##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 o
    
    Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of
1934
 OR
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 For the Fiscal Year Ended: March 31, 2007
 Commission File Number: 0-26448
 
 (LOGO)
    
    DESWELL INDUSTRIES, INC.
  
 
      o þ
 o þ
  þ o
  o þ o
 o þ
 o þ




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##### 



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
    
    
    13ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    25ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    26ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    36ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    37ITEM 8. FINANCIAL INFORMATION
    
    
    41ITEM 9. THE OFFER AND LISTING
    
    
    42ITEM 10. ADDITIONAL INFORMATION
    
    
    43ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    49ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    50PART II
    
    
    50ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    50ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    50ITEM 15T. CONTROLS AND PROCEDURES
    
    
    50ITEM 16. RESERVED
    
    
    51ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    51ITEM 16B. CODE OF ETHICS
    
    
    51ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    52ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR THE AUDIT COMMITTEE.
    
    
    52ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATE PURCHASERS.
    
    
    52PART III
    
    
    53ITEM 17. FINANCIAL STATEMENTS
    
    
    53ITEM 18. FINANCIAL STATEMENTS
    
    
    53ITEM 19. EXHIBITS
    
    
    54SIGNATURES
    
    
    55CERTIFICATION 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 14.1EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 14.1
  2




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INTRODUCTION
    
    
    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 yuan is the base unit;
    
    all references to HK dollars or HK$ are to the legal currency of Hong Kong.
    
    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 data)Income Statement Data:
    
    Year ended March 31,2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Net sales
    
    $
    90,905
    
    
    $
    97,195
    
    
    $
    125,590
    
    
    $
    115,276
    
    
    $
    136,779Cost of sales
    
    
    61,006
    
    
    
    66,105
    
    
    
    92,072
    
    
    
    89,850
    
    
    
    105,506Gross profit
    
    
    29,899
    
    
    
    31,090
    
    
    
    33,518
    
    
    
    25,426
    
    
    
    31,273Selling, general and administrative expenses
    
    
    15,354
    
    
    
    14,718
    
    
    
    15,759
    
    
    
    15,052
    
    
    
    18,957Other income (expenses), net
    
    
    496
    
    
    
    90
    
    
    
    (106
    )
    
    
    (823
    )
    
    
    1,376Operating income (4)
    
    
    15,041
    
    
    
    16,462
    
    
    
    17,653
    
    
    
    9,551
    
    
    
    13,692Interest expense
    
    
    (6
    )
    
    
    (16
    )
    
    
    (12
    )
    
    
    (6
    )
    
    
    Non-operating income (expenses), net
    
    
    322
    
    
    
    820
    
    
    
    448
    
    
    
    447
    
    
    
    547Income before income taxes
    
    
    15,357
    
    
    
    17,266
    
    
    
    18,089
    
    
    
    9,992
    
    
    
    14,239Income taxes
    
    
    3,826
    
    
    
    589
    
    
    
    576
    
    
    
    (27
    )
    
    
    1,239Income before minority interests
    
    
    11,531
    
    
    
    16,677
    
    
    
    17,513
    
    
    
    10,019
    
    
    
    13,000Minority interests
    
    
    1,288
    
    
    
    1,957
    
    
    
    2,330
    
    
    
    1,240
    
    
    
    833Net income
    
    $
    10,243
    
    
    $
    14,720
    
    
    $
    15,183
    
    
    $
    8,779
    
    
    $
    12,167Basic earnings per share (2)(3)
    
    $
    0.79
    
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.59
    
    
    $
    0.81Average number of shares outstandingbasic (2)(3)
    
    
    13,008
    
    
    
    13,664
    
    
    
    14,656
    
    
    
    14,908
    
    
    
    14,956Diluted earnings per share (3)
    
    $
    0.77
    
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    0.59
    
    
    $
    0.81Average number of shares outstandingdiluted (2)(3)
    
    
    13,278
    
    
    
    14,160
    
    
    
    14,933
    
    
    
    14,936
    
    
    
    15,048Statistical Data:Gross margin
    
    
    32.9
    %
    
    
    32.0
    %
    
    
    26.7
    %
    
    
    22.1
    %
    
    
    22.9
    %Operating margin (4)
    
    
    16.5
    %
    
    
    16.9
    %
    
    
    14.1
    %
    
    
    8.3
    %
    
    
    10.0
    %Dividends per share (3)
    
    $
    0.51
    
    
    $
    0.63
    
    
    $
    0.65
    
    
    $
    0.63
    
    
    $
    0.65
 Balance Sheet Data:
    
    At March 31,2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Working capital
    
    $
    58,223
    
    
    $
    52,876
    
    
    $
    57,576
    
    
    $
    55,114
    
    
    $
    58,672Total assets
    
    
    106,172
    
    
    
    113,534
    
    
    
    136,976
    
    
    
    130,670
    
    
    
    141,210Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    81,846
    
    
    
    89,730
    
    
    
    104,767
    
    
    
    106,768
    
    
    
    111,655
 
 (1)
    
    Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America and are stated in U.S. dollars. See
Financial Statements and Currency Presentation.(2)
    
    Basic EPS excludes dilution from potential common shares and is computed by dividing income
available to common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from potential common shares.(3)
    
    Share and per share amounts presented above have been adjusted to reflect the three-for-two
stock splits effected in July 2002 and March 2005 (see Note 12 of Notes to Consolidated
Financial Statements).(4)
    
    Other operating income (expenses) are reclassified in the consolidated statement of income
for the year ended March 31, 2007 for better presentation. Comparative figures for the years
ended March 31, 2003 to 2006 were reclassified accordingly. The reclassification of operating
income has no impact on the net income on the consolidated statement of income the years ended
March 31, 2003 to 2006. 4




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Risk Factors
  We face numerous risks as a result of our operations in China.
  The Chinese government could change its policies toward or even nationalize private enterprise,
which could result in the total loss of our investment in that country.
  There may be a lack of remedies and impartiality under the Chinese legal system that prevents us
from enforcing the agreements under which we operate our factories.
  If our business licenses in China were not renewed, we would be required to move our operations out
of China, which would impair our profitability, competitiveness and market position and jeopardize
our ability to continue operations.
  A fire, severe weather, flood, or other act of God could cause significant damage to our properties
in China and disrupt our business operations.
  5




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Possible changes and uncertainties in economic policies in the Special Economic Zones of China in
which we operate could harm our operations by eliminating benefits we currently enjoy.
  We are subject to the risk of increased income and other taxes in China.
     We could suffer losses from corrupt or fraudulent business practices. Conducting business in China
is inherently risky.
  Controversies affecting Chinas trade with the United States could harm our operations or depress
our stock price.
  6




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Changes in currency rates involving the Hong Kong dollar could increase our expenses or cause
economic or political problems affecting our business. Changes in currency rates involving the RMB
implemented in July 2005 increased our expenses in the year ended March 31, 2007.
  Any future outbreak of severe acute respiratory syndrome or other diseases may have a negative
impact on our business and operating results.
   Political and economic instability of Hong Kong and Macao could harm our operations.
  A recent labor shortage in southern China could adversely affect our gross margins or decrease
revenue.
  7




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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.
  We have no long-term contracts to obtain plastic resins and our profit margins and net income could
suffer from an increase in resin prices.
  Year ended March 31,2005
    

2006
    

2007Resins cost as a % of plastic products sold
    
    
    58
    %
    
    
    53
    %
    
    
    52
    %Resins cost as a % of total cost of goods sold
    
    
    24
    %
    
    
    21
    %
    
    
    20
    %
  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.
  We are facing increasing competition, which has had an adverse effect on our gross profit margins.
  8




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March 31Year ended March 31, 2007
    
    Year ended March 31, 2006
    
    Year ended March 31, 2005
    
    2004Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    Percentageincrease from
    
    
    
    
    
    decline from
    
    
    
    
    
    decline fromPercent
    
    previous year
    
    Percent
    
    previous year
    
    Percent
    
    previous year
    
    PercentGross margin
    
    
    22.9
    %
    
    
    3.6
    %
    
    
    22.1
    %
    
    
    (17.2
    )%
    
    
    26.7
    %
    
    
    (16.6
    )%
    
    
    32.0
    %
  Our customers are dependent on shipping companies for delivery of our products and interruptions to
shipping could materially and adversely affect our business and operating results.
  Because our operations are international, we are subject to significant worldwide political,
economic, legal and other uncertainties.
  
    
    changes in economic and political conditions and in governmental policies,
    
    changes in international and domestic customs regulations,
    
    wars, civil unrest, acts of terrorism and other conflicts,
    
    changes in tariffs, trade restrictions, trade agreements and taxation,
    
    difficulties in managing or overseeing foreign operations, and
    
    limitations on the repatriation of funds because of foreign exchange controls.
  Our loss of certain members of our senior management could cause disruptions in our business and
harm our customer relationships thereby adversely affecting sales.
  
