<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                              ---------------------

                                    FORM 20-F

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

                                       OR

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

                              ---------------------

For the Fiscal Year Ended:                               Commission File Number:
    March 31, 2002                                               0-26448

                              ---------------------

                            DESWELL INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

                             British Virgin Islands
                 (Jurisdiction of incorporation or organization)

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

                              ---------------------

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

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

                    Common shares, $0.01 par value per share

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

As of March 31, 2002, there were 5,580,331 common shares of the registrant
outstanding.

        Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.

                                    Yes  [X]    No
                                         ---       ---

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

                                Item 17       Item 18  [X]
                                        ---            ---


<PAGE>

                                TABLE OF CONTENTS



<TABLE>
<S>                                                                                       <C>
               Financial Statements and Currency Presentation.............................. 2

PART I
   Item 1.     Identity of Directors, Senior Management and Advisors....................... 3
   Item 2.     Offer Statistics and Expected Timetable .................................... 3
   Item 3.     Key Information............................................................. 3
   Item 4.     Information on the Company.................................................. 9
   Item 5.     Operating and Financial Review and Prospects................................20
   Item 6.     Directors, Senior Management and Employees..................................27
   Item 7.     Major Shareholders and Related Party Transactions...........................30
   Item 8.     Financial Information.......................................................33
   Item 9.     The Listing.................................................................34
   Item 10.    Additional Information......................................................35
   Item 11.    Quantitative and Qualitative Disclosure about Market Risk...................50
   Item 12.    Description of Securities Other than Equity Securities......................50

PART II
   Item 13.    Defaults, Dividend Arrearages and Delinquencies.............................51
   Item 14.    Material Modifications to the Rights of Security Holders and
               Use of Proceeds.............................................................51
   Item 15     [Reserved]
   Item 16.    [Reserved]

PART III
   Item 17.    Financial Statements........................................................51
   Item 18     Financial Statements........................................................51
   Item 19     Exhibits....................................................................52
SIGNATURES ................................................................................54
</TABLE>

                                  -------------

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

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

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

                                  -------------

                 FINANCIAL STATEMENTS AND CURRENCY PRESENTATION

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




                                       2
<PAGE>

                                     PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

        Not applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

        Not applicable.

ITEM 3. KEY INFORMATION

SELECTED FINANCIAL DATA(1)

        The selected consolidated financial data set forth below should be read
in conjunction with our consolidated financial statements and notes thereto
included elsewhere in this Report. The selected income statement data for each
of the three fiscal years in the period ended March 31, 2002, and the balance
sheet data as of March 31, 2001 and 2002 are derived from our audited
consolidated financial statements included in this Report. The selected income
statement data for the years ended March 31, 1998 and 1999, and the balance
sheet data as of March 31, 1998, 1999 and 2000 are derived from our audited
consolidated financial statements, which are not included in this Report.

<TABLE>
<CAPTION>
                                    (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
      INCOME STATEMENT DATA                          YEAR ENDED MARCH 31,
                                      --------------------------------------------------
                                       1998        1999     2000       2001       2002
                                      -------     -------  -------    -------    -------
<S>                                   <C>         <C>      <C>        <C>        <C>
Net sales                             $66,169     $53,439  $60,958    $80,847    $83,320
Cost of sales                          36,246      32,179   38,262     52,596     54,448
                                      -------     -------  -------    -------    -------
Gross profit                           29,923      21,260   22,696     28,251     28,872
Selling, general and
  administrative expenses              14,067      10,364   11,970     15,414     14,939
                                      -------     -------  -------    -------    -------
Operating income                       15,856      10,896   10,726     12,837     13,933
Interest expense                           (2)       (306)      (3)        (6)       (26)
Other income, net                       1,094         939      898        915        877
                                      -------     -------  -------    -------    -------
Income before income taxes             16,948      11,529   11,621     13,746     14,784
Income taxes                              688         462      890        315        535
                                      -------     -------  -------    -------    -------
Income before minority interests       16,260      11,067   10,731     13,431     14,249
Minority interests                      3,289       1,575      433        621        925
                                      -------     -------  -------    -------    -------
Net income                            $12,971      $9,492  $10,298    $12,810    $13,324
                                      =======      ======  =======    =======    =======
Basic earnings per share(2)(3)        $  2.59      $ 1.73  $  1.90    $  2.38    $  2.38
                                      =======      ======  =======    =======    =======
Average number of shares
  outstanding--basic(2)                 5,006       5,478    5,412      5,376      5,602
Diluted earnings per share(3)           $2.40       $1.72    $1.89      $2.36      $2.36
Average number of shares
  outstanding--diluted(2)               5,394       5,524    5,449      5,435      5,644

        STATISTICAL DATA:

Gross margin                            45.2%       39.8%    37.2%     34.9%      34.7%
Operating margin                        24.0%       20.4%    17.6%     15.9%      16.7%
Dividends per share                     $0.70       $1.08    $0.88     $0.88      $1.29
</TABLE>


<TABLE>
<CAPTION>
        BALANCE SHEET DATA                                 AT MARCH 31,
                                        ---------------------------------------------------
                                         1998       1999       2000       2001       2002
                                        -------    -------    -------    -------    -------
<S>                                     <C>        <C>        <C>        <C>        <C>
Working capital                         $35,968    $41,066    $44,727    $47,356    $54,922
Total assets                             59,144     64,273     71,841     83,466     94,744
Long-term debt, less current portion         --         --         --         --         --
Total debt                                   --         --         --         --        482
Shareholders' equity                     45,211     48,767     53,031     63,877     69,651
</TABLE>

----------
(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 stockholders by the weighted-average
    number of common shares outstanding for the period. Diluted EPS reflects the
    potential dilution from potential common shares.

(3) Net income per share amounts presented above are calculated without regard
    to the effects of the three-for-two stock split payable on July 22, 2002
    (see Note 15 of Notes to Consolidated Financial Statements). Net income per
    share information calculated on a post stock split basis is as follows:

<TABLE>
<S>                                     <C>         <C>      <C>        <C>        <C>
Basic:
Net income per share                    $1.73       $1.16    $1.27      $1.59      $1.59
                                        =====       =====    =====      =====      =====
Weighted average common shares          7,509       8,217    8,118      8,064      8,403
                                        =====       =====    =====      =====      =====
Diluted:
Net income per share                    $1.60       $1.15    $1.26      $1.57      $1.57
                                        =====       =====    =====      =====      =====
Weighted average common shares          8,091       8,286    8,174      8,153      8,466
                                        =====       =====    =====      =====      =====
</TABLE>




                                       3
<PAGE>

RISK FACTORS

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

WE FACE NUMEROUS RISKS AS A RESULT OF OUR OPERATIONS IN CHINA AND HONG KONG.

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

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

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

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

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

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

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

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

        Firefighting and disaster relief or assistance in China are primitive by
Western standards. At March 31, 2002, we maintained fire, casualty and theft
insurance aggregating approximately US$33,448,000 covering certain




                                       4
<PAGE>

of our stock in trade, goods and merchandise, furniture and equipment and
factory buildings in China. The proceeds of this insurance may not be sufficient
to cover material damage to, or the loss of, any of our factories due to fire,
severe weather, flood, or other act of God or cause. We do not maintain any
business interruption insurance.

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

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

        Uncertain applications of Chinese tax laws could subject us to greater
taxes in China.

        Under applicable Chinese law, we have been afforded a number of tax
concessions by the Chinese taxing authorities and have avoided paying taxes on a
substantial portion of our operations in China by reinvesting all or part of the
profits attributable to our Chinese plastic manufacturing subsidiary for at
least five years. The Chinese tax system is subject to substantial uncertainties
and was subject to significant changes enacted on January 1, 1994, the
interpretation and enforcement of which are still uncertain. Currently, under
the Chinese tax system we can obtain tax breaks by reinvesting profits of
certain of our subsidiaries in China. We are considering the reinvestment of a
portion of our profits of $4,000,000, from our Chinese plastic manufacturing
subsidiary for the year ended December 31, 2001 and, if we make such
reinvestment, we expect we will only be subject to taxes of 7.5% on these
operations for the remaining profits for tax year ended December 31, 2001. For
the tax year commencing January 1, 2002, the Company will be subject to taxes of
10% on these operations. Changes in Chinese tax laws or their interpretation or
application may, subject us to greater Chinese taxation in the future.

