted in preparation for our initial public offering of securities in the United
States.
    
    provisions were added in recognition of, and to assure compliance with, certain
laws, rules and regulations of the United States applicable to us, including the
Sarbanes-Oxley Act of 2002, and the Marketplace Rules of the NASDAQ Stock Market.
    
    holders of our shares:
 
    
    are entitled to one vote for each whole share on all matters to
be voted upon by shareholders, including the election of directors.
    
    do not to have cumulative voting rights in the election of
directors.
    
    are entitled to receive dividends if and when declared by our
board of directors out of funds legally available under British Virgin Islands
law.
 
    
    all of common shares are equal to each other with respect to liquidation and
dividend rights.
    
    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.
 Objects and Purposes
  Directors
  45




---



##### 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
     46




---



##### Table of Contents



Limitations on Share Ownership
  Potential Anti-Takeover Deterrence
        Ownership Information
  Differences from United States Law
  Material Contracts
   47




---



##### Table of Contents



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 its securities holdings;
    
    a financial institution or a bank;
    
    an 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 United States federal income 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, by voting power or
value, of our common shares;
    
    certain former U.S. citizens and residents who have expatriated; or
    
    a person who receives our shares pursuant to the exercise of employee stock
options or otherwise as compensation.
 U.S. Holders
  
    
    an individual United States citizen or resident alien of the United States (as
specifically defined for United States federal income tax purposes);
 48




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##### Table of Contents




    
    a corporation, or other entity treated as a corporation for United States
federal income tax purposes, created or organized in or under the laws of the United
States, any State or the District of Columbia;
    
    an estate whose income is subject to United States federal income tax
regardless of its source; or
    
    a trust (x) if a United States court can exercise primary supervision over the
trusts administration and one or more United States 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 United States person prior to that date and has a valid election
in effect under applicable Treasury regulations to be treated as a United States
person.
  Distributions
    Sale, Exchange or Other Disposition of Our Common Shares
  
    
    you will recognize capital gain or loss equal to the difference (if any) between:
    
    the amount realized on such sale, exchange or other taxable disposition and
 49




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##### Table of Contents




    
    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 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;
    
    such gain or loss will generally be treated as United States source for United
States foreign tax credit purposes; and
    
    your ability to deduct capital losses is subject to limitations.
 Passive Foreign Investment Company (PFIC)
         50




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##### Table of Contents



Non-U.S. Holders
  Distributions on Our Common Shares
  
    
    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, Exchange or Other Disposition of Our Common Shares
  
    
    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
 51




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##### Table of Contents




    
    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 United States federal taxpayer identification number
and certify, under penalties of perjury, that you are not subject to backup
withholding.
  British Virgin Islands Tax Consequences
   Documents on Display
   
 Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Exchange Controls
  52




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Foreign Currency Risk
   EquivalentU.S. DollarHoldingsUnited States dollars
    
    $
    18,155,000Hong Kong dollars
    
    
    13,633,000Chinese RMB
    
    
    3,199,000Macao dollars
    
    
    100,000Euro
    
    
    17,000Japanese yen
    
    
    14,000Pounds sterling
    
    
    2,000
 Item
 Interest Rate 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
  53




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Item 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Report of Management on Internal Control over Financial Reporting
     Attestation Report of the Registered Public Accounting Firm
  54




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        /s/ BDO LimitedBDO LimitedHong Kong, July 29, 2010 55




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##### Table of Contents



Changes in Internal Controls
  
 Item 16. RESERVED
 
 Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
 Item
 
 Item 16B. CODE OF ETHICS
  
 Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Year ended March 31,2009
    
    
    2010(In thousands)Audit fees (1)
    
    $
    226
    
    
    $
    206Audit-related fees(2)
    
    
    
    
    
    
    Tax fees(3)
    
    
    
    
    
    
    All other fees(4)
    
    
    
    
    
    
    $
    226
    
    
    $
    206
 
 (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, 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
  