    
    Richard Lau, our former Chief Executive Officer, who retired from this post in
January 2007 , and remains Chairman of our Board of Directors;
    
    Franki S.F. Tse, our Chief Executive Officer, who in February 2007 succeeded
Richard Lau, who remains Chairman of our Board of Directors;
    
    C. P. Li, our Executive Director, General Manager in charge of manufacturing and
administrative operations for plastic products;
    
    C. W. Leung, Executive Director of Engineering in charge of the mold division and
engineering for our plastic manufacturing operations;
 9




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
    
    S. K. Lee, our Director of Administration and Marketing and General Manager in
charge of administrative and marketing operations for electronic and metallic
products; and
    
    M. C. Tam, our Director of Engineering and Manufacturing, in charge of
manufacturing and operations for electronic and metallic products.
  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.
    10




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The concentration of share ownership in our senior management allows them to control or
substantially influence the outcome of matters requiring shareholder approval.
  Compliance with the first phase of Section 404 of the Sarbanes-Oxley Act of 2002 has increased our
general and administrative expenses; if we do not receive an unqualified opinion on the adequacy of
our internal control over financial reporting, investors could lose confidence in the reliability
of our financial statements, which could result in a decrease in the value of our shares.
   Legislative actions and potential new accounting pronouncements are likely to impact our future
financial position and results of operations and in the case of FASBs new pronouncement regarding
the expensing of stock options will adversely impact our financial results.
  Our boards ability to amend our charter without shareholder approval could have anti-takeover
effects that could prevent a change in control.
  11




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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.
  
    
    Rule4350(c)(1):A majority of our Board of Directors are not independent
directors within the definition of independent director in Nasdaq Marketplace Rule
4200(a)(15);
    
    Rule4350(c)(2): Our independent directors do not meet in executive session;
    
    Rule4350(c)(3): Our board does not have a compensation committee;
    
    Rule4350(c)(4): Nominees for appointment as our directors are not selected or
recommended by (i) a majority of our independent directors, or a nominating
committee composed solely of independent directors.
  We may not pay dividends in the future.
  12




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ITEM 4. INFORMATION ON THE COMPANY
 History and Development of Deswell
      13




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14




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Organizational Structure
   15




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16




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Capital Expenditures
  2005
    
    2006
    
    2007Purchase of property, plant and equipment
    
    $
    17,003,000
    
    
    $
    6,940,000
    
    
    $
    7,812,000Proceeds from the sale of property,
plant and equipment
    
    
    36,000
    
    
    
    50,000
    
    
    
    3,232,000
        Business Overview
 Introduction to Deswell
  17




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
    
    cases and key tops for personal organizers and remote controls;
    
    cases for flashlights, telephones, paging machines, projectors and alarm clocks;
    
    grips and rods for fishing tackle;
    
    toner cartridges and cases for photocopy and printer machines;
    
    parts for electrical products such as air-conditioning and ventilators;
    
    parts for audio equipment;
    
    double injection caps and baby products;
    
    laser key caps; and
    
    automobile components.
  
    
    complex printed circuit board assemblies using surface mount (SMT), ball grip
assembly (BGA) and pin-through-hole (PTH) interconnection technologies and
    
    finished products which include business communication products such as digital
phone systems, or digital keysets and voice over IP, or VoIP, phones, and
    
    sophisticated professional audio equipment including digital audio workstation,
digital or analogue mixing consoles, instrument amplifiers, signal processors,
firewire/USB audio interfaces, keyboard controllers and synthesizers, etc.
   Industry Overview
   18




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




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Finishing
  Electronic Products and Assemblies
       20




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Metal Parts Manufacturing
  Quality Control
       Raw Materials, Component Parts and Suppliers
 Plastic Resins.
  Year ended March 31, 2007Average cost of ABS as a percentage of the total cost of
    
    2005
    
    2006
    
    2007Plastic products sold
    
    
    58
    %
    
    
    53
    %
    
    
    51
    %Goods sold
    
    
    24
    %
    
    
    21
    %
    
    
    20
    %
  21




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Component Parts and Supplies
  Raw Metal
  Transportation
  Customers and Marketin
  22




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Year ended March 31,Geographic Areas
    
    2005
    
    2006
    
    2007United States
    
    
    40.5
    %
    
    
    49.0
    %
    
    
    42.4
    %China
    
    
    44.8
    
    
    
    37.5
    
    
    
    39.2Europe
    
    
    10.9
    
    
    
    7.0
    
    
    
    11.2Hong Kong
    
    
    0.8
    
    
    
    3.0
    
    
    
    3.4Others
    
    
    3.0
    
    
    
    3.5
    
    
    
    3.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Modern Plastics International Injection Molding
 Major Customers
  Year ended March 31,Customer
    
    Product
    
    2005
    
    2006
    
    2007Line 6 Manufacturing
    
    Professional audio equipment
    
    
    14.9
    %
    
    
    14.5
    %
    
    
    15.1
    %Digidesign, Inc.
    
    Professional audio equipment
    
    
    19.1
    
    
    
    17.4
    
    
    
    13.3Vtech Telecommunications Limited
    
    Plastic component
    
    
    12.1
    
    
    
    *
    
    
    
    12.7Peavey Electronics Corp.
    
    Professional audio equipment
    
    
    *
    
    
    
    *
    
    
    
    10.4
 
 *
    
    Less than 10%   Competition
  23




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Patents, Licenses and Trademarks
  Seasonality
  Property, Plants and Equipment
 Macao
  Hong Kong
  Southern China
      24




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ITEM 4A. UNRESOLVED STAFF COMMENTS
  25




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  Operating Result
  General
      26




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Year ended March 31, 2005
    
    Year ended March 31, 2006
    
    Year ended March 31, 2007Plastic
    
    
    
    
    
    
    
    
    
    Plastic
    
    
    
    
    
    
    
    
    
    PlasticInjection-
    
    Electronic
    
    
    
    
    
    Injection-
    
    Electronic
    
    
    
    
    
    Injection-
    
    ElectronicMolding
    
    & 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
    
    
    65.2
    
    
    
    80.6
    
    
    
    73.3
    
    
    
    72.5
    
    
    
    81.9
    
    
    
    77.9
    
    
    
    68.1
    
    
    
    84.1
    
    
    
    77.1Gross profit
    
    
    34.8
    
    
    
    19.4
    
    
    
    26.7
    
    
    
    27.5
    
    
    
    18.1
    
    
    
    22.1
    
    
    
    31.9
    
    
    
    15.9
    
    
    
    22.9Selling, general and
administrative expenses
    
    
    16.6
    
    
    
    8.9
    
    
    
    12.5
    
    
    
    17.7
    
    
    
    9.7
    
    
    
    13.1
    
    
    
    17.4
    
    
    
    11.2
    
    
    
    13.9Other income, net
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (1.4
    )
    
    
    (0.3
    )
    
    
    (0.7
    )
    
    
    2.5
    
    
    
    (0.1
    )
    
    
    1.0Operating income
    
    
    18.2
    
    
    