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

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

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

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

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

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




                                       5
<PAGE>

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

        Our executive and sales office, and several of our customers and
suppliers are located in Hong Kong, formerly a British Crown Colony. Sovereignty
over Hong Kong was transferred effective July 1, 1997 to China. The continued
stability of political, economic or commercial conditions in Hong Kong remains
uncertain, and any instability could have an adverse impact on our business.

WE ARE DEPENDENT ON A FEW MAJOR CUSTOMERS AND HAVE NO LONG-TERM CONTRACTS WITH
THEM. OUR SALES WOULD SUBSTANTIALLY DECREASE AND WE WOULD SUFFER DECREASES IN
NET INCOME OR LOSSES IF WE LOSE ANY OF OUR MAJOR CUSTOMERS, IF THEY
SUBSTANTIALLY REDUCE THEIR ORDERS OR IF THEY ARE UNABLE TO PAY US.

        Historically, a substantial percentage of our sales have been to a small
number of customers. Our four largest customers during the year ended March 31,
2002 were Inter-Tel Incorporated, Kyocera Mita Industrial Co. (H.K.) Limited,
VTech Telecommunications Limited and Epson Precision (H.K.) Limited. Each of
these customers individually accounted for 10% or more of our total net sales
during the year ended March 31, 2002 and accounted for an aggregate of 71.4%,
69.3% and 58.0%, respectively, of our total net sales during the years ended
March 31, 2000, 2001 and 2002, respectively. Our sales are based on purchase
orders and we have no long-term contracts with any of our customers and the
percentage of sales to any of our customers may fluctuate from time to time. The
loss of any one of our largest customers or a substantial reduction in orders
from any of them would adversely impact our sales and decrease our net income or
cause us to incur losses unless and until we were able to replace the customer
or order with one or more of comparable size. In addition, a substantial portion
of our sales is made on credit and our results of operations would be adversely
affected if a major customer were unable to pay for our products or services.

WE HAVE NO LONG-TERM CONTRACTS TO OBTAIN PLASTIC RESINS AND OUR PROFIT MARGINS
AND NET INCOME COULD SUFFER FROM AN INCREASE IN RESIN PRICES.

        The primary materials used by us in the manufacture of our plastic
injection molded products are various plastic resins. The following table shows
our cost of plastic resins as a percentage of our cost of plastic products sold
and as a percentage of our total costs of goods sold for the years ended March
31, 2000, 2001 and 2002:

<TABLE>
<CAPTION>
                                                    Year ended March 31,
                                                  ------------------------
                                                   2000     2001     2002
                                                  ------   ------   ------
<S>                                               <C>      <C>      <C>
Resins cost as a % of plastic products sold         55%      58%      52%
Resins cost as a % of total cost of goods sold      31%      32%      25%
</TABLE>

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

WE ARE FACING INCREASING COMPETITION, WHICH HAS HAD AN ADVERSE EFFECT ON OUR
GROSS PROFIT MARGINS.

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

    -   0.6%, from 34.9% during the year ended March 31, 2001 to 34.7% during
        the year ended March 31, 2002,

    -   6.2%, from 37.2% during the year ended March 31, 2000 to 34.9% during
        the year ended March 31, 2001; and

    -   6.5%, from 39.8% during the year ended March 31, 1999 to 37.2% during
        the year ended March 31, 2000.




                                       6
<PAGE>

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

POLITICAL INSTABILITY, AND CHANGES IN IMPORT/EXPORT REGULATIONS, TARIFFS AND
FREIGHT RATES IN COUNTRIES OTHER THAN CHINA WHERE WE DO BUSINESS COULD CAUSE OUR
PROFIT MARGINS TO DECLINE.

        Because of the international nature of our operations and customers, our
business is subject to political and economic risks beyond those involving
China, including political instability, and changes in import/export
regulations, tariffs and freight rates. Changes in tariff structures or other
trade policies could adversely affect our suppliers or customers or decrease the
cost of supplies for our competitors. Japan's trade surplus has forced a
revaluation of the Japanese yen on international markets that may have the
effect of making material or components that we use to manufacture our products
more expensive.

OUR LOSS OF CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT COULD CAUSE DISRUPTIONS IN
OUR BUSINESS AND HARM OUR CUSTOMER RELATIONSHIPS THEREBY ADVERSELY AFFECTING
SALES.

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

           -   Richard Lau, our Chairman of the Board and Chief Executive
               Officer;

           -   C. P. Li, our Executive Director, General Manager in charge of
               our day-to-day manufacturing and administrative operations for
               plastic products, and Chief Financial Officer;

           -   C. W. Leung, Executive Director of Engineering in charge of the
               mold division and engineering for our plastic manufacturing
               operations;

           -   S. K. Lee, our Director of Administration and Marketing and
               General Manager in charge of our day-to-day administrative and
               marketing operations for electronic products;

           -   M. C. Tam, our Director of Engineering and Manufacturing, in
               charge of manufacturing and operations for electronic products;
               and

           -   Dickson Lam, our Director of Marketing for plastic and electronic
               products.

Messrs. Lau, Li and Leung founded our company and have played integral roles in
the management, growth and development of our company in general and our plastic
injection molding business in particular. They have developed and maintain
relationships with several of our key customers in our plastic injection molding
business. Mr. S. K. Lee and Mr. M. C. Tam founded our electronic products
manufacturing business and have developed and continue to manage it since we
acquired the business from them. Mr. Dickson Lam has developed and maintains
several key relationships with our key customers in our electronic and plastic
injection products manufacturing business. We have no employment contracts with
any of these executives and their loss would require us to find executives
suitable to replace them, which could be difficult and disruptive to our
business. Customers with whom they have relationships may cease to deal with us
or choose to use a competitor for a greater portion of their business, resulting
in our loss of sales.

THE CONCENTRATION OF SHARE OWNERSHIP IN OUR SENIOR MANAGEMENT ALLOWS THEM TO
CONTROL OR SUBSTANTIALLY INFLUENCE THE OUTCOME OF MATTERS REQUIRING SHAREHOLDER
APPROVAL.

        Our senior management as a group, each of whom are also members and
constitute a majority of our board of directors, directly or indirectly through
an affiliated company beneficially own more than 45% of our shares at March 31,
2002 . As a result, acting together they may be able to control, and they can
substantially influence, the outcome of all matters requiring approval by our
shareholders, including the election of directors and approval of significant
corporate transactions. This ability may have the effect of delaying or
preventing a change in control of Deswell, or causing a change in control of
Deswell that may not be favored by our other shareholders.




                                       7
<PAGE>

OUR BOARD'S ABILITY TO AMEND OUR CHARTER WITHOUT SHAREHOLDER APPROVAL COULD HAVE
ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL.

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

OUR EXEMPTIONS FROM CERTAIN OF THE REPORTING REQUIREMENTS UNDER THE EXCHANGE ACT
LIMITS THE PROTECTIONS AND INFORMATION AFFORDED TO INVESTORS.

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

           -   the rules under the Exchange Act requiring the filing with the
               Commission of quarterly reports on Form 10-Q or current reports
               on Form 8-K;

           -   the sections of the Exchange Act regulating the solicitation of
               proxies, consents or authorizations in respect to a security
               registered under the Exchange Act;

           -   and the sections of the Exchange Act requiring insiders to file
               public reports of their stock ownership and trading activities
               and establishing insider liability for profits realized from any
               "short-swing" trading transaction (i.e., a purchase and sale, or
               sale and purchase, of the issuer's equity securities within less
               than six months).

Because of these exemptions, investors are not afforded the same protections or
information generally available to investors in public companies organized in
the United States.




                                       8
<PAGE>

ITEM 4.  INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF DESWELL

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

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

        In October 1992, the Company purchased a controlling interest of the
outstanding stock of Kwanasia Electronics Company Limited, a Hong Kong limited
liability company ("Kwanasia") and an independent contract manufacturer of
electronic products, components and subassemblies, from two former shareholders.
In December 1994, the Company increased its interest in Kwanasia to 51% of the
outstanding Kwanasia shares by purchasing the requisite stock from Mr. S. K. Lee
and Mr. M. C. Tam, Kwanasia's then remaining two shareholders. Messrs. Lee and
Tam still own, in equal shares, 39% of the capital stock of Kwanasia's parent
corporation and continue to serve as the executives in charge of administrative
and manufacturing operations, respectively, for the Company's contract
manufacturing operations for electronic products and subassemblies. See Item 10
Directors and Executive Officers. The total price paid by the Company in 1994
for its majority interest in Kwanasia's shares was approximately $517,000, which
was paid in cash. At the time majority control of Kwanasia was acquired by the
Company, Kwanasia had one active operating subsidiary, Bright Ace Limited
("Bright Ace"), a Hong Kong limited liability company. Bright Ace had been
inactive since April 2001 and was struck off from the Companies Registry of Hong
Kong in October 2002.