 Item 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  56




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Item 16G. CORPORATE GOVERNANCE
 Item
 
 PART III
 
 Item 17. FINANCIAL STATEMENTS
  
 Item 18. FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Income and Comprehensive Income
    
    
    F-3Consolidated Statements of Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
  57




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      /s/ BDO LimitedBDO LimitedHong Kong, July 29, 2010 F-1




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
 March 31,2009
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,134
    
    
    $
    35,120Marketable securities (note 3)
    
    
    100
    
    
    
    5,673Accounts receivable, less allowances for doubtful amounts of $349 and $223
at March 31, 2009 and 2010, respectively
    
    
    22,227
    
    
    
    14,399Inventories (note 4)
    
    
    21,445
    
    
    
    15,808Assets held for sale (note 6)
    
    
    987
    
    
    
    Prepaid expenses and other current assets (note 5)
    
    
    1,887
    
    
    
    1,844Total current assets
    
    
    69,780
    
    
    
    72,844Property, plant and equipment-net (note 6)
    
    
    66,564
    
    
    
    60,705Deferred income tax assets (note 9)
    
    
    746
    
    
    
    70Goodwill (note 7)
    
    
    392
    
    
    
    392Total assets
    
    $
    137,482
    
    
    $
    134,011LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,370
    
    
    $
    7,298Accrued payroll and employee benefits
    
    
    2,473
    
    
    
    2,570Customer deposits
    
    
    1,460
    
    
    
    883Other accrued liabilities (note 8)
    
    
    2,167
    
    
    
    1,905Income taxes payable
    
    
    705
    
    
    
    Deferred income tax liabilities (note 9)
    
    
    
    
    
    
    340Total current liabilities
    
    
    17,175
    
    
    
    12,996Commitments and contingencies (note 10)
    
    
    
    
    
    
    Shareholders equity:Common shares nil par value-authorized 30,000,000 shares,
shares issued and outstanding March 31, 2009  15,790,810;
March 31, 2010  16,191,810
    
    
    49,923
    
    
    
    50,803Additional paid-in capital
    
    
    7,771
    
    
    
    7,719Accumulated other comprehensive income
    
    
    5,316
    
    
    
    5,316Retained earnings
    
    
    57,297
    
    
    
    57,177Total shareholders equity
    
    
    120,307
    
    
    
    121,015Total liabilities and shareholders equity
    
    $
    137,482
    
    
    $
    134,011
  F-2




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(U.S. dollars in thousands, except per share data)
 Year ended March 31,2008
    
    
    2009
    
    
    2010Net sales
    
    $
    143,806
    
    
    $
    131,738
    
    
    $
    81,614Cost of sales
    
    
    117,373
    
    
    
    111,570
    
    
    
    68,958Gross profit
    
    
    26,433
    
    
    
    20,168
    
    
    
    12,656Selling, general and administrative expenses
    
    
    19,601
    
    
    
    19,291
    
    
    
    15,505Other income (expenses), net
    
    
    1,838
    
    
    
    (132
    )
    
    
    4,594Operating income
    
    
    8,670
    
    
    
    745
    
    
    
    1,745Non-operating income, net
    
    
    521
    
    
    
    168
    
    
    
    444Income before income taxes
    
    
    9,191
    
    
    
    913
    
    
    
    2,189Income taxes (note 9)
    
    
    104
    
    
    
    (282
    )
    
    
    690Net income
    
    
    9,087
    
    
    
    1,195
    
    
    
    1,499Net income attributable to non-controlling interests
    
    
    228
    
    
    
    
    
    
    
    Net income attributable to Deswell Industries, Inc.
    
    
    8,859
    
    
    
    1,195
    
    
    
    1,499Other comprehensive incomeForeign currency translation adjustment
    
    
    2,628
    
    
    
    1,582
    
    
    
    Comprehensive income attributable to Deswell Industries, Inc.
    