    10.3
    
    
    
    14.1
    
    
    
    8.5
    
    
    
    8.1
    
    
    
    8.3
    
    
    
    17.0
    
    
    
    4.6
    
    
    
    10.0Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-operating income, net
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.4Income before income taxes
and minority interst
    
    
    18.4
    
    
    
    10.8
    
    
    
    14.4
    
    
    
    9.4
    
    
    
    8.2
    
    
    
    8.7
    
    
    
    17.8
    
    
    
    4.8
    
    
    
    10.4Income taxes
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    (0.6
    )
    
    
    0.4
    
    
    
    (0.0
    )
    
    
    1.8
    
    
    
    0.2
    
    
    
    0.9Income before
minority interests
    
    
    18.1
    
    
    
    10.2
    
    
    
    13.9
    
    
    
    10.0
    
    
    
    7.8
    
    
    
    8.7
    
    
    
    15.9
    
    
    
    4.6
    
    
    
    9.5Minority interests
    
    
    0.7
    
    
    
    2.9
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1
    
    
    
    0.6Net income
    
    
    17.4
    %
    
    
    7.3
    %
    
    
    12.1
    %
    
    
    10.0
    %
    
    
    5.9
    %
    
    
    7.6
    %
    
    
    15.9
    %
    
    
    3.5
    %
    
    
    8.9
    %
 Year ended March 31, 2007 Compared to Year Ended March 31, 2006
 Net Sales 
    Gross Profit
  27




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##### Table of Contents



Selling, General and Administrative Expenses
  Other operating income
   Operating Income
   Income Taxes
 28




---



##### Table of Contents



Minority Interest
 Net Income
   Year ended March 31, 2006 Compared to Year Ended March 31, 2005
 Net Sales
    29




---



##### Table of Contents



Gross Profit
   Selling, General and Administrative Expenses
   Other operating income
   30




---



##### Table of Contents



Operating Income
   Income Taxes
   Minority Interest
 Net Income
   Seasonality
  31




---



##### Table of Contents



Year ended March 31,2005
    
    2006
    
    2007Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Net sales
    
    $
    28,788
    
    
    $
    31,924
    
    
    $
    36,185
    
    
    $
    28,693
    
    
    $
    30,075
    
    
    $
    29,046
    
    
    $
    29,972
    
    
    $
    26,183
    
    
    $
    31,689
    
    
    $
    35,715
    
    
    $
    39,002
    
    
    $
    30,373Gross profit
    
    
    8,318
    
    
    
    8,461
    
    
    
    9,402
    
    
    
    7,337
    
    
    
    7,640
    
    
    
    6,209
    
    
    
    6,561
    
    
    
    5,016
    
    
    
    8,446
    
    
    
    8,865
    
    
    
    8,754
    
    
    
    5,208Operating
income
    
    
    4,822
    
    
    
    4,502
    
    
    
    4,832
    
    
    
    3,497
    
    
    
    3,600
    
    
    
    3,126
    
    
    
    2,632
    
    
    
    193
    
    
    
    3,866
    
    
    
    3,973
    
    
    
    4,016
    
    
    
    1,837Net income
    
    
    3,995
    
    
    
    3,628
    
    
    
    4,207
    
    
    
    3,353
    
    
    
    3,151
    
    
    
    2,795
    
    
    
    2,380
    
    
    
    453
    
    
    
    3,403
    
    
    
    3,597
    
    
    
    3,605
    
    
    
    1,562
  Impact of Inflation
  Exchange Rates
      32




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##### Table of Contents



Liquidity and Capital Resources
        Payments due by period(In thousands)Period from
    
    
    Period from
    
    
    PeriodYear ending
    
    
    April 1, 2008
    
    
    April 1, 2010
    
    
    afterMarch 31,
    
    
    to March 31,
    
    
    to March 31,
    
    
    March 31,Contractual obligations
    
    Total
    
    
    2008
    
    
    2010
    
    
    2012
    
    
    2012Long-term bank borrowing
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital (finance) lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    131
    
    
    
    112
    
    
    
    19
    
    
    
    
    
    
    
    Capital expenditures
    
    
    1,100
    
    
    
    1,088
    
    
    
    12
    
    
    
    
    
    
    
    Purchase obligations
    
    
    14,595
    
    
    
    14,593
    
    
    
    2
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    15,826
    
    
    $
    15,793
    
    
    $
    33
    
    
    $
    
    
    
    $
    
 33




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##### Table of Contents



Off Balance Sheet Arrangements
  Critical Accounting Policies
   Inventories
 Valuation of long-lived assets
 Foreign currency translation
   Allowance for doubtful account
 34




---



##### Table of Contents



Recent Changes in Accounting Standards
      35




---



##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Name
    
    Age
    
    Position(s) with CompanyLau Pui Hon (Richard Lau)
    
    
    62
    
    
    Chairman of the Board of DirectorsFranki S. F. Tse
    
    
    43
    
    
    Chief Executive OfficerLi Chin Pang (C. P. Li)
    
    
    61
    
    
    Executive Director and General Manager of
Manufacturing and Administration for Plastic
Operations, Secretary and Member of the Board of
DirectorsLeung Chi Wai (C. W. Leung)
    
    
    52
    
    
    Executive Director of Engineering for Plastic
Operations and Member of the Board of DirectorsHung-Hum Leung
    
    
    61
    
    
    Member of Board of Directors and Audit CommitteesAllen Yau-Nam Cham
    
    
    60
    
    
    Member of Board of Directors and Audit CommitteesWing-Ki Hui
    
    
    61
    
    
    Member of Board of Directors and Audit CommitteesEliza Y. P. Pang
    
    
    45
    
    
    Chief Financial OfficerLee Shu Kwan (S. K. Lee)
    
    
    61
    
    
    Director of Administration and Marketing for
Electronic OperationsTam Man Chi (M. C. Tam)
    
    
    57
    
    
    Director of Engineering and Manufacturing for
Electronic Operations
 Richard Lau
 Franki S. F. Tse.
 C. P. Li.
 C. W. Leung.
 Hung-Hum Leung.
 Allen Yau-Nam Cham
 36




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##### Table of Contents



Wing-Ki Hui.
 Eliza Y. P. Pang
 S. K. Lee
 M. C. Tam.
  Compensation of Directors and Executive Officers
 Executive Officers
  Directors
  Board Practices
  Audit Committee
  37




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##### Table of Contents



Other Committees; Nasdaq Compliance
  Employees
  Share Ownership
 Share Ownership of Directors and Senior Management
  Employee Stock Option Plans
      38




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##### Table of Contents



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 Lau
    
    
    3,891,760
    
    
    
    25.3
    %C. P. Li
    
    
    3,688,750
    
    
    
    24.0
    %C. W. Leung
    
    
    3,688,750
    
    
    
    24.1
    %Leesha Holdings Ltd.
    