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




                                       9
<PAGE>

Kwanasia and Lang Wang, both parties agreed that Kwanasia would have in
substance a 100% economic interest in the joint venture enterprise with Lang
Wang guaranteed an annual rental income for the buy out.

        The Company's incorporation in the British Virgin Islands in December
1993 was part of a restructuring in which Deswell Industries, Inc. was organized
to become the ultimate parent holding company of the companies engaged in actual
business operations and to the spin off to Messrs. Lau, Li and Leung other
companies that hold real estate in Hong Kong. This restructuring, which was
completed in March 1994 involved the following steps. First, on December 13,
1993, the Company (i) allotted a total of 2,539 common shares to provide the
initial capital of the Company and (ii) acquired the entire issued share capital
of Leesha Holdings Limited, the former ultimate parent company, in exchange for
which it issued a total of 3,387,304 common shares. These shares were issued in
equal portions to Messrs. Lau, Li and Leung, the former shareholders of Leesha
Holdings Limited. Second, on March 22, 1994, the Company acquired the entire
issued share capitals of Jetcrown, Marcon (including its interest in Jetcrown
Shenzhen) and Richtex from Leesha Enterprises Limited, a wholly owned subsidiary
of Leesha Holdings Limited and a second-tier holding company, in exchange for
which the Company issued an aggregate of 7,618 common shares in equal
proportions to Messrs. Lau, Li and Leung. Third, also on March 22, 1994, the
Company acquired Leesha Enterprises Limited's 50.00005% interest in Kwanasia in
exchange for the issue of 2,539 common shares in the Company in equal
proportions to Messrs. Lau, Li and Leung and the assignment of a debt due to
Jetcrown of approximately $465,000 relating to the original purchase of
Kwanasia. Finally, on March 22, 1994, the Company made a distribution in specie
of the entire share capital of Leesha Holdings Limited to Messrs. Lau, Li and
Leung. The immediate effect of this restructuring was that the Company wholly
owned Jetcrown, Marcon (which wholly owned Jetcrown Shenzhen) and Richtex and
also owned 51% of the outstanding capital stock of Kwanasia (which, in turn,
wholly-owned Bright Ace and had a 100% economic interest in Shenzhen Kwanam).
Messrs. Lee and Tam owned the balance of Kwanasia. In 1995, this restructuring
was fine-tuned for tax purposes, with the Company forming two new corporations,
Union International Limited (which changed its name to Integrated International
Limited on May 1, 1996) ("Integrated") and Oriental Enterprises Limited (which
changed its name to Bright Oriental Enterprises Limited on May 1, 1996)
("Oriental Enterprises"), both corporations organized under the laws of Western
Samoa. Integrated issued its shares proportionately to Deswell and Messrs. Lee
and Tam in exchange for all outstanding capital stock of Kwanasia respectively
held by them, with the result that Integrated is now 51%-owned by Deswell and
49%-owned by Messrs. Lee and Tam. Integrated in turn owns all of the outstanding
capital stock of Kwanasia (which, in turn, continues to wholly own Bright Ace).
As part of the fine-tuning, Oriental Enterprises was organized as a wholly-owned
subsidiary of Integrated and it was assigned Kwanasia's joint venture interest
in Shenzhen Kwanam and assumed Kwanasia's rights and responsibilities under the
Shenzhen Kwanam joint venture. With the completion during the year ended March
31, 1998 of the purchase of CTC's 30% joint venture interest in Shenzhen Kwanam
pursuant to the Buy-out Agreement, Shenzhen Kwanam became a wholly owned
subsidiary of Oriental Enterprises.

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

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

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

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




                                       10
<PAGE>

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

        In August 2001, the Company organized Jetcrown & Kwanasia (OEM)
Specialist Limited ("J&K OEM"), a limited liability Hong Kong Company, to
conduct marketing for Deswell's plastic and electronic businesses. The capital
stock of J&K OEM is owned 51% by Deswell, 39% by Dickson Lam, Deswell's Director
of Marketing for plastic and electronic products, and 10% by two other
individuals, who are not otherwise related to Deswell.

CAPITAL EXPENDITURES

        Principal capital expenditures and divestitures made by Deswell during
the three years in the period ended March 31, 2002 include the following:

<TABLE>
<CAPTION>
                                                              2000          2001           2002
                                                           ----------    -----------    ----------
<S>                                                        <C>           <C>            <C>
Purchase of property, plant and equipment                  $6,019,000    $13,926,000    $4,397,000
Proceeds from the sale of property, plant and equipment       176,000        113,000    $  276,000
</TABLE>

        Principal capital expenditures currently in progress relate to
improvements we are constructing on the land we purchased in Dongguan, China to
build a new factory. The construction of our new Dongguan factory and
dormitories will consist of three to four phases. The pace of its development
depends on our financial situation and future operating results. We estimate
that we will spend an aggregate of approximately $12 million for the first phase
of construction, which comprised approximately 330,000 square feet of factory
space, 70,000 square feet for an amenity center and 80,000 square feet of
dormitory space, and which began in October 2001 and is expected to be completed
in August 2002. Completion of interior build-out is expected to take another
three months, and therefore the new factory built from the Phase I portion of
activity is expected to be ready for use by the end of December 2002. Following
completion of space built through Phase I, we estimate spending an aggregate of
approximately $4.5 million for the second phase of construction, which will
comprise an additional 110,000 square feet of factory space and 70,000 square
feet of dormitory space, and which will begin in August 2002 and is expected to
take approximately five months. Baring unforeseen delays, we expect that the new
factory from the Phase II portion of construction will commence operation in
April 2003. Deswell has not yet authorized construction of additional phases of
this project and will make those decisions based on its future operating
results.

        These capital expenditures were financed and are being financed mainly
from internally generated funds.

BUSINESS OVERVIEW

        INTRODUCTION TO DESWELL

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

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

           -   cases and key tops for calculators and personal organizers;

           -   cases for flashlights, telephones, paging machines, projectors
               and alarm clocks;

           -   grips and rods for fishing tackle; and

           -   toner cartridges and cases for photocopy machines.

        Electronic products manufactured by the Company include

           -   complex printed circuit board assemblies using surface mount
               ("SMT") and pin-through-hole ("PTH") interconnection technologies
               and

           -   finished products which include




                                       11
<PAGE>

                  >   telecommunication products such as special purpose
                      telephones used as a private automated branch exchange, a
                      network terminal and an internet phone, for each of which
                      we also manufacture the plastic parts;,

                  >   telephone answering machines, and

                  >   sophisticated professional audio equipments such as power
                      amplifiers, mixers and digital signal processors and DVD
                      players.

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

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

        As part of its manufacturing operations, the Company consults with its
customers in the design of plastic parts and the design and production of the
molds used to manufacture plastic parts, which are made by Deswell at its
customers' expense, and provides advice and assistance in the design and
manufacturing of printed circuit boards. The Company believes that its ability
to manufacture high-end plastic and metal parts of the quality required by OEMs
and contract manufacturers which furnish products and services internationally,
Deswell's expertise in designing and manufacturing molds for its customers and
the Company's low production costs distinguish Deswell from most other
manufacturers of plastic products and provide it with a competitive advantage.
However, as a result of increased competition, Deswell has been forced to reduce
the sales prices of its products during the years ended March 31, 2000, 2001 and
2002, which has resulted in lower gross profit margins during these years.

        INDUSTRY OVERVIEW

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

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

        OPERATIONS

        Plastic Injection Molding

        Plastic injection molding manufacturing accounted for 62.9%, 62.2% and
57.0% of the Company's total sales during the years ended March 31, 2000, 2001
and 2002, respectively. At March 31, 2002, the Company conducted its plastic
manufacturing operations in approximately 408,500 and 114,900 square feet of
factory space in its factories located in Shekou, Shenzhen, China and Dongguan,
Shenzhen, China, respectively.

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




                                       12
<PAGE>

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

        The mold-making process ranges from 30 to 75 days, depending on the size
and complexity of the mold. Mold making requires specialized machines and is
capital intensive. At March 31, 2002, the Company used 22 EDMs (electrical
discharge machines), 25 CNC (computer numerical control) milling machines and 63
NC (numerical control) milling machines in the mold-making process.