    $
    11,487
    
    
    $
    2,777
    
    
    $
    1,499Net income per share attributable to Deswell Industries, Inc. (note 2)Basic:Net income per share
    
    $
    0.57
    
    
    $
    0.08
    
    
    $
    0.09Weighted average common shares outstanding
(shares in thousands)
    
    
    15,517
    
    
    
    15,791
    
    
    
    15,965Diluted:Net income per share
    
    $
    0.57
    
    
    $
    0.08
    
    
    $
    0.09Weighted average common and potential common shares
(shares in thousands)
    
    
    15,556
    
    
    
    15,805
    
    
    
    16,039
  F-3




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(U.S. dollars in thousands, except per share data)
 AccumulatedCommon  stock
    
    
    Additional
    
    
    otherShares
    
    
    
    
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    Shareholdersoutstanding
    
    
    Amount
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    equityBalance at March 31, 2007
    
    
    15,038,730
    
    
    
    42,393
    
    
    
    7,601
    
    
    
    1,106
    
    
    
    60,555
    
    
    
    111,655Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    310Exercise of stock options
    
    
    120,000
    
    
    
    1,188
    
    
    
    (202
    )
    
    
    
    
    
    
    
    
    
    
    986Issue of common stock for
acquisition of additional
interest in a subsidiary
    
    
    632,080
    
    
    
    6,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,342Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,628
    
    
    
    
    
    
    
    2,628Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,859
    
    
    
    8,859Dividends ($0.61 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,523
    )
    
    
    (9,523
    )Balance at March 31, 2008
    
    
    15,790,810
    
    
    
    49,923
    
    
    
    7,709
    
    
    
    3,734
    
    
    
    59,891
    
    
    
    121,257Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    62Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,582
    
    
    
    
    
    
    
    1,582Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,195
    
    
    
    1,195Dividends ($0.24 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,789
    )
    
    
    (3,789
    )Balance at March 31, 2009
    
    
    15,790,810
    
    
    
    49,923
    
    
    
    7,771
    
    
    
    5,316
    
    
    
    57,297
    
    
    
    120,307Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Exercise of stock options
    
    
    401,000
    
    
    
    880
    
    
    
    (177
    )
    
    
    
    
    
    
    
    
    
    
    703Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,499
    
    
    
    1,499Dividends ($0.10 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,619
    )
    
    
    (1,619
    )Balance at March 31, 2010
    
    
    16,191,810
    
    
    
    50,803
    
    
    
    7,719
    
    
    
    5,316
    
    
    
    57,177
    
    
    
    121,015
  F-4




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
 Year ended March 31,2008
    
    
    2009
    
    
    2010Cash flows from operating activitiesNet income
    
    $
    8,859
    
    
    $
    1,195
    
    
    $
    1,499Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    6,940
    
    
    
    7,264
    
    
    
    7,011Impairment of property, plant and equipment
    
    
    
    
    
    
    176
    
    
    
    8Loss (gain) on sale of property, plant and equipment
    
    
    43
    
    
    
    216
    
    
    
    (4,339
    )Unrealized holding (gain) loss on marketable securities
    
    
    (9
    )
    
    
    16
    
    
    
    (42
    )Gain on disposal of marketable securities
    
    
    
    
    
    
    
    
    
    
    (160
    )Impairment loss on goodwill
    
    
    317
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    310
    
    
    
    62
    
    
    
    125Non-controlling interests
    
    
    228
    
    
    
    
    
    
    
    Deferred tax
    
    
    (551
    )
    
    
    (517
    )
    
    
    1,016Changes in operating assets and liabilities:Accounts receivable
    
    
    (334
    )
    
    
    (918
    )
    
    
    7,828Inventories
    
    
    3,033
    
    
    
    4,923
    
    
    
    5,637Prepaid expenses and other current assets
    
    
    (345
    )
    
    
    1,306
    
    
    
    287Income taxes receivable
    
    
    127
    
    
    
    3
    
    
    
    Accounts payable
    
    
    (3,338
    )
    