    
    3,453,750
    
    
    
    22.8
    %Wellington Management Company, LLP (6)
    
    
    1,602,505
    
    
    
    10.6
    %Royce & Associates, Inc. (7)
    
    
    1,228,996
    
    
    
    8.1
    %Micropower Enterprises Limited
    
    
    1,143,750
    
    
    
    7.6
    %FMR Corp./ Edward C. Johnson 3d (8)
    
    
    907,214
    
    
    
    6.0
    %Franki S. K. Tse
    
    
    *
    
    
    
    *M. C. Tam
    
    
    *
    
    
    
    *S. K. Lee
    
    
    *
    
    
    
    *Eliza Y. P. Pang
    
    
    *
    
    
    
    *Hung-Hum Leung
    
    
    *
    
    
    
    *Allen Yau-Nam Cham
    
    
    *
    
    
    
    *Wing-Ki Hui
    
    
    *
    
    
    
    *
 
 *
    
    Less than 1%.(1)
    
    Based on 15,143,730 shares outstanding on June 30, 2007. 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 3,453,750 shares held of record by Leesha, 203,010 shares held of record by Mr.
Lau and options to purchase 235,000 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 $11.61 per
share until June 25, 2016. As a director of Leesha, Mr. Lau shares the voting and investment
power of the shares held by Leesha.(3)
    
    Consists of 3,453,750 shares held of record by Leesha, nil shares held of record by Mr. Li
and options to purchase 235,000 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 $11.61 per
share until June 25, 2016. As a director of Leesha, Mr. Li shares the voting and investment
power of the shares held by Leesha.(4)
    
    Consists of 3,453,750 shares held of record by Leesha, 100,000 shares held of record by Mr.
Leung and options to purchase 135,000 shares granted to Mr. Leung under the Companys stock
option plans. Mr. Leungs options are exercisable at a weighted average exercise price of
$14.10 per share until September 30, 2013. As a director of Leesha, Mr. Leung shares the
voting and investment power of the shares held by Leesha.(5)
    
    Leesha is an investment holding company organized as an International Business Company under
the laws of the British Virgin Islands. Messrs. Lau, Li and Leung, who are its directors,
wholly own Leesha in equal shares. Among 39




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##### Table of Contents



other investments, Leesha owns the 3,453,750 shares of Deswell, which were transferred to
Leesha by Messrs. Lau, Li and Leung after Deswells initial public offering.(6)
    
    Based on Amendment No. 4 to Schedule 13G filed with the SEC on February 14, 2007.(7)
    
    Based on Amendment No. 6 to a Schedule 13G filed with the SEC on January 19, 2007.(8)
    
    Based on Amendment No. 4 to a Schedule 13G filed with the SEC on February 14, 2007. Change in the Percentage Ownership Held by Major Shareholders
  Percentage Ownership (1) atJune 28,2005
    
    June 30, 2006
    
    June 30, 2007Richard Lau
    
    
    25.9
    %
    
    
    26.0
    %
    
    
    25.3
    %C. P. Li
    
    
    25.6
    %
    
    
    25.2
    %
    
    
    24.0
    %C. W. Leung
    
    
    24.1
    %
    
    
    24.3
    %
    
    
    24.1
    %Leesha Holdings Ltd.
    
    
    23.2
    %
    
    
    23.1
    %
    
    
    22.8
    %Wellington Management Company, LLP
    
    
    8.4
    %
    
    
    9.6
    %
    
    
    10.6
    %Royce & Associates, Inc.
    
    
    9.3
    %
    
    
    10.4
    %
    
    
    8.1
    %Micropower Enterprises Limited
    
    
    7.7
    %
    
    
    7.7
    %
    
    
    7.6
    %FMR Corp./ Edward C. Johnson 3d/
Abigail P. Johnson
    
    
    7.6
    %
    
    
    6.3
    %
    
    
    6.0
    %
 
 (1)
    
    Based on 14,908,730, 14,923,730 and 15,143,730 and shares outstanding on June 28, 2005,
June 30, 2006 and June 30, 2007, respectively. However, in accordance with Rule 13d-3(d)(1)
under the Securities Exchange Act of 1934, common shares not outstanding but which are the
subject of currently exercisable options have been considered outstanding for the purpose of
computing the percentage of outstanding common shares owned by the listed person holding such
options, but are not considered outstanding for the purpose of computing the percentage of
common shares owned by any of the other listed persons.  Related Party Transactions
   40




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
 Financial Statements
  Legal Proceedings
  Exports Sales
  Dividend Policy
  
    
    2005 aggregating $9,234,000, $2,196,000 of which was based on results for the
last quarter of the year ended March 31, 2004 and $7,038,000 of which was based on
results for the first three quarters of the year ended March 31, 2005; and
    
    2006 aggregating $9,400,000, $2,535,000 of which was based on results for the
last quarter of the year ended March 31, 2005 and $6,865,000 of which was based on
results for the first three quarters of the year ended March 31, 2006.
    
    2007 aggregating $9,720,000, $2,089,000 of which was based on results for the
last quarter of the year ended March 31, 2006 and $7,631,000 of which was based on
results for the first three quarters of the year ended March 31, 2007.
  41




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
   Year Ended March 31,
    
    High
    
    Low2007
    
    $
    12.50
    
    
    $
    8.102006
    
    
    16.48
    
    
    
    9.002005
    
    
    18.167
    
    
    
    12.8672004
    
    
    20.40
    
    
    
    10.432003
    
    
    27.23
    
    
    
    7.33
  Quarter ended
    
    High
    
    LowMarch 31, 2007
    
    $
    12.50
    
    
    $
    11.21December 31, 2006
    
    
    11.70
    
    
    
    10.46September 30, 2006
    
    
    10.96
    
    
    
    8.40June 30, 2006
    
    
    9.90
    
    
    
    8.10March 31, 2006
    
    
    12.67
    
    
    
    9.00December 31, 2005
    
    
    14.87
    
    
    
    10.20September 30, 2005
    
    
    16.00
    
    
    
    14.09June 30, 2005
    
    
    16.48
    
    
    
    13.67
  Month ended
    
    High
    
    LowJune 30, 2007
    
    $
    13.04
    
    
    $
    10.92May 31, 2007
    
    
    12.62
    
    
    
    11.25April 30, 2007
    
    
    12.32
    
    
    
    11.40March 31, 2007
    
    
    12.22
    
    
    
    11.40February 29, 2007
    
    
    12.50
    
    
    
    11.21January 31, 2007
    
    
    12.49
    
    
    
    11.30
 42




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##### Table of Contents



ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
 Objects and Purposes
  Directors
     Rights, Preferences and Restrictions of Authorized and Outstanding Shares and Changes to
Rights of Shareholders
   43




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##### Table of Contents



Calling Annual General Meetings and Extraordinary General Meetings of Shareholders
     Limitations on Share Ownership
  Potential Anti-Takeover Deterrence
  Ownership Information
  Differences from United States Law
  Material Contracts
  44




---



##### 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 your securities holdings;
    
    a financial institution;
    
    a life insurance company;
    
    a tax-exempt organization;
    
    a person that holds our common shares in a hedging transaction or as part of a
straddle or a conversion transaction;
    
    a person whose functional currency for tax purposes is not the U.S. dollar;
    
    a person liable for alternative minimum tax;
    
    a person that owns, or is treated as owning, 10 percent or more of our common shares;
    
    certain former U.S. citizens and residents deemed to have expatriated to avoid U.S. taxation; or
    
    a person who receives our shares pursuant to the exercise of employee stock options
or otherwise as compensation.
 Tax Consequences to U.S. Holders
  
    
    an individual U.S. citizen or resident alien of the United States (as specifically
defined for tax purposes);
    
    a corporation created or organized in or under the laws of the United States or any
State or political subdivision thereof;
 45




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##### Table of Contents




    
    an estate whose income is subject to U.S. federal income tax regardless of its
source;
    
    a trust (x) if a U.S. court can exercise primary supervision over the trusts
administration and one or more U.S. persons are authorized to control all substantial
decisions of the trust or (y) if it was in existence on August 20, 1996, was treated as
a U.S. person prior to that date and has a valid election in effect under applicable
treasury regulations to be treated as a U.S. person; or
    
    any other person or entity that would be subject to U.S. federal income tax on a net
income basis in respect of our common shares.
  Distributions
   Sale or Other Disposition of Our Shares
  
    
    you will recognize gain or loss equal to the difference (if any) between:
    
    the amount realized on such sale or other taxable disposition and
    
    your adjusted tax basis in such common shares (your adjusted tax basis in the shares
you hold generally will equal your U.S. dollar cost of such shares);
    
    such gain or loss will be capital gain or loss and will be long-term capital gain or
loss if your holding period for our common shares is more than one year at the time of
such sale or other disposition;
 46