        Deswell is continually adding equipment to expand its mold-making and
tolling capabilities. In January 1999 the Company purchased two advanced
"Makino" tooling machines, a Graphite CNC Milling Machine and a V55-A15 Vertical
Machining Center, for approximately $700,000. These machines can achieve higher
efficiency in mold making and are nearly four times faster than normal machines
in certain applications. The machines were installed in April 1999. During July
to September 1999, the Company purchased 10 sets of NC milling machines, 5 sets
of EDM and 2 sets of CNC milling machines for approximately $510.000. During the
period from June to November 2000, the Company purchased six sets of EDM, 14
sets of CNC milling machines and 11 sets of NC milling machines for
approximately $995,000. During February to April 2002, the Company purchased 12
additional injection-molding machines with clamping force of 365 to 550 tons for
approximately $1.5 million. The Company expects that these new injection-molding
machines will be installed in July 2002. In March 2002, the Company also
upgraded its tooling software used in the mold-making process for enhanced
precision and efficiency. Molds produced by the Company generally weigh from 220
to 12,000 pounds and generally cost between $3,000 and $500,000.

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

        During the year ended March 31, 2002, the Company made on average about
70 different molds every month. Management believes that the Company's skills
and expertise in mold-making, coupled with having its facilities and operations
in China, allow the Company to produce molds at costs substantially less than
molds of comparable quality made in Japan, Korea and Taiwan.

        Plastic Injection. During the mold-making process, suitable plastic
resin for the particular product is selected and purchased. See "Raw Materials,
Component Parts and Suppliers." The completed mold is mounted onto injection
machines, which are classified according to the clamping force (the pressure per
square inch required to hold a mold in place during the injection molding
process). At March 31, 2002, the Company had 251 injection molding machines,
ranging from 50 to 1,600 tons of clamping force, with most machines in the range
of from 80 to 100 tons. Each of the Company's machines is capable of servicing a
variety of applications and product configurations and the Company has machines,
which permit the Company to fabricate plastic parts as small as a button and as
large as a 3 ft. x 2 ft. case for a copy machine.

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




                                       13
<PAGE>

Company has experienced what it believes to be a relatively low scrap rate and
has been able to maintain a high level of productivity of its injection molding
machines.

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

        Electronic Products and Assemblies

        In an aggregate of approximately 298,000 square feet of factory space at
March 31, 2002 located at facilities in Dongguan, China, the Company
manufactures and assembles electronic products and electronic assemblies for
OEMs. Finished products include consumer and sophisticated studio-quality audio
equipment, telephones and telephone answering machines, computer peripherals
such as local area network ("LAN") add-in cards, CD-ROM drives and sound cards,
electronic toys, infrared remote controls and radar detectors. Assemblies
consist of PCBs with passive (e.g., resistors, capacitors, transformers,
switches and wire) and active (e.g., semiconductors and memory chips) components
mounted on them. During the years ended March 31, 2000, 2001 and 2002,
manufacturing of electronic products accounted for approximately 30.6%, 35.4%
and 40.4%, respectively, of the Company's total sales. During the same periods,
manufacturing of finished products accounted for 95%, 91% and 96%, respectively,
of electronic product sales and assembling of printed circuit boards accounted
for the balance of such sales during those periods.

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

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

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

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

        Metal Parts Manufacturing

        In an aggregate of approximately 120,100 square feet of factory space at
March 31, 2002 located at facilities in Dongguan, China near to the facilities
the Company uses to manufacture and assemble electronic products and electronic
assemblies, the Company manufactures metallic molds and accessory parts for use
in audio equipment, telephone and copying machines. The manufacturing by the
Company of metal mold products accounted for approximately 6.5%, 2.4% and 2.6%
of the Company's total sales during the years ended March 31, 2000, 2001 and
2002, respectively.




                                       14
<PAGE>

        Quality Control

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

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

        Plastic, electronic and metal products manufactured and assembled at the
Company's facilities have a low level of product defects, and aggregate returns
represented less than 3% of total net sales during each of the years ended March
31, 2000, 2001 and 2002. In 1995, the Company earned ISO 9002 certifications for
both its plastic and electronic products manufacturing operations. In April
2000, the Company also received ISO 9002 for its metal manufacturing operation.
The "ISO" or International Organization for Standardization is a Geneva-based
organization dedicated to the development of worldwide standards for quality
management guidelines and quality assurance. ISO 9000, which is the first
quality system standard to gain worldwide recognition, requires a company to
gather, analyze, document and monitor and to make improvements where needed. ISO
9002 is the ISO level appropriate for manufacturers like the Company. The
Company's receipt of ISO 9002 certification demonstrates that the Company's
manufacturing operations meet the established world standards.

        Raw Materials, Component Parts and Suppliers

        Plastic Resins. The primary raw materials used by the Company in the
manufacture of its plastic parts are various plastic resins, primarily ABS
(acrylonitrile-butadiene-styrene), which in the years ended March 31, 2000, 2001
and 2002 averaged approximately 55%, 58% and 52%, respectively, of the Company's
cost of plastic products sold and 31%, 32% and 25%, respectively, of the
Company's total cost of goods sold. Because plastic resins are commodity
products, the Company selects its suppliers primarily based on price. The
Company has no long-term supply agreements for plastic resins. The Company
currently obtains its plastic resins from suppliers in Hong Kong, Japan and
Taiwan and normally maintains a three to four month inventory supply.

        The Company used in excess of 17,200,000 pounds of plastic resins during
the year ended March 31, 2002. Management believes that the Company's large
volume purchases of plastic resin have generally resulted in lower unit raw
material costs and generally has enabled the Company to obtain adequate
shipments of raw materials. While the Company is not generally bound by fixed
price contracts with its customers, the Company has found that increases in
resin prices can be difficult to pass on to its customers and, as a consequence,
a significant increase in resin prices could have, and in the past has had, a
material adverse effect on the Company's operations.

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

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

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




                                       15
<PAGE>

        Raw Metal. The primary materials used by the Company in metal molds and
parts manufacturing are various metals, but purchases of raw metal were
immaterial to the Company's total operations during the years ended March 31,
2000, 2001 and 2002. Typically the Company buys metals from a variety of
suppliers in Hong Kong and China and has no long-term contracts with metal
suppliers.

        Transportation

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

        Customers and Marketing

        The Company's customers are OEMs and contract manufacturers. The Company
sells its products in Asia (Hong Kong, Japan and China), North America (the
United States and Canada) and Europe (Germany, United Kingdom, France and
Italy). Net sales to customers by geographic area are determined by reference to
shipping destinations as directed by the Company's customers. For example, if
the products are delivered to the customer in Hong Kong, the sales are recorded
as generated in Hong Kong; if the customer directs the Company to ship its
products to Europe, the sales are recorded as sold to Europe. See Note 14 of
Notes to Consolidated Financial Statements for the dollar amounts of export
sales by geographic area for each of the years ended March 31, 2000, 2001 and
2002. Net sales as a percentage of total sales to customers by geographic area
consisted of the following for the years ended March 31, 2000, 2001 and 2002:

<TABLE>
<CAPTION>
        GEOGRAPHIC AREAS          2000            2001            2002
        ----------------         ------          ------          ------
        <S>                      <C>             <C>             <C>
        China ..........          42.6%           54.5%           56.3%
        North America ..          27.0            22.6            23.2
        Hong Kong ......          24.1            19.2            14.0
        Europe .........           5.1             2.2             4.9
        Others .........           1.2             1.5             1.6
                                 ------          ------          ------
                Total ..         100.0%          100.0%          100.0%
                                 =====           =====           =====
</TABLE>

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

        Major Customers

        The table below sets forth each of the Company's customers which
accounted for 10% or more of net sales during the year ended March 31, 2002 the
products purchased and the percentage of total Company net sales accounted for
by such customers during the years ended March 31, 2000, 2001 and 2002.

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED MARCH 31,
                                                                                -----------------------
CUSTOMER                                      PRODUCT                           2000     2001     2002
------------------------------------------    -------------------------------   -----    -----    -----
<S>                                           <C>                               <C>      <C>      <C>
Epson Precision (H.K.) Limited                Plastic components                  *      13.0%    17.5%
VTech Telecommunications Limited              Telephones and organizers         22.1%    17.6%    15.3%
Kyocera Mita Industrial Co. (H.K.) Limited    Plastic components and assembly   24.0%    18.7%    13.6%
Inter-Tel Incorporated                        Telephones                        25.3%    20.0%    11.6%
</TABLE>

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




                                       16
<PAGE>

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

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

        Competition

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

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

        Patents, Licenses and Trademarks

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

SEASONALITY

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

ORGANIZATIONAL STRUCTURE

        The chart below illustrates the organizational structure of the Company
and its active subsidiaries at March 31, 2002.