    
    (2,157
    )
    
    
    (3,072
    )Accrued payroll and employee benefits
    
    
    23
    
    
    
    (376
    )
    
    
    97Customer deposits
    
    
    342
    
    
    
    335
    
    
    
    (577
    )Other accrued liabilities
    
    
    594
    
    
    
    67
    
    
    
    (262
    )Income taxes payable
    
    
    179
    
    
    
    74
    
    
    
    (705
    )Net cash provided by operating activities
    
    
    16,418
    
    
    
    11,669
    
    
    
    14,351Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (7,288
    )
    
    
    (7,402
    )
    
    
    (1,606
    )Acquisition of non-controlling interest in a subsidiary
    
    
    (414
    )
    
    
    
    
    
    
    Proceeds from sale of property, plant and equipment, net of
transaction costs
    
    
    333
    
    
    
    345
    
    
    
    5,528Purchase of marketable securities
    
    
    
    
    
    
    
    
    
    
    (5,631
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    260Net cash used in investing activities
    
    
    (7,369
    )
    
    
    (7,057
    )
    
    
    (1,449
    )Cash flows from financing activitiesDividends paid
    
    
    (9,523
    )
    
    
    (3,789
    )
    
    
    (1,619
    )Exercise of stock options
    
    
    986
    
    
    
    
    
    
    
    703Net cash used in financing activities
    
    
    (8,537
    )
    
    
    (3,789
    )
    
    
    (916
    )Effect of exchange rate changes
    
    
    (2,343
    )
    
    
    (407
    )
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (1,831
    )
    
    
    416
    
    
    
    11,986Cash and cash equivalents, beginning of year
    
    
    24,549
    
    
    
    22,718
    
    
    
    23,134Cash and cash equivalents, end of year
    
    $
    22,718
    
    
    $
    23,134
    
    
    $
    35,120Supplementary disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    365
    
    
    $
    79
    
    
    $
    380Supplementary disclosures of significant non-cash transactions:Issuance of common stock in connection with acquisition of
additional 24% shareholding in a subsidiary
    
    $
    6,342
    
    
    $
    
    
    
    $
    Excess of acquisition cost over the fair value of acquired
net assets of additional shareholding of a subsidiary
    
    $
    (1,314
    )
    
    $
    
    
    
    $
    
  F-5




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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 
 F-6




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Inventories 
 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
 Leases
 Valuation of long-lived assets
 Revenue recognition
 Comprehensive income -
 Allowance for doubtful account
 Shipping and handling cost-
 F-7




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Income
taxes
  Foreign currency translation
       F-8




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Post-retirement and post-employment benefits
 Stock-based compensation
   2008
    
    2009
    
    2010Risk-free interest rate  weighted average
    
    
    3.63
    %
    
    
    2.90
    %
    
    
    2.88
    %Expected life of options  weighted average
    
    10 years
    
    10 years
    
    10 yearsStock volatility
    
    
    41.28
    %
    
    
    40.49
    %
    
    
    47.08
    %Expected dividend yield
    
    
    5.04
    %
    
    
    7.35
    %
    
    
    6.61
    %
  Net income per share
  Year ended March 31,2008
    
    2009
    
    2010Net income attributable to Deswell Industries, Inc.
    
    $
    8,859
    
    
    $
    1,195
    
    
    $
    1,499Basic net income per share
    
    $
    0.57
    
    
    $
    0.08
    
    
    $
    0.09Basic weighted average common shares outstanding
    
    
    15,517
    
    
    
    15,791
    
    
    
    15,965Effect of dilutive securities  Options
    
    
    39
    
    
    
    14
    
    
    
    74Diluted weighted average common and potential common
shares outstanding
    
    
    15,556
    
    
    
    15,805
    
    
    
    16,039Diluted net income per share
    
    $
    0.57
    
    
    $
    0.08
    
    
    $
    0.09
  F-9




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Use of estimates 
 Fair value of financial instruments 
 Fair Value Measurements 
      Recent changes in accounting standards
  F-10