---



##### Table of Contents




    
    net long-term capital gains derived by individual U.S. Holders from sales or other
taxable dispositions of our shares before January 1, 2011 will generally be taxed at
the rate of 5 percent (zero, in 2008, 2009 and 2010) or 15 percent, depending upon the
particular taxpayers U.S. federal income tax bracket;
    
    such gain or loss will generally be treated as having U.S. source for U.S. foreign
tax credit purposes; and
    
    your ability to deduct capital losses is subject to limitations.
 Passive Foreign Investment Company
   
    
    75 percent or more of our gross income in that year is passive income (including our
pro-rata share of the gross income of any company in which we own, or are treated as
owning, 25 percent or more of the shares by value), which includes dividends,
interests, royalties, rents, annuities, and some types of gains; or
    
    the average percentage of the value of our assets in that year (including our
pro-rata share of the assets of any company in which we own, or are treated as owning,
25 percent or more of the shares by value) that produce or are held for the production
of passive income is at least 50 percent.
   
    
    any excess distribution, which would be your share of distributions in any year
that are greater than 125 percent of the average annual distributions received by you
in the three preceding years before the current taxable year (or during your holding
period for the shares, if shorter), and
    
    any gain realized on the sale or other disposition of our common shares.
  
    
    the excess distribution or gain would be allocated ratably to each day that you have
held our common shares,
    
    the amount allocated to the taxable year in which you realize the excess
distribution or gain would be taxed as ordinary income,
    
    the amount allocated to the taxable years prior to the first taxable year in which
we are a PFIC would be taxed as ordinary income for the taxable year in which you
realize the excess distribution or gain, and
    
    the amounts allocated to each of the prior taxable years for which we were a PFIC
would be taxed as ordinary income at the highest applicable tax rate in effect for that
year, and, in addition, an interest charge generally applicable to underpayments of tax
would be imposed on you, as if the tax had been due for the tax year to which such
amounts were allocated under these rules.
 47




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##### Table of Contents



Tax Consequences to Non-U.S. Holders
  Distributions
  
    
    you conduct a trade or business in the United States and
    
    the distributions are effectively connected with the conduct of that trade or
business (and, if an applicable income tax treaty so requires as a condition for you to
be subject to U.S. federal income tax on a net income basis in respect of income from
our common shares, such distributions are attributable to a permanent establishment
that you maintain in the United States).
  Sale or Other Disposition of Our 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
    
    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.
  48




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##### Table of Contents



Backup Withholding and Information Reporting
  
    
    you are a corporation or other exempt recipient, or
    
    you provide your correct U.S. federal taxpayer identification number and certify
that no loss of exemption from backup withholding has occurred.
    British Virgin Islands Tax Consequences
   
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Exchange Controls
   49




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##### Table of Contents



Foreign Currency Risk
   EquivalentU.S. DollarHoldingsUnited States dollars
    
    $
    11,352,000Hong Kong dollars
    
    
    8,384,000Euro
    
    
    24,000Chinese RMB
    
    
    4,500,000Japanese yen
    
    
    246,000Macao dollars
    
    
    43,000
  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
  
 ITEM 15T. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Report of Management on Internal Control over Financial Reporting
  50




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##### Table of Contents



Changes in Internal Controls
  
 ITEM 16. RESERVED
 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  51




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##### Table of Contents



ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Year ended March 31,2006
    
    
    2007(US $ (in thousands))Audit Fees(1)
    
    $
    115
    
    
    $
    122Audit-related Fees(2)
    
    
    
    
    
    
    Tax Fees(3)
    
    
    
    
    
    
    All Other Fees(4)
    
    
    
    
    
    
    $
    115
    
    
    $
    122
 
 (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.
  52




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##### Table of Contents



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
    
    
    F-3Consolidated Statements of Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
  53




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    BDO McCabe Lo Limited  BDO McCabe Lo Limited
   F-1




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (U.S. dollars in thousands)
 March 31,2006
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,369
    
    
    $
    24,549Restricted cash (note 7)
    
    
    649
    
    
    
    Marketable securities (note 3)
    
    
    164
    
    
    
    107Accounts receivable, less allowances for doubtful amounts of $970 and $1,230
at March 31, 2006 and 2007, respectively
    
    
    18,318
    
    
    
    21,063Inventories (note 4)
    
    
    21,845
    
    
    
    29,495Prepaid expenses and other current assets (note 5)
    
    
    5,035
    
    
    
    4,999Income taxes receivable
    
    
    
    
    
    
    130Total current assets
    
    
    71,380
    
    
    
    80,343Property, plant and equipment-net (notes 6)
    
    
    58,286
    
    
    
    60,157Deferred income tax assets (note 10)
    
    
    294
    
    
    
    Goodwill (note 8) (note 8)
    
    
    710
    
    
    
    710Total assets
    
    $
    130,670
    
    
    $
    141,210LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,886
    
    
    $
    15,865Dividend payable
    
    
    2,089
    
    
    
    Accrued payroll and employee benefits
    
    
    1,415
    
    
    
    2,746Customer deposits
    
    
    674
    
    
    
    783Other accrued liabilities (note 9)
    
    
    1,018
    
    
    
    1,506Income taxes payable
    
    
    184
    
    
    
    450Deferred income tax liability (note 10)
    
    
    
    
    
    
    321Total current liabilities
    
    
    16,266
    
    
    
    21,671Commitments and contingencies (note 11)
    
    
    
    
    
    
    Minority interests
    
    
    7,636
    
    
    
    7,884Shareholders equity:Common shares nil par value-authorized 30,000,000 shares,
shares issued and outstanding March 31, 2006 - 14, 923,730;
March 31, 2007  15,038,730 (note 12)
    
    
    41,254
    
    
    
    42,393Additional paid-in capital
    
    
    6,970
    
    
    
    7,601Accumulated other comprehensive income
    
    
    436
    
    
    
    1,106Retained earnings
    
    
    58,108
    
    
    
    60,555Total shareholders equity
    
    
    106,768
    
    
    
    111,655Total liabilities and shareholders equity
    
    $
    130,670
    
    
    $
    141,210
  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 31,2005
    
    
    2006
    
    
    2007Net sales
    
    $
    125,590
    
    
    $
    115,276
    
    
    $
    136,779Cost of sales
    
    
    92,072
    
    
    
    89,850
    
    
    
    105,506Gross profit
    
    
    33,518
    
    
    
    25,426
    
    
    
    31,273Selling, general and administrative expenses
    
    
    15,759
    
    
    
    15,052
    
    
    
    18,957Other income (expenses), net
    
    
    (106
    )
    
    
    (823
    )
    
    
    1,376Operating income (note 2)
    
    
    17,653
    
    
    
    9,551
    
    
    
    13,692Interest expense
    
    
    (12
    )
    
    
    (6
    )
    
    
    Non-operating income, net
    
    
    448
    
    
    
    447
    
    
    
    547Income before income taxes and minority interests
    
    
    18,089
    
    
    
    9,992
    
    
    
    14,239Income taxes (note 10)
    
    
    576
    
    
    
    (27
    )
    
    
    1,239Income before minority interests
    
    
    17,513
    
    
    
    10,019
    
    
    
    13,000Minority interests
    
    
    2,330
    
    
    
    1,240
    
    
    
    833Net income
    
    
    15,183
    
    
    
    8,779
    
    
    
    12,167Other comprehensive incomeForeign currency translation adjustment
    
    
    
    
    
    
    436
    
    
    
    670Comprehensive income
    
    $
    15,183
    
    
    $
    9,215
    
    
    $
    12,837Net income per share (note 2)Basic:Net income per share
    
    $
    1.04
    
    
    $
    0.59
    
    
    $
    0.81Weighted average common shares outstanding
(shares in thousands)
    
    
    14,656
    
    
    
    14,908
    
    
    
    14,956Diluted:Net income per share
    
    $
    1.02
    
    
    $
    0.59
    
    
    $
    0.81Weighted average common and potential common shares
(shares in thousands)
    
    
    14,933
    
    
    
    14,936
    
    
    
    15,048
  F-3




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (U.S. dollars in thousands, except share and per share data)
 Common stock
    
    
    
    
    