                                       17
<PAGE>

<TABLE>
<CAPTION>
<S>                <C>             <C>            <C>             <C>              <C>                 <C>             <C>
                                                   ------------------------------
                                                  /   Deswell Industries, Inc.   /
                                                  /   A British Virgin Islands   /
                                                  /International Business Company/
                                                   ------------------------------
                                                                 /
                                                                 /
        -----------------------------------------------------------------------------------------------------------------------
        /                  /               /              /                /                    /                   /        /
   100% /             100% /          100% /         100% /          51%   /               100% /              100% /     51%/
 --------------     -------------   ------------   -------------  ----------------  ---------------     ------------    ------------
/ Blue Collar  /  /    Marcon    /  / Jetcrown /  /  Richtex   /  /  Integrated  /  /Star Peace Ltd./   /  Jetcrown  /  /Jetcrown &/
/Holdings Ltd. /  / Enterprises  /  /Industrial/  /  Services  /  /International /  /  (A British   /   / Industrial /  / Kwanasia /
/ (A British   /  /     Ltd.     /  /  Limited /  /  Limited   /  /     Ltd.     /  /Virgin Islands /   /  Sdn. Bhd  /  /  (OEM)   /
/Virgin Islands/  /  (A British  /  / (A Hong  /  /(A Hong Kong/  /   (A Samoa   /  / International /   /(A Malaysian/  /Specialist/
/International /  /Virgin Islands/  /   Kong   /  /  Limited   /  / Corporation) /  /   Business    /   /  Limited   /  /   Ltd.   /
/   Business   /  / International/  /  Limited /  / Liability  /   ---------------  /   Company)    /   / Liability  /  / (A Hong  /
/  Company)    /  /   Business   /  / Liability/  /  Company)  /           /          -------------     /  Company)  /  /   Kong   /
 --------------   /   Company)   /  / Company) /  --------------           /                             ------------   / Limited  /
        /           -------------   -----------                            /                                            /Liability /
        /                  /                                               /                                            / Company) /
        /                  /                                               /                                            -----------
        /                  /                          ---------------------------------------------------------------------
        /                  /                          /                      /                         /                  /
   100% /             100% /                     100% /                 100% /                    100% /             100% /
 -------------      -------------              ------------           ------------              -----------        ------------
/   Jetcrown  /    /   Jetcrown  /            /  Kwanasia  /         /   Kwanta   /            /   Bright   /     /  Digiwave  /
/  Industrial /    /  Industrial /            /Electronics /         / Precision  /            /  Oriental  /     /  Limited   /
/  (Dongguan) /    /  (Shenzhen) /            /  Company   /         /   Metal    /            /Enterprises /     /(A Hong Kong/
/   Limited   /    /   Limited   /            /  Limited   /         /  Products  /            /    Ltd.    /     /  Limited   /
/  (A limited /    /  (A limited /            /(A Hong Kong/         /Company Ltd /            /  (A Samoa  /     / Liability  /
/  liability  /    /  liability  /            /  Limited   /         /(A Hong Kong/            /Corporation)/     /  Company)  /
/China Foreign/    /China Foreign/            / Liability  /         /  Limited   /             -----------        ------------
/  Operation) /    /  Operation) /            /  Company)  /         / Liability  /                    /
 -------------      -------------              ------------          /  Company)  /                    /
                                                      /               ------------                     /
                                                      /                                                /
                                                      /                                                /
                                               100%   /                                         100%   /
                                             --------------------                             --------------------
                                            /    Dongguan Kwan   /                           /  Shenzhen Kwanam   /
                                            /   Hong Electronics /                           /    Electronics     /
                                            /      Co. Ltd.      /                           /  Company Limited   /
                                            /(A limited liability/                           /(A limited liability/
                                            /    China Foreign   /                           /   China Foreign    /
                                            /     Operation)     /                           /     Operation)     /
                                             --------------------                             --------------------

</TABLE>




PROPERTY, PLANTS AND EQUIPMENT

        HONG KONG

        The Company owns Unit 516-517, Hong Leong Industrial Complex, No. 4 Wang
Kwong Road, Kowloon Bay, Kowloon, Hong Kong and uses these premises for the
administration and marketing offices of its plastic injection molding
operations. In addition, the Company leases from unaffiliated parties Units 514,
515 and 602, Hong Leong Industrial Complex, No. 4 Wang Kwong Road, Kowloon Bay,
Kowloon, Hong Kong for use as an office and warehouse for its plastic injection
molding operations. The total monthly rent under the leases is approximately
$3,200. These leases expire from July 2002 to February 2004.

        The Company owns Unit 10-14, 19/F., Kwong Sang Hong Centre, 151-153 Hoi
Bun Road, Kwun Tong, Hong Kong and uses this space for the administration and
marketing offices for both its contract electronic and metal manufacturing
operations.

        Moreover, the Company leases from an unaffiliated party Unit 1201,
12/F., Prosperity Center, 25 Chong Yip Street, Kwun Tong, Hong Kong for use as
an office for its marketing operations. The total monthly rent under the lease
is approximately $1,500. The lease expires in August 2003.




                                       18
<PAGE>

        SOUTHERN CHINA

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

        At March 31, 2002, the Company leased approximately 295,600 square feet
of manufacturing space at Block A, 1/F-2/F, Block B, 1/F-3/F, Block C, 1/F,
Block D, 1/F-5/F, Block E, 2/F-5/F, Block F, 1/F-5/F, and Block H, G/F and
2/F-5/F Wing Village Industrial Estate, Shekou, Shenzhen, China which are used
for its plastic injection molding operations. These factory premises are leased
from the local Chinese government and third parties under separate leases
expiring from September 2002 to May 2007. The aggregate monthly rent is
approximately $63,200.

        In January 2000, the Company also leased approximately 56,800 square
feet of manufacturing space and 37,100 square feet of ancillary dormitory space
at Huangguan Industrial Estate, Houjie Town, Dongguan, Shenzhen, China, which
are used for its plastic injection molding operations. Additionally, in May and
August 2000, the Company leased approximately 58,100 square fee of manufacturing
space and 22,400 square feet of ancillary dormitory space at Huangguan
Industrial Estate, Houjie Town, Dongguan, Shenzhen China, which are used for its
plastic injection molding operations. The new premises are adjacent to the
factory leased in January 2000. These premises are leased from the local Chinese
government and third party under separate leases expiring from February 2002 to
July 2004. The aggregate monthly rental is approximately $16,600.

        The Company leases space at various locations near its plastics
manufacturing factories in Shekou and Dongguan, Shenzhen that it uses as
dormitories for factory workers. Management estimates that the space leased for
dormitories approximated 97,200 square feet and 30,600 square feet at March 31,
2002 in Shekou and Dongguan, respectively. The facilities are leased for periods
of one year to two years, expiring from August 2002 to March 2003. The aggregate
monthly rental is approximately $21,300. The Company has acquired under purchase
and sale agreements with third parties an aggregate of approximately 24,600
square feet of additional space at various locations near its plastics
manufacturing operations in Shenzhen, which are also used as dormitories for
factory workers.

        At March 31, 2002, the Company leased approximately

           -   264,200 square feet of manufacturing space at Kwan Hong Building,
               Cheung On, Dongguan, China,

           -   1,000 square feet of office space in Yee Ho Plaza, Nanshan,
               Shenzhen, China,

           -   22,200 square feet of ancillary dormitory space at Lan Wang
               Building, Cheung On, Dongguan, China, and

           -   1,800 square feet of office space in Intelligent Transport
               Research & Development Centre, Hangzhou, China

for its contract electronic manufacturing operations;

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

           -   133,300 square feet of ancillary dormitory space at Kwan Hong
               Building

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

           -   69,400 square feet of manufacturing space in Kwanta Building,
               Cheung On, Dongguan, China, and

           -   44,700 square feet of ancillary dormitory space at Lan Wang
               Building

for its contract metal manufacturing operation. These premises are leased from
third parties under separate leases expiring from February 2003 to May 2009. The
aggregate monthly rental is approximately $75,100.

        In addition, the Company leases approximately 133,500 square feet of
space at various locations near its contract electronics and metal manufacturing
factories in Dongguan, Shenzhen, which are used as staff quarters. The
facilities are leased from third parties for periods of one to two years and
expire from December 2002 to May 2004. The aggregate monthly rental is
approximately $6,500.