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 3. Marketable Securities
  March 31,2009
    
    2010Cost
    
    $
    297
    
    
    $
    5,631Market value
    
    $
    100
    
    
    $
    5,673
    4. Inventories
  March 31,2009
    
    2010Raw materials
    
    $
    11,930
    
    
    $
    10,162Work in progress
    
    
    4,941
    
    
    
    2,938Finished goods
    
    
    4,574
    
    
    
    2,708$
    21,445
    
    
    $
    15,808
 5. Prepaid Expenses and Other Current Assets
  March 31,2009
    
    2010Value added tax receivable
    
    $
    886
    
    
    $
    749Deposit for purchase of plant and equipment
    
    
    249
    
    
    
    Rental and utility deposit
    
    
    50
    
    
    
    181Advance to suppliers
    
    
    182
    
    
    
    458Prepayment
    
    
    443
    
    
    
    81Others
    
    
    77
    
    
    
    375$
    1,887
    
    
    $
    1,844
 F-11




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 6. Property, Plant and Equipment
  March 31,2009
    
    2010At cost:Land and buildings
    
    $
    34,700
    
    
    $
    34,895Plant and machinery
    
    
    40,617
    
    
    
    41,726Furniture, fixtures and equipment
    
    
    24,414
    
    
    
    24,551Motor vehicles
    
    
    2,263
    
    
    
    1,903Leasehold improvements
    
    
    4,767
    
    
    
    4,616Total
    
    
    106,761
    
    
    
    107,691Less: accumulated depreciation and amortization
    
    
    (41,632
    )
    
    
    (47,152
    )Less: impairment
    
    
    (61
    )
    
    
    (69
    )65,068
    
    
    
    60,470Construction in progress
    
    
    1,611
    
    
    
    315Less: impairment
    
    
    (115
    )
    
    
    (80
    )1,496
    
    
    
    235Net book value
    
    $
    66,564
    
    
    $
    60,705
  March 31,2009
    
    2010Land use right of state-owned land and buildings erected thereon (a)
    
    $
    30,532
    
    
    $
    30,727Long term leased land and buildings erected thereon (b)
    
    
    4,168
    
    
    
    4,168$
    34,700
    
    
    $
    34,895
 
 (a)
    
    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.(b)
    
    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 Chang 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 Chang
An Xiaobian District Co-operation to change the legal form of the land from collectively-owned to
state-owned. As of March 31, 2010, the Company is not aware of any steps being taken by the
Dongguan Chang An Xiaobian District Co-operation for such application.  F-12




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 7. Goodwill
   March 31,2009
    
    2010Electronic division
    
    $
    393
    
    
    $
    393Metallic division
    
    
    317
    
    
    
    317Foreign exchange differences
    
    
    (1
    )
    
    
    (1
    )Impairment  metallic division
    
    
    (317
    )
    
    
    (317
    )$
    392
    
    
    $
    392
 8. Other Accrued Liabilities
  March 31,2009
    
    2010Accrued expenses
    
    $
    1,164
    
    
    $
    1,242Commission expenses
    
    
    239
    
    
    
    91Value added tax payable
    
    
    53
    
    
    
    49Others
    
    
    711
    
    
    
    523$
    2,167
    
    
    $
    1,905
 9. Income Taxes
  Year ended March 31,2008
    
    2009
    
    2010Hong Kong
    
    $
    (1
    )
    
    $
    (5
    )
    
    $
    (1
    )China
    
    
    9,192
    
    
    
    918
    
    
    
    2,190$
    9,191
    
    
    $
    913
    
    
    $
    2,189
   F-13




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 9. Income Taxes  continued
        F-14




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 9. Income Taxes  continued
   Year ended March 31,2008
    
    2009
    
    2010Current tax- China
    
    $
    654
    
    
    $
    234
    
    
    $
    380Deferred tax
    
    
    (550
    )
    