    AccumulatedAdditional
    
    otherShares
    
    
    
    
    
    paid-in
    
    comprehensive
    
    Retained
    
    Shareholdersoutstanding
    
    Amount
    
    capital
    
    income
    
    earnings
    
    equityBalance at March 31, 2004
    
    
    13,723,627
    
    
    
    29,980
    
    
    
    6,970
    
    
    
    
    
    
    
    52,780
    
    
    
    89,730Exercise of stock options
    
    
    1,055,250
    
    
    
    9,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,092Odd share redemption upon
stock split
    
    
    (147
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,183
    
    
    
    15,183Dividends ($0.65 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,234
    )
    
    
    (9,234
    )Balance at March 31, 2005
    
    
    14,778,730
    
    
    
    39,068
    
    
    
    6,970
    
    
    
    
    
    
    
    58,729
    
    
    
    104,767Exercise of stock options
    
    
    25,000
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352Issue of common stock for
acquisition of additional
interest in a subsidiary
    
    
    120,000
    
    
    
    1,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,834Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    436Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,779
    
    
    
    8,779Dividends ($0.63 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,400
    )
    
    
    (9,400
    )Balance at March 31, 2006
    
    
    14,923,730
    
    
    
    41,254
    
    
    
    6,970
    
    
    
    436
    
    
    
    58,108
    
    
    
    106,768Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    820
    
    
    
    
    
    
    
    
    
    
    
    820Exercise of stock options
    
    
    115,000
    
    
    
    1,139
    
    
    
    (189
    )
    
    
    
    
    
    
    
    
    
    
    950Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    670
    
    
    
    
    
    
    
    670Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,167
    
    
    
    12,167Dividends ($0.65 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,720
    )
    
    
    (9,720
    )Balance at March 31, 2007
    
    
    15,038,730
    
    
    
    42,393
    
    
    
    7,601
    
    
    
    1,106
    
    
    
    60,555
    
    
    
    111,655
  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 31,2005
    
    
    2006
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    15,183
    
    
    $
    8,779
    
    
    $
    12,167Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,970
    
    
    
    5,299
    
    
    
    5,274Loss (gain) on sale of property, plant and equipment
    
    
    125
    
    
    
    45
    
    
    
    (643
    )Realized gain on disposal of other investments
    
    
    (295
    )
    
    
    
    
    
    
    Unrealized holding loss on marketable securities
    
    
    53
    
    
    
    80
    
    
    
    57Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    820Minority interests
    
    
    2,330
    
    
    
    1,215
    
    
    
    833Deferred tax
    
    
    (15
    )
    
    
    (294
    )
    
    
    615Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,134
    )
    
    
    6,773
    
    
    
    (2,745
    )Inventories
    
    
    (4,962
    )
    
    
    (709
    )
    
    
    (7,650
    )Prepaid expenses and other current assets
    
    
    (1,809
    )
    
    
    (274
    )
    
    
    36Income taxes receivable
    
    
    107
    
    
    
    20
    
    
    
    (130
    )Accounts payable
    
    
    5,281
    
    
    
    (5,563
    )
    
    
    4,979Accrued payroll and employee benefits
    
    
    (246
    )
    
    
    (605
    )
    
    
    1,331Customer deposits
    
    
    109
    
    
    
    (194
    )
    
    
    109Other accrued liabilities
    
    
    1,533
    
    
    
    (2,109
    )
    
    
    488Income taxes payable
    
    
    195
    
    
    
    (141
    )
    
    
    266Net cash provided by operating activities
    
    
    16,425
    
    
    
    12,322
    
    
    
    15,807Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (17,003
    )
    
    
    (6,940
    )
    
    
    (7,812
    )Proceeds from sale of property, plant and equipment
    
    
    36
    
    
    
    50
    
    
    
    3,232Net cash used in investing activities
    
    
    (16,967
    )
    
    
    (6,890
    )
    
    
    (4,580
    )Cash flows from financing activitiesDividends paid
    
    
    (9,234
    )
    
    
    (7,311
    )
    
    
    (11,809
    )Dividends paid to minority shareholders of a subsidiary
    
    
    (756
    )
    
    
    (1,229
    )
    
    
    (582
    )Exercise of stock options
    
    
    9,092
    
    
    
    352
    
    
    
    950Odd shares redemption
    
    
    (4
    )
    
    
    
    
    
    
    (Increase) decrease in restricted cash
    
    
    (650
    )
    
    
    391
    
    
    
    649Loan to minority shareholders of subsidiaries
    
    
    (26
    )
    
    
    (170
    )
    
    
    Net cash used in financing activities
    
    
    (1,578
    )
    
    
    (7,967
    )
    
    
    (10,792
    )Effect of exchange rate changes
    
    
    
    
    
    
    (169
    )
    
    
    (1,255
    )Net decrease in cash and cash equivalents
    
    
    (2,120
    )
    
    
    (2,704
    )
    
    
    (820
    )Cash and cash equivalents, beginning of year
    
    
    30,193
    
    
    
    28,073
    
    
    
    25,369Cash and cash equivalents, end of year
    
    $
    28,073
    
    
    $
    25,369
    
    
    $
    24,549Supplementary disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    12
    
    
    $
    6
    
    
    $
    Income taxes
    
    $
    289
    
    
    $
    387
    
    
    $
    487Supplementary disclosures of significant non-cash transactions:Issuance of common stock in connection with acquisition of
additional 5% shareholding in a subsidiary
    
    $
    
    
    
    $
    1,834
    
    
    $
    Excess of acquisition cost over the fair value of acquired
net assets of additional shareholding of a subsidiary
    
    $
    
    
    
    $
    234
    
    
    $
    
  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-
 Inventories
 Prepaid expenses and other current assets
 F-6




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##### Table of Contents



2. Summary of Significant Accounting Policies  continued
 Property, plant and equipment
 Leasehold land and buildings
    
    40 - 50 yearsPlant and machinery
    
    4 - 10 yearsFurniture, fixtures and equipment
    
    4 - 5 yearsMotor vehicles
    
    3 - 4 yearsLeasehold improvements the lease term
    
    the shorter of 5 years or
 Valuation of long-lived assets
 Revenue recognition
 Comprehensive income-
 Allowance for doubtful account
 Reclassification of financial statements-
 Shipping and handling cost-
 Income taxes
 Foreign currency translation
  F-7




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##### Table of Contents



2. Summary of Significant Accounting Policies  continued
   Post-retirement and post-employment benefits
 Stock-based compensation
     2007Risk-free interest rate  weighted average
    
    
    5.22
    %Expected life of options  weighted average
    
    10 yearsStock volatility
    
    
    44.10
    %Expected dividend yield
    
    
    4.75
    %
  Net income per share
 F-8




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##### Table of Contents



2. Summary of Significant Accounting Policies  continued
  Year ended March 31,2005
    
    2006
    
    2007Net income
    
    $
    15,183
    
    
    $
    8,779
    
    
    $
    12,167Basic net income per share
    
    $
    1.04
    
    
    $
    0.59
    
    
    $
    0.81Basic weighted average common shares outstanding
    
    
    14,656
    
    
    
    14,908
    
    
    
    14,956Effect of dilutive securities  Options
    
    
    277
    
    
    
    28
    
    
    
    92Diluted weighted average common and potential common
shares outstanding
    
    
    14,933
    
    
    
    14,936
    
    
    
    15,048Diluted net income per share
    
    $
    1.02
    
    
    $
    0.59
    
    
    $
    0.81
 Use of estimates-
 Recent changes in accounting standards
     F-9




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##### Table of Contents



3. Marketable Securities
  March 31,2006
    
    2007Cost
    
    $
    297
    
    
    $
    297Market value
    
    $
    164
    
    
    $
    107
   4. Inventories
  March 31,2006
    
    2007Raw materials
    
    $
    8,782
    
    
    $
    13,267Work in progress
    
    
    6,932
    
    
    
    10,227Finished goods
    
    
    6,131
    
    
    