                                       19
<PAGE>

        The Company leases approximately 1,900 square feet of space from S. K.
Lee and M.C. Tam near its office in Shenzhen that is used as staff quarters.
Messrs. Lee and Tam are executive officers of the Company in charge of its
contract manufacturing operations. These premises are leased for terms expiring
from March 2002 to September 2003. The total monthly rental is approximately
$970.

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

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

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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

OPERATING RESULTS

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

        GENERAL

        The Company's revenues are derived from the manufacture and sale of
injection-molded plastic parts and components, electrical products and
subassemblies and metallic molds and accessories. Jetcrown (a wholly owned
subsidiary) carries on the plastics operations whereas Integrated (a 51%-owned
consolidated subsidiary) carries out the electronics operations. The Company
acquired a controlling interest in Integrated's predecessor in October 1992 and
has included the results of the predecessor in its consolidated financial
statements from the date of acquisition. Integrated acquired a 64.9% interest in
Kwanta in October 1996 and the Company has included the results of Kwanta in its
consolidated financial statements since the date of acquisition. In April and
July 1999, Integrated acquired the remaining 35.1% interest in Kwanta.

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

        The Company's earnings have benefited from favorable overall effective
income tax rates of 7.7%, 2.3% and 3.6% for the years ended March 31, 2000, 2001
and 2002, respectively. The Company is subject to Hong Kong income tax on its
income arising in, or derived from, Hong Kong. Currently, under the Chinese tax
system we can obtain tax breaks by reinvesting profits of certain of our
subsidiaries in China. We are considering the reinvestment of a portion of our
profits of $4,000,000, from our Chinese plastic manufacturing subsidiary for the
year ended December 31, 2001 and, if we do so, we expect we will only be subject
to taxes of 7.5% on these operations for the remaining profits for tax year
ended December 31, 2001. For the tax year commencing January 1, 2002, the
Company will be subject to taxes of 10% on these operations. Certain of the
Company's income accrue in tax-free jurisdictions and are not subject to any
income taxes. See Note 7 of Notes to consolidated financial statements for a
further description of income taxes. The Company expects to continue to benefit
from a low overall effective




                                       20
<PAGE>

income tax rate in the future, barring unforeseen changes in tax laws and
regulations in the various jurisdictions in which it operates. See "Uncertain
applications of Chinese tax laws could subject us to greater taxes in China"
included under "We face numerous risks as a result of our operations in China
and Hong Kong" in Item 3. Key Information -- "Risk Factors."

        The following table sets forth the percentages of net sales of certain
income and expense items of the Company for each of the three years in the
period ended March 31, 2002.

<TABLE>
<CAPTION>
                                                          YEAR ENDED MARCH 31,
                                                    ------------------------------
                                                     2000        2001        2002
                                                    ------      ------      ------
<S>                                                 <C>         <C>         <C>
Net sales                                           100.0%      100.0%      100.0%
Cost of sales                                        62.8        65.1        65.3
                                                    ------      ------      ------
Gross profit                                         37.2        34.9        34.7
Selling, general and administrative expenses         19.6        19.0        18.0
                                                    ------      ------      ------
Operating income                                     17.6        15.9        16.7
Interest expense                                      0.0         0.0         0.0
Other income, net                                     1.5         1.1         1.0
                                                    ------      ------      ------
Income before income taxes                           19.1        17.0        17.7
Income taxes                                          1.5         0.4         0.6
                                                    ------      ------      ------
Income before minority interests                     17.6        16.6        17.1
Minority interests                                    0.7         0.8         1.1
                                                    ------      ------      ------
Net income                                           16.9%       15.8%       16.0%
                                                    ======      ======      ======
</TABLE>

        YEAR ENDED MARCH 31, 2002 COMPARED TO YEAR ENDED MARCH 31, 2001

        The Company's net sales for the year ended March 31, 2002, were
$83,320,000, an increase of $2,473,000 or 3.1% as compared to year ended March
31, 2001. Sales to Inter-Tel Incorporated ("Inter-Tel"), Kyocera Mita Industrial
Co. (H.K.) Ltd. ("Mita"), VTech Telecommunications Ltd. ("VTech") and Epson
Precision (H.K.) Ltd. ("Epson"), the Company's four largest customers during the
year ended March 31, 2002, represented approximately 58.0% of the net sales for
the year. See Item 4. "Information on the Company -- Major Customers".

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

        Net sales to customers by geographic area are determined by reference to
shipping destinations as directed by the Company's customers. During the year
ended March 31, 2002, sales to China, North America, Europe and other areas
increased by $2,797,000, $1,093,000, $2,291,000 and $599,000, respectively, and
sales to Hong Kong and Japan decreased by $3,867,000 and $440,000, respectively,
over levels for the year ended March 31, 2001.

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

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

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




                                       21
<PAGE>

        During the year ended March 31, 2002, the Company established a
51%-owned marketing subsidiary to strengthen its marketing capability. As a
result, minority interests represent the 49% minority interest in the
electronics and metallic subsidiaries and the marketing subsidiary. The increase
in minority interest to $925,000 for the year ended March 31, 2002, from
$621,000 for the year ended March 31, 2001, reflects the fact that the
electronics and metallic businesses generated more net income in the year ended
March 31, 2002 as compared to the prior year.

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

        YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000

        The Company's net sales for the year ended March 31, 2001 were
$80,847,000, an increase of $19,889,000 or 32.6% as compared to year ended March
31, 2000. Sales to Inter-Tel, Mita , VTech and Epson, the Company's four largest
customers during the year ended March 31, 2001, represented approximately 69.3%
of the net sales for the year. See Item 4. "Information on the Company -- Major
Customers".

        The increase in sales was mainly related to increases in sales of
injection-molded plastic products and electronic and metallic products of
$10,996,000 and $8,893,000, respectively. This represented increases of 28.7%
and 39.3%, respectively, as compared with comparable net sales in the prior
year. The increase in net sales in both operations was attributed to the
substantial increase in orders from the existing strong customer base together
with orders from new customers.

        Net sales to customers by geographic area are determined by reference to
shipping destinations as directed by the Company's customers. During the year
ended March 31, 2001, sales to China, North America, Hong Kong, Japan and other
areas increased by $18,120,000, $1,795,000, $852,000, $14,000 and $400,000,
respectively, and sales to Europe decreased by $1,293,000, over fiscal 2000
levels.

        The overall gross profit for the year ended March 31, 2001 was
$28,251,000, representing a gross profit margin of 34.9%. This compares with the
overall gross profit and gross profit margin of $22,696,000 or 37.2% for the
year ended March 31, 2000. The absolute and percentage decrease in the overall
gross profit margin of 2.3% and 6.2%, respectively, was mainly attributable to
the combined effect of an increase in resin costs and an increase in electronics
component costs in the plastic and electronic divisions.

        Selling, general and administrative expenses for the year ended March
31, 2001 were $15,414,000, amounting to 19.0% of total net sales, as compared to
$11,970,000 or 19.6% of total net sales for the year ended March 31, 2000. The
decline in selling, general and administrative expenses as a percentage of sales
over the prior year was the result of spreading such expenses over increased
sales during fiscal 2001.

        As a result, operating income was $12,837,000 for the year ended March
31, 2001, an increase of $2,111,000 or 19.7% as compared with the prior year.

        The minority interests represent the 49% minority interest in both the
electronics and metallic subsidiaries. The increase in minority interest to
$621,000 for the year ended March 31, 2001 from $433,000 for the year ended
March 31, 2000 reflects the fact that the electronic and metallic businesses
generated more profits in fiscal 2001 than fiscal 2000.

        As a result of the above factors, net income was $12,810,000 for the
year ended March 31, 2001, an increase of $2,512,000 or 24.4%, as compared to
the year ended March 31, 2000 and net income as a percentage of net sales
decreased to 15.8% from 16.9%.