    
    (516
    )
    
    
    310$
    104
    
    
    $
    (282
    )
    
    $
    690
  Year ended March 31,2008
    
    2009
    
    2010Provision for income taxes at statutory tax rate in China
    
    $
    2,988
    
    
    $
    227
    
    
    $
    547Effect of different tax rate in various jurisdictions
    
    
    
    
    
    
    (1
    )
    
    
    (210
    )Tax holidays and concessions
    
    
    (89
    )
    
    
    
    
    
    
    Effect of income for which no income tax is chargeable
    
    
    (3,435
    )
    
    
    (1,452
    )
    
    
    (212
    )Effect of expense for which no income tax is deductible
    
    
    231
    
    
    
    1,307
    
    
    
    847Net change in valuation allowances
    
    
    (16
    )
    
    
    (15
    )
    
    
    (233
    )Under (over) provision of income tax in previous years
    
    
    477
    
    
    
    (348
    )
    
    
    (69
    )Others
    
    
    (52
    )
    
    
    
    
    
    
    20Effective tax
    
    $
    104
    
    
    $
    (282
    )
    
    $
    690
  March 31,2009
    
    2010Deferred tax asset (liability) :Net operating loss carry forwards
    
    $
    550
    
    
    $
    704Provision of employee benefits
    
    
    308
    
    
    
    242Depreciation and amortization
    
    
    93
    
    
    
    26Revenue recognized for financial reporting purpose
before being recognized for tax purpose
    
    
    
    
    
    
    (1,285
    )Others
    
    
    28
    
    
    
    43Less: Valuation allowances
    
    
    (233
    )
    
    
    Net deferred tax asset (liability)
    
    $
    746
    
    
    $
    (270
    )
   F-15




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 10. Commitments and Contingencies
    2011
    
    $
    29Total minimum lease payments
    
    $
    29
  11. Employee Benefits
  12. Stock Option Plan
   Year ended March 31,2008
    
    2009
    
    2010Weighted
    
    
    
    
    
    
    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
    
    
    1,029,000
    
    
    $
    11.91
    
    
    
    1,119,000
    
    
    $
    11.14
    
    
    
    1,066,000
    
    
    $
    9.19Granted during the year
    
    
    210,000
    
    
    
    5.71
    
    
    
    190,000
    
    
    
    1.34
    
    
    
    233,000
    
    
    
    2.09Exercised during the year
    
    
    (120,000
    )
    
    
    8.26
    
    
    
    
    
    
    
    
    
    
    
    (401,000
    )
    
    
    1.75Canceled or expired
    
    
    
    
    
    
    
    
    
    
    (243,000
    )
    
    
    12.03
    
    
    
    (207,500
    )
    
    
    12.27Outstanding and exercisable at the end of the year
    
    
    1,119,000
    
    
    $
    11.14
    
    
    
    1,066,000
    
    
    $
    9.19
    
    
    
    690,500
    
    
    $
    10.19Range of exercise price per share
    
    $5.71 to $14.10
    
    $1.34 to $14.10
    
    $1.34 to $14.10
 F-16




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 12. Stock Option Plan  continued
   13. Operating Risk
 Concentrations of Credit Risk and Major Customers
 Percentage of net salesYear ended March 31,2008
    
    2009
    
    2010N&J Company Limited
    
    
    11.8
    %
    
    
    28.6
    %
    
    
    19.2
    %Digidesign, Inc.
    