    6,001$
    21,845
    
    
    $
    29,495
 5. Prepaid Expenses and Other Current Assets
  March 31,2006
    
    2007Value added tax receivable
    
    $
    1,893
    
    
    $
    2,723Deposit for purchase of plant and equipment
    
    
    71
    
    
    
    82Rental and utility deposit
    
    
    169
    
    
    
    139Advance to suppliers
    
    
    1,183
    
    
    
    587Prepayment
    
    
    346
    
    
    
    353Others
    
    
    1,373
    
    
    
    1,115$
    5,035
    
    
    $
    4,999
 F-10




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##### Table of Contents



6. Property, Plant and Equipment
  March 31,2006
    
    2007At cost:Land and buildings
    
    $
    25,528
    
    
    $
    30,553Plant and machinery
    
    
    34,708
    
    
    
    39,488Furniture, fixtures and equipment
    
    
    18,247
    
    
    
    18,721Motor vehicles
    
    
    2,383
    
    
    
    2,775Leasehold improvements
    
    
    5,237
    
    
    
    5,305Total
    
    
    86,103
    
    
    
    96,842Less: accumulated depreciation and amortization
    
    
    (35,116
    )
    
    
    (37,869
    )Construction in progress
    
    
    7,299
    
    
    
    1,184Net book value
    
    $
    58,286
    
    
    
    60,157
  March 31,2006
    
    2007Leasehold land and buildings (a)
    
    $
    1,476
    
    
    $
    Land use right of state-owned land and buildings erected thereon (b)
    
    
    17,067
    
    
    
    24,911Long term leased land and buildings erected thereon (c)
    
    
    4,170
    
    
    
    4,170Other buildings (d)
    
    
    2,815
    
    
    
    1,472$
    25,528
    
    
    $
    30,553
 
 (a)
    
    Leasehold land and buildings located in Hong Kong with lease terms of 50 years expiring in 2047
was disposed of in March 2007.(b)
    
    The land use rights of state-owned land and buildings erected thereon represent land and
buildings located in China with lease terms of 50 years expiring in 2050.(c)
    
    Long term leased land and buildings erected thereon represent land and buildings on
collectively-owned land located in China on which an upfront lump-sum payment has been made for the
right to use the land and building for a term of 50 years to 2053. Dongguan Cheng An Xiaobian
District Co-operation, the lessor, is the entity to whom the collectively-owned land has been
granted. According to existing China laws and regulations, collectively-owned land is not freely
transferable unless certain application and approval procedures are fulfilled by the Dongguan Cheng
An Xiaobian District Co-operation to change the legal form of the land from collectively-owned to
state-owned. As of March 31, 2007, the Company is not aware of any steps being taken by the
Dongguan Cheng An Xiaobian District Co-operation for such application.(d)
    
    Other buildings represent factory premises and dormitory units located in China purchased by
the Company with lease terms from 30 to 70 years expiring from 2018 to 2063. 7. Credit Facilities and Pledged Assets
  F-11




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##### Table of Contents



8. Goodwill
  9. Other Accrued Liabilities
  March 31,2006
    
    2007Value added tax payable
    
    $
    70
    
    
    $
    Accrued expenses
    
    
    131
    
    
    
    777Commission expenses
    
    
    217
    
    
    
    254Others
    
    
    600
    
    
    
    475$
    1,018
    
    
    
    1,506
 10. Income Taxes
  Year ended March 31,2005
    
    
    2006
    
    
    2007Hong Kong
    
    $
    80
    
    
    $
    4
    
    
    $
    (1
    )China and others
    
    
    18,009
    
    
    
    9,988
    
    
    
    14,240$
    18,089
    
    
    $
    9,992
    
    
    $
    14,239
 Hong Kong
  China
   F-12




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##### Table of Contents



10. Income Taxes  Continued
 China  Continued
       Others
   Year ended March 31,2005
    
    
    2006
    
    
    2007Current tax- Hong Kong
    
    $
    51
    
    
    $
    29
    
    
    $
    9- China
    
    
    540
    
    
    
    238
    
    
    
    615Deferred tax
    
    
    (15
    )
    
    
    (294
    )
    
    
    615$
    576
    
    
    $
    (27
    )
    
    $
    1,239
 F-13




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##### Table of Contents



10. Income Taxes  Continued
  Year ended March 31,2005
    
    
    2006
    
    
    2007Provision for income taxes at statutory tax rate in China
    
    $
    4,884
    
    
    $
    2,698
    
    
    $
    3,837Effect of different tax rate in various jurisdictions
    
    
    (219
    )
    
    
    6
    
    
    
    212Tax holidays and concessions
    
    
    (666
    )
    
    
    99
    
    
    
    (351
    )Effect of income for which no income tax is chargeable
    
    
    (3,459
    )
    
    
    (2,853
    )
    
    
    (3,007
    )Increase in valuation allowances
    
    
    
    
    
    
    
    
    
    
    264Under provision of income tax in previous year
    
    
    34
    
    
    
    8
    
    
    
    273Others
    
    
    2
    
    
    
    15
    
    
    
    11Effective tax
    
    $
    576
    
    
    $
    (27
    )
    
    $
    1,239
  March 31,2006
    
    
    2007Deferred tax asset:Net operating loss carryforwards
    
    $
    294
    
    
    $
    264Less: Valuation allowances
    
    
    
    
    
    
    (264
    )294
    
    
    
    Deferred tax liabilityRevenue recognized for financial reporting
purpose before being recognized for tax purpose
    
    
    
    
    
    
    (321
    )Net deferred tax asset (liability)
    
    $
    294
    
    
    $
    (321
    )
 11. Commitments and Contingencies
   Years ending March 312008
    
    $
    1122009
    
    
    19Total minimum lease payments
    
    $
    131
   F-14




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##### Table of Contents



12. Shareholders Equity
  13. Employee Benefits
  14. Stock Option Plan
   Year ended March 31,2005
    
    
    2006
    
    
    2007Weighted
    
    
    
    
    
    
    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
    
    
    1,724,250
    
    
    $
    10.74
    
    
    
    669,000
    
    
    $
    14.10
    
    
    
    644,000
    
    
    $
    14.10Granted during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    8.26Exercised during the year
    
    
    (1,055,250
    )
    
    
    8.61
    
    
    
    (25,000
    )
    
    
    14.10
    
    
    
    (115,000
    )
    
    
    8.26Outstanding and exercisable at the end of the year
    
    
    669,000
    
    
    
    14.10
    
    
    
    644,000
    
    
    
    14.10
    
    
    
    1,029,000
    
    
    
    11.91Range of exercise price per share
    
    
    
    
    
    $
    14.10
    
    
    
    
    
    
    $
    14.10
    
    
    
    
    
    
    $8.26 to $14.10
   F-15




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##### Table of Contents



15. Operating Risk
 Concentrations of Credit Risk and Major Customers
 Percentage of net salesYear ended March 31,2005
    
    2006
    
    2007Line 6 Manufacturing
    
    
    14.9
    %
    
    
    14.5
    %
    
    
    15.1
    %Digidesign, Inc.
    
    
    19.1
    %
    
    
    17.4
    %
    
    
    13.3
    %VTech Telecommunications Limited
    
    
    12.1
    %
    
    
    *
    
    
    
    12.7
    %Peavey Electronic Corp.
    