SEASONALITY

         The following table sets forth certain unaudited quarterly financial
information for the twelve quarters in the three-year period ended March 31,
2002 (in thousands):




                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                              YEAR ENDED MARCH 31,
                  ----------------------------------------------------------------------------------------------------------
                                 2000                                2001                               2002
                  ----------------------------------  ----------------------------------  ----------------------------------
                     Q1       Q2       Q3       Q4       Q1       Q2       Q3       Q4       Q1       Q2       Q3       Q4
                  -------  -------  -------  -------  -------  -------  -------  -------  -------  -------  -------  -------
<S>               <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Net sales         $12,081  $16,110  $17,809  $14,958  $17,786  $24,809  $21,376  $16,876  $21,884  $22,189  $20,217  $19,030
Gross profit        4,592    6,727    6,255    5,122    6,255    9,155    7,619    5,222    7,523    7,564    7,225    6,560
Operating income    1,925    3,450    3,201    2,150    2,820    5,071    3,337    1,609    3,956    3,806    3,447    2,724
Net income          2,113    3,336    2,944    1,905    2,757    4,011    3,589    2,453    3,369    3,635    3,430    2,890
</TABLE>

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

IMPACT OF INFLATION

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

EXCHANGE RATES

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

        In 1994, China adopted a floating currency system whereby the official
exchange rate is equal to the market rate. Since the market and official Yuan
rates were unified, the value of the Yuan against the dollar has been
essentially stable, with an average rate of 8.28 Yuan per $1.00 during Deswell's
fiscal years ended March 31, 2000, 2001 and 2002. The Company believes, because
its Chinese operations presently are confined to manufacturing products for
export or for customers in China that are controlled by foreign investors and
which pay the Company in Hong Kong dollars, that the current economic climate in
China should not have a direct adverse impact on the Company's business.

        The Company did not hedge its currency risk during the years ended March
31, 2000, 2001 or 2002 and at March 31, 2002, the Company had no open forward
currency contracts. The Company continues to review its hedging strategy and
there can be no assurance that hedging techniques implemented by the Company
will be successful or will not result in charges to the Company's results of
operations.

LIQUIDITY AND CAPITAL RESOURCES

        For the year ended March 31, 2002, net cash generated from operations
totaled $18,203,000, including net income of $13,324,000 and depreciation and
amortization of $4,918,000. Accounts receivable and inventories increased by
$1,111,000 and $1,191,000, respectively, over levels at March 31, 2001,
primarily as a result of increases in sales and the general increase in business
activities. Accounts payable increased by $3,309,000 over the March 31, 2001
level. For the year ended March 31, 2001, net cash generated from operations
totaled $13,810,000, including net income of $12,810,000 and depreciation and
amortization of $5,039,000. Accounts receivable and inventories increased by
$5,170,000 and $1,102,000, respectively, over levels at March 31, 2000,
primarily as a




                                       23
<PAGE>

result of increases in sales and the general increase in business activities.
Accounts payable decreased by $1,127,000 over the March 31, 2000 level.

        In February 2001, Messrs. Richard Lau, C.P. Li and C.W. Leung, the
Company's senior executive officers, members of its board and principal
shareholders exercised options for a total 240,000 common shares of the Company.
Proceeds to Deswell totaled $2,588,000. Other employees exercised options for a
total of 10,000 common shares of the Company in September 2000 with proceeds to
Deswell of $158,000. In June 2002, Messrs. Lau and Leung exercised options
totaling 45,000 common shares of the Company. Proceeds to Deswell from these
option exercises totaled $700,000.

        Net cash used in investing activities amounted to $4,994,000 and
$13,672,000 for the years ended March 31, 2002 and 2001, respectively. Capital
expenditures during these periods totaled $4,397,000 and $13,926,000,
respectively, and were financed by cash generated from operations during each
year. The capital expenditure primarily related to the acquisition of plant and
machinery for the Company's production facilities in China and office equipment
for the Company's administrative operations in China. Cash of $936,000 was
pledged as security for the short-term borrowing facilities and $63,000 was
released as deposit for customs duty in Dongguan, China during the year ended
March 31, 2002.

        Net cash used in financing activities for the years ended March 31, 2002
and 2001 was $7,005,000 and $1,964,000, respectively. Net cash used in financing
activities during the year ended March 31, 2002 was primarily to fund the
Company's dividend payments to its shareholders and to repurchase 34,100 common
shares of the Company of $564,000 netting off the short-term bank borrowings of
$482,000, the proceeds of $243,000 from the exercise of stock options from
employees and $63,000 contribution from minority shareholders of a subsidiary.
Net cash used in financing activities during the year ended March 31, 2001 was
primarily to fund the Company's dividend payments to its shareholders netting
off the proceeds of $2,746,000 form the exercise of stock options from directors
and employee.

        To date, the Company has generated sufficient funds from its operating
activities to finance its operations and there has been little need for external
financing. The Company had outstanding short-term borrowings of $482,000 and no
long-term debt at March 31, 2002 and no outstanding short-term-borrowings or
long-term debt at March 31, 2001. Deswell had no off balance sheet financing
arrangements at March 31, 2002.

        As a consequence of the fixed exchange rate between the Hong Kong dollar
and the U.S. dollar, interest rates on Hong Kong dollar borrowings are similar
to U.S. interest rates. The Hong Kong Prime Rate fluctuated during the year
ended March 31, 2002, increasing from 8% at the beginning of the year to 9.5%
and then decreased to 5.125% at March 31, 2002.

        At March 31, 2002, the Company had cash and cash equivalents of
$31,534,000 and committed credit facilities of $19,515,000, of which $2,934,000
had been used. The Company also had restricted cash of $2,762,000 and leasehold
land and buildings of $1,348,000, which were pledged as collateral for those
credit facilities and $99,000 pledged as deposit for customs duty in Dongguan,
China. The Company expects that working capital requirements and capital
additions will continue to be funded through cash on hand and internally
generated funds. The Company's working capital requirements are expected to
increase in line with the growth in the Company's business. The Company had
capital commitments for plant and machinery of $3,363,000 as of March 31, 2002.
The Company expects that internally generated funds will be sufficient to
satisfy its cash needs for at least the next 12 months.

        At March 31, 2002, the Company was obligated under operating leases
requiring minimum rentals of $7,710,000 as follows:

<TABLE>
<CAPTION>
                                              (In thousands)
                                           Year ending March 31,
                           ----------------------------------------------------
                                                                      2008 and
                            2003     2004    2005    2006     2007   thereafter
                           ------   ------   ----   ------   ------  ----------
<S>                        <C>      <C>      <C>    <C>      <C>     <C>
Operating lease payments   $1,971   $1,195   $987   $1,004   $1,047    $1,506
</TABLE>




                                       24
<PAGE>

CRITICAL ACCOUNTING POLICIES

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

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

        Intangible assets -- The Company makes assumptions regarding estimated
future cash flows and other factors to determine the fair value of intangible
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record an impairment charge if the estimated fair
value of intangible assets are less than their recorded amount. Through March
31, 2002, the Company has not recorded an impairment charge for intangible
assets. Beginning April 1, 2002, the Company will be required to adopt Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", and will be required to analyze goodwill and other intangible assets
for impairment issues during the year 2003, and on a periodic basis thereafter.

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

        Income taxes -- The Company records a valuation allowance to reduce its
deferred tax assets to the amount that the Company believes is more likely than
not to be realized. In the event the Company was to determine that it would be
able to realize its deferred tax assets in the future in excess of its recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine that
it would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.

        Impairment of assets -- The Company reviews all assets on a regular
basis to ensure that there is no impairment in the carrying value. If the
Company determines that there has been a permanent decline in, or the Company
has become unable to recover the carrying value of the asset, an impairment
charge will be recorded, which will have an adverse effect upon the Company's
future operating results.

RECENT CHANGES IN ACCOUNTING STANDARDS

        In June 2001, the Financial Accounting Standard Board (the "FASB")
issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
provides that goodwill and other intangible assets with indefinite lives will
not be amortized, but will be tested for impairment on an annual basis. This
statement is effective for fiscal years beginning after December 15, 2001. The
Company will adopt this statement on April 1, 2002 and the management is
reviewing this statement to determine what effect they will have, if any, on its
financial position and results of operations.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses the diverse accounting
practices for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company will be required
to adopt this standard on April 1, 2003. The Company is reviewing the statement
to determine what effect it will have, if any, on its financial position and
results of operations.

        In August 2001, the FASB also issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that is applicable to financial
statements issued for fiscal years beginning after December 15,




                                       25
<PAGE>

2001. The FASBs new rules on asset impairment supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and portions of APB Option No. 30, "Reporting the Results for
Operations". The statement requires a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that would have
to be met to classify an asset as held-for-sale. Classification as held-for-sale
is an important distinction since such assets are not depreciated and are stated
at the lower of fair value and carrying amount. The statement also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The Company is reviewing the statement
to determine what effect it will have, if any, on its financial position and
results of operations.