    
    17.0
    %
    
    
    12.7
    %
    
    
    12.0
    %VTech Telecommunications Limited
    
    
    *
    
    
    
    *
    
    
    
    10.8
    %Inter-Tel Incorporated
    
    
    10.2
    %
    
    
    *
    
    
    
    *Line 6 Manufacturing
    
    
    14.3
    %
    
    
    *
    
    
    
    *
 
 *
    
    Less than 10%   Percentage ofaccountsreceivableMarch 31,2009
    
    2010Largest receivable balances from the five customers
    
    
    61.0
    %
    
    
    47.6
    %
  Country risk
 F-17




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 14. Segment Information
    Year ended March 31,2008

    
    2009

    
    2010Net
    
    
    Intersegment
    
    
    Profit
    
    
    Net
    
    
    Intersegment
    
    
    Profit
    
    
    Net
    
    
    Intersegment
    
    
    Profitsales
    
    
    Sales
    
    
    (loss)
    
    
    sales
    
    
    Sales
    
    
    (loss)
    
    
    sales
    
    
    Sales
    
    
    (loss)Segment:Injection molded plastic parts
    
    $
    58,858
    
    
    $
    28
    
    
    $
    7,049
    
    
    $
    75,838
    
    
    $
    2,437
    
    
    $
    1,553
    
    
    $
    48,177
    
    
    $
    1,168
    
    
    $
    3,734Electronic products
    
    
    85,494
    
    
    
    3,940
    
    
    
    2,412
    
    
    
    57,859
    
    
    
    724
    
    
    
    29
    
    
    
    34,634
    
    
    
    51
    
    
    
    (1,048
    )Metallic parts
    
    
    3,422
    
    
    
    
    
    
    
    (270
    )
    
    
    1,202
    
    
    
    
    
    
    
    (669
    )
    
    
    36
    
    
    
    14
    
    
    
    (497
    )Segment total
    
    $
    147,774
    
    
    $
    3,968
    
    
    $
    9,191
    
    
    $
    134,899
    
    
    $
    3,161
    
    
    $
    913
    
    
    $
    82,847
    
    
    $
    1,233
    
    
    $
    2,189Reconciliation to consolidated
totals:Sales eliminations
    
    
    (3,968
    )
    
    
    (3,968
    )
    
    
    
    
    
    
    (3,161
    )
    
    
    (3,161
    )
    
    
    
    
    
    
    (1,233
    )
    
    
    (1,233
    )
    
    
    Consolidated totals:Net sales
    
    $
    143,806
    
    
    $
    
    
    
    
    
    
    
    $
    131,738
    
    
    $
    
    
    
    
    
    
    
    $
    81,614
    
    
    $
    Income before income taxes
    
    
    
    
    
    
    
    
    
    $
    9,191
    
    
    
    
    
    
    
    
    
    
    $
    913
    
    
    
    
    
    
    
    
    
    
    $
    2,189
 Year ended March 31,2008

    
    2009

    
    2010Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interestincome
    
    
    expenses
    
    
    income
    
    
    expenses
    
    
    income
    
    
    expensesSegment:Injection molded plastic parts
    
    $
    458
    
    
    $
    
    
    
    $
    215
    
    
    $
    
    
    
    $
    166
    
    
    $
    Electronic products
    
    
    49
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    13
    
    
    
    Metallic parts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated total
    
    $
    507
    
    
    $
    
    
    
    $
    227
    
    
    $
    
    
    
    $
    179
    
    
    $
    
 Year ended March 31,2008
    
    
    2009
    
    
    2010Depreciation
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    
    
    
    
    DepreciationIdentifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    andassets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortizationSegment:Injection molded
plastic parts
    
    $
    96,463
    
    
    $
    5,050
    
    
    $
    5,613
    
    
    $
    101,497
    
    
    $
    6,648
    
    
    $
    5,834
    
    
    $
    105,084
    
    
    $
    1,308
    
    
    $
    5,838Electronic products
    
    
    42,583
    
    
    
    1,994
    
    
    
    1,048
    
    
    
    34,885
    
    
    
    637
    
    
    
    1,229
    
    
    
    32,569
    
    
    
    257
    
    
    
    1,007Metallic parts
    
    
    1,540
    
    
    
    244
    
    
    
    279
    
    
    
    1,067
    
    
    
    117
    
    
    
    201
    
    
    
    739
    
    
    
    41
    
    
    