    
    *
    
    
    
    *
    
    
    
    10.4
    %Epson Precision (H.K.) Limited
    
    
    18.5
    %
    
    
    14.6
    %
    
    
    *
 
 *
    
    Less than 10%   Percentage ofaccountsreceivableMarch 31,2006
    
    2007Largest receivable balances
    
    
    59.4
    %
    
    
    57.8
    %
  Country risk
 16. Fair Value of Financial Instruments
  17. Segment Information
   F-16




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##### Table of Contents



17. Segment Information  Continued
  Year ended March 31,2005
    
    
    2006
    
    2007Net
    
    
    Intersegment
    
    
    Profit
    
    
    Net
    
    
    Intersegment
    
    
    Profit
    
    
    Net
    
    
    Intersegment
    
    
    Profitsales
    
    
    Sales
    
    
    (loss)
    
    
    sales
    
    
    Sales
    
    
    (loss)
    
    
    sales
    
    
    Sales
    
    
    (loss)Segment:Injection molded plastic parts
    
    $
    61,519
    
    
    $
    1,877
    
    
    $
    10,967
    
    
    $
    49,429
    
    
    $
    1,152
    
    
    $
    4,521
    
    
    $
    59,587
    
    
    $
    150
    
    
    $
    10,554Electronic products
    
    
    60,472
    
    
    
    
    
    
    
    6,660
    
    
    
    66,563
    
    
    
    1,926
    
    
    
    7,282
    
    
    
    77,970
    
    
    
    2,969
    
    
    
    3,551Metallic parts
    
    
    8,200
    
    
    
    2,724
    
    
    
    462
    
    
    
    2,362
    
    
    
    
    
    
    
    (1,811
    )
    
    
    2,341
    
    
    
    
    
    
    
    134Segment total
    
    $
    130,191
    
    
    $
    4,601
    
    
    $
    18,089
    
    
    $
    118,354
    
    
    $
    3,078
    
    
    $
    9,992
    
    
    $
    139,898
    
    
    $
    3,119
    
    
    $
    14,239Reconciliation to consolidated
totals:Sales eliminations
    
    
    (4,601
    )
    
    
    (4,601
    )
    
    
    
    
    
    
    (3,078
    )
    
    
    (3,078
    )
    
    
    
    
    
    
    (3,119
    )
    
    
    (3,119
    )
    
    
    Consolidated totals:Net sales
    
    $
    125,590
    
    
    $
    
    
    
    
    
    
    
    $
    115,276
    
    
    $
    
    
    
    
    
    
    
    $
    136,779
    
    
    $
    Income before income taxes
and minority interests
    
    
    
    
    
    
    
    
    
    $
    18,089
    
    
    
    
    
    
    
    
    
    
    $
    9,992
    
    
    
    
    
    
    
    
    
    
    $
    14,239
 Year ended March 31,2005
    
    
    2006
    
    
    2007Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interestincome
    
    
    expenses
    
    
    income
    
    
    expenses
    
    
    income
    
    
    expensesSegment:Injection molded plastic parts
    
    $
    128
    
    
    $
    
    
    
    $
    407
    
    
    $
    
    
    
    $
    436
    
    
    $
    Electronic products
    
    
    13
    
    
    
    12
    
    
    
    64
    
    
    
    
    
    
    
    91
    
    
    
    Metallic parts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Consolidated total
    
    $
    141
    
    
    $
    12
    
    
    $
    471
    
    
    $
    6
    
    
    $
    527
    
    
    $
    
 Year ended March 31,2005
    
    
    2006
    
    
    2007Depreciation
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    
    
    
    
    DepreciationIdentifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    andassets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortizationSegment:Injection molded
plastic parts
    
    $
    94,707
    
    
    $
    15,232
    
    
    $
    3,550
    
    
    $
    89,622
    
    
    $
    6,156
    
    
    $
    3,844
    
    
    $
    93,633
    
    
    $
    7,080
    
    
    $
    4,064Electronic products
    
    
    36,072
    
    
    
    1,479
    
    
    
    968
    
    
    
    33,796
    
    
    
    555
    
    
    
    993
    
    
    
    45,108
    
    
    
    595
    
    
    
    903Metallic parts
    
    
    8,628
    
    
    
    292
    
    
    
    452
    
    
    
    6,768
    
    
    
    230
    
    
    
    462
    
    
    
    2,279
    
    
    
    137
    
    
    
    307Segment totals
    
    $
    139,407
    
    
    $
    17,003
    
    
    $
    4,970
    
    
    $
    130,186
    
    
    $
    6,941
    
    
    $
    5,299
    
    
    $
    141,020
    
    
    $
    7,812
    
    
    $
    5,274Reconciliation to
consolidated
totals:Elimination of
receivables
from intersegments
    
    
    (2,909
    )
    
    
    
    
    
    
    
    
    
    
    (226
    )
    
    
    
    
    
    
    
    
    
    
    (520
    )
    
    
    
    
    
    
    Goodwill not
allocated to
segments
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    Consolidated totals
    
    $
    136,976
    
    
    $
    17,003
    
    
    $
    4,970
    
    
    $
    130,670
    
    
    $
    6,941
    
    
    $
    5,299
    
    
    $
    141,210
    
    
    $
    7,812
    
    
    $
    5,274
 F-17




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##### Table of Contents



17. Segment Information  Continued
  Year ended March 31,2005
    
    
    2006
    
    
    2007Net salesChina
    
    $
    56,311
    
    
    $
    43,220
    
    
    $
    53,573United States of America
    
    
    50,837
    
    
    
    56,514
    
    
    
    57,968Hong Kong
    
    
    1,001
    
    
    
    3,409
    
    
    
    4,670Europe
    
    
    13,733
    
    
    
    8,098
    
    
    
    15,350Others
    
    
    3,708
    
    
    
    4,035
    
    
    
    5,218Total net sales
    
    $
    125,590
    
    
    $
    115,276
    
    
    $
    136,779
  March 31,2005
    
    
    2006
    
    
    2007Hong Kong and Macau
    
    $
    49,626
    
    
    $
    41,933
    
    
    $
    41,749China
    
    
    86,872
    
    
    
    88,027
    
    
    
    98,751Total identifiable assets
    
    
    136,498
    
    
    $
    129,960
    
    
    $
    140,500Goodwill
    
    
    478
    
    
    
    710
    
    
    
    710Total assets
    
    $
    136,976
    
    
    $
    130,670
    
    
    $
    141,210
 F-18




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##### Table of Contents



ITEM 19. EXHIBITS
  Exhibit No.
    
    Description1.1
    
    Memorandum and Articles of Association (as amended through March 7, 1995) (incorporated by
reference to Exhibit 3.1 to Deswells Registration Statement on Form F-1 filed with the SEC
on June 19, 1995).1.2
    
    Amendment to Memorandum and Articles of Association filed with BVI Registry of Companies on
July 19, 1995 (incorporated by reference to Exhibit 1.2 to Deswells Annual Report on Form
20-F for the year ended March 31, 2001 filed with the SEC on July 10, 2001).1.3
    
    Notice of amendment of Memorandum and Articles of Association, with Certified Extract of a
Resolution Adopted by the Directors Pursuant to the Articles of Association of the Company
on the 8th day of July 2002 (incorporated by reference to Exhibit 1.3 to Deswells Form 8A/A
(Amendment No. 1) filed with the SEC on August 14, 2002).1.4
    
    Notice of amendment of Memorandum and Articles of Association (Amendment No. 2), with
Notice of Increase in Authorised Capital and Certified Extract of a Resolution Adopted by
the Directors Pursuant to the Articles of Association of the Company on the 8th day of July
2002 (incorporated by reference to Exhibit 1.4 to Deswells Form 8A/A (Amendment No. 2)
filed with the SEC on August 14, 2002)2.1
    
    Form of common share certificate (incorporated by reference to Exhibit 4.1 of Amendment No.
1 to Deswells Registration Statement on Form F-1 filed with the SEC on July 13, 1995).4.1
    
    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 amended August 1, 2005 (incorporated
by reference to Exhibit A to the Companys Proxy Statement filed with the Securities and
Exchange Commission on Form 6-K on August 29, 2005).8.1
    
    Diagram of the Companys operating subsidiaries and affiliates  (see page 16 of this report)11.1
    
    Code of Ethics (incorporated by reference to Exhibit 11.1 of registrants Form 20-F for the
year ended March 31, 2004, filed with the SEC on July 16, 2004)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 International to incorporation of its report on the Companys consolidated
financial statements into Registrants Registration Statements on Form S-8.
 54




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##### Table of Contents



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