    166Segment totals
    
    $
    140,586
    
    
    $
    7,288
    
    
    $
    6,940
    
    
    $
    137,449
    
    
    $
    7,402
    
    
    $
    7,264
    
    
    $
    138,392
    
    
    $
    1,606
    
    
    $
    7,011Reconciliation to
consolidated
totals:Elimination of receivables
from intersegments
    
    
    (570
    )
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    
    
    
    
    
    
    
    
    (4,773
    )
    
    
    
    
    
    
    Goodwill not
allocated to
segments
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    
    
    
    
    Consolidated
totals
    
    $
    140,407
    
    
    $
    7,288
    
    
    $
    6,940
    
    
    $
    137,482
    
    
    $
    7,402
    
    
    $
    7,264
    
    
    $
    134,011
    
    
    $
    1,606
    
    
    $
    7,011
 F-18




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 14. Segment Information  Continued
  Year ended March 31,2008
    
    
    2009
    
    
    2010Net salesUnited States of America
    
    $
    67,302
    
    
    $
    42,100
    
    
    $
    36,144China
    
    
    53,231
    
    
    
    69,617
    
    
    
    42,848United Kingdom
    
    
    13,055
    
    
    
    13,925
    
    
    
    1,278Hong Kong
    
    
    2,486
    
    
    
    1,762
    
    
    
    597Europe
    
    
    2,227
    
    
    
    2,438
    
    
    
    364Others
    
    
    5,505
    
    
    
    1,896
    
    
    
    383Total net sales
    
    $
    143,806
    
    
    $
    131,738
    
    
    $
    81,614
  March 31,2008
    
    
    2009
    
    
    2010Hong Kong and Macao
    
    $
    37,800
    
    
    $
    38,745
    
    
    $
    52,457China
    
    
    102,216
    
    
    
    98,345
    
    
    
    81,162Total identifiable assets
    
    $
    140,016
    
    
    $
    137,090
    
    
    $
    133,619Goodwill
    
    
    391
    
    
    
    392
    
    
    
    392Total assets
    
    $
    140,407
    
    
    $
    137,482
    
    
    $
    134,011
 15. Subsequent events
  F-19




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##### Table of Contents



Item 19. EXHIBITS
  ExhibitNo.
    
    Description1.1
    
    Memorandum and Articles of Association (as amended and restated on 13th December,
2007 and 30th March, 2010)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
    
    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.)4.2
    
    2003 Stock Option Plan of Deswell Industries, Inc. (as adopted August 20, 2003 and amended
August 1, 2005 and August 17, 2007) (incorporated by reference to Exhibit A to the Companys
Proxy Statement filed with the Securities and Exchange Commission on Form 6-K on September
11, 2007).4.3
    
    Sale and Purchase Agreement dated as of August 5, 2009 by and between Jetcrown Industrial
(Shenzhen) Co., Ltd., as assignor, and an unrelated third party as assignee, to sell real
property in Shekou, Shenzhen, China that was formerly used for Deswells plastic injection
molding operations for RMB 50,000,000 (approximately $7.3 million, based on an exchange rate
of 1:6.8309 on August 5, 2009 as reported on http://forex-history.net)* (incorporated by
reference to Exhibit 4.3 of Deswells Annual Report on Form 20-F for the year ended March
31, 2009 filed with the SEC on August 11, 2009)8.1
    
    Diagram of the Companys operating subsidiaries and affiliates  (see page 19 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)12.1
    
    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 Limited to incorporation of its report on the Companys consolidated
financial statements into Registrants Registration Statements on Form S-8.
 
 *
    
    The agreement is written in Chinese and an English Summary is included in accordance with Form
20-F Instructions to Exhibits and Rule 12b-12 (d) under the Exchange Act). 58




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##### Table of Contents



SIGNATURES
  DESWELL INDUSTRIES, INC.By:
    /s/ Franki S. F. TseFranki S. F. Tse,Chief Executive Officer  59