        In April 2002, the FASB also issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", to update, clarify, and simplify certain existing accounting
pronouncements. Specifically, SFAS No. 145: (i) Rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", an amendment of APB Opinion No.
30, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", which amended SFAS No. 4, as these two standards required that
all gains and losses from the extinguishment of debt be aggregate and, if
material, classified as an extraordinary item. Consequently, such gains and
losses will now be classified as extraordinary only if they meet the criteria
for extraordinary treatment set forth in APB Opinion 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extra-ordinary, Unusual and Infrequently Occurring Events and Transactions;
(ii) Rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers",
an amendment of Chapter 5 of Accounting Research Bulletins No. 43 and an
interpretation of APB Opinions 17 and 30, because the discrete event to which
the Statement relates is no longer relevant; (iii) Amends SFAS No. 13,
"Accounting for leases", to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as such transactions; (iv) Makes certain technical corrections,
which the FASB deemed to be non-substantive, to a number of existing accounting
pronouncements. The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 and No. 64 are effective for fiscal years beginning after May 15, 2002.
The provisions related to the amendment of SFAS No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of SFAS No. 145
are effective for financial statements issued on or after May 15, 2002. The
Company adopted SFAS No. 145 during the year ended March 31, 2002 and it did not
impact the Company's financial statements.




                                       26
<PAGE>

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

        The directors and executive officers of the Company at June 28, 2002 are
as follows:

<TABLE>
<CAPTION>
           Name                  Age               Position(s) with Company
           ----                  ---               ------------------------
<S>                              <C>  <C>
Lau Pui Hon (Richard Lau)        57   Chief Executive Officer and Chairman of the
                                      Board of Directors

Li Chin Pang (C. P.  Li)         56   Executive Director and General Manager of
                                      Manufacturing and Administration for Plastic
                                      Operations, Chief Financial Officer, Secretary
                                      and Member of the Board of Directors

Leung Chi Wai (C. W. Leung)      47   Executive Director of Engineering for Plastic
                                      Operations and Member of the Board of Directors

Lee Shu Kwan (S. K. Lee)         56   Director of Administration and Marketing for
                                      Electronic Operations

Tam Man Chi (M. C. Tam)          52   Director of Engineering and Manufacturing for
                                      Electronic Operations

Dickson Lam                      60   Director of Marketing for Plastic and
                                      Electronics Operations

Eliza Y. P. Pang                 40   Financial Controller

Stephen K. Seung                 55   Member of Board of Directors and Audit
                                      Committee

Hung-Hum Leung                   56   Member of Board of Directors and Audit
                                      Committee
</TABLE>

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

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

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

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

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




                                       27
<PAGE>

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

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

        STEPHEN K. SEUNG. Mr. Seung has been a director of the Company and
member of the Audit Committee since July 1995. Mr. Seung is an attorney and
since 1981 has been engaged in the private practice of law in New York, New
York. Mr. Seung received a B.S. degree in Engineering from the University of
Minnesota in 1969, an M.S. degree in Engineering from the University of
California at Berkeley in 1971, an MBA degree from New York University in 1973
and a J.D. degree from New York Law School in 1979. Mr. Seung also serves the
Company as its authorized agent in the United States.

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

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

COMPENSATION OF DIRECTORS AND SENIOR MANAGERS

        Executive Officers

        The aggregate amount of compensation (including non-cash benefits) paid
by the Company and its subsidiaries during the year ended March 31, 2002 to all
directors and executive officers as a group for services in all capacities was
approximately $3,104,000 and excludes amounts paid by the Company to
shareholders as dividends during the year ended March 31, 2002. For information
concerning the Company's policy for dividends, see Item 8. Financial Information
-- Dividend Policy.

        Directors

        From July 1995 to September 2000, it was the Company's policy to pay
each director who was not an employee of the Company or any of its subsidiaries
$500 per month. Since October 2000, it has been the Company's policy to pay each
director who is not an employee of the Company or any of its subsidiaries $1,000
per month. The Company also reimburses such director all reasonable expenses
incurred in connection with services as a director.

BOARD PRACTICES

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

        The Audit Committee meets from time to time to review the financial
statements and matters relating to the audit and has full access to management
and the Company's auditors in this regard. The Audit Committee




                                       28
<PAGE>

recommends the engagement or discharge of the Company's independent accountants,
consults on the adequacy of the Company's internal controls and accounting
procedures and reviews and approves financial statements and reports. Deswell's
audit committee consists of Messrs. Stephen Seung and Hung-Hum Leung.

        The Company does not have a compensation or remuneration committee.

EMPLOYEES

        At March 31, 2002, the Company employed 3,819 persons on a full-time
basis, of which 37 were located in Hong Kong and 3,782 in China. Of the
Company's employees 2,324, 1,005 and 490 were engaged in plastic injection
molding manufacturing, contract electronic manufacturing and metal molds and
parts manufacturing, respectively, at March 31, 2002. The Company has not
experienced significant labor stoppages. Management believes that relations with
the Company's employees are satisfactory.

SHARE OWNERSHIP

        SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT

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

        EMPLOYEE STOCK OPTION PLANS

        In 1995, the Company adopted its 1995 Stock Option Plan permitting the
Company to grant options to purchase up to 450,000 common shares to employees,
officers, directors and consultants of the Company. On September 29, 1997, the
Company's Board of Directors and shareholders approved an increase of 244,000
shares in the number of shares that can be optioned and sold under the Option
Plan bringing to a total of 694,000 shares the number of common shares that can
be optioned and sold under the Option Plan. On August 15, 2001 the Board
approved the adoption of the 2001 Stock Option Plan permitting the Company to
grant options to purchase up to an additional 500,000 common shares to
employees, officers, directors and consultants of the Company. On January 7,
2002 shareholders approved the 2001 plan. The Company's option plans are
administered by the Board of Directors, which determines the terms of options
granted, including the exercise price, the number of shares subject to the
option and the option's exercisability. The exercise price of all options
granted under the option plans must be at least equal to the fair market value
of such shares on the date of grant. The maximum term of options granted under
the option plans is 10 years.

        At June 28, 2002, options to purchase an aggregate of 1,194,000 common
shares had been granted under the option plans, options to purchase an aggregate
of 651,000 common shares were outstanding and no options to purchase common
shares were available for future grant under the option plans.




                                       29
<PAGE>

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

BENEFICIAL OWNERSHIP BY MAJOR SHAREHOLDERS AND SENIOR MANAGEMENT

        Except as disclosed in the footnotes to the table below with respect to
Leesha Holdings Limited ("Leesha"), The Company is not directly owned or
controlled by another corporation or by any foreign government. The following
table sets forth, as of June 28, 2002, the beneficial ownership of the Company's
common shares by each person known by the Company to beneficially own 5% or more
of the common shares of the Company and by each of the Directors and Senior
Management of the Company who beneficially own in excess of one percent of our
common shares.

<TABLE>
<CAPTION>
                                                                  NUMBER OF SHARES
                                                                BENEFICIALLY OWNED(1)
                                                            ----------------------------
                    NAME OF BENEFICIAL OWNER
                      OR IDENTITY OF GROUP                     AMOUNT            PERCENT
               ---------------------------------            ------------         -------
               <S>                                          <C>                  <C>
               Richard Lau                                  1,936,210(2)          33.2%
               C. P. Li                                     1,954,810(3)          33.4%
               C. W. Leung                                  1,919,210(4)          33.0%
               Leesha Holdings Ltd.                         1,535,000(5)          27.2%
               Micropower Enterprises Limited                 455,000              8.1%
               Royce & Associates, Inc. (6)                   358,200(6)           6.3%
               S. K. Lee                                       *                     *
               M. C. Tam                                       *                     *
               Dickson Lam                                     *                     *
               Eliza Y. P. Pang                                *                     *
               Stephen K. Seung                                *                     *
               Hung-Hum Leung                                  *                     *
</TABLE>

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

(1) Based on 5,646,831 common shares outstanding on June 28, 2002. However, in
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934,
common shares not outstanding but which are the subject of currently exercisable
options have been considered outstanding for the purpose of computing the
percentage of outstanding common shares owned by the listed person holding such
options, but are not considered outstanding for the purpose of computing the
percentage of common shares owned by any of the other listed persons.

(2) Consists of 1,535,000 common shares held of record by Leesha, 221,210 common
shares held of record by Mr. Lau and options to purchase 180,000 common shares
granted to Mr. Lau under the Company's Stock Option Plan. Mr. Lau's options are
exercisable at a weighted average exercise price of $16.50 per share until
January 9, 2012. As a director of Leesha, Mr. Lau shares the voting and
investment power as to the common shares held by Leesha.

(3) Consists of 1,535,000 common shares held of record by Leesha, 219,810 common
shares held of record by Mr. Li and options to purchase 200,000 common shares
granted to Mr. Li under the Company's Stock Option Plan. Mr. Li's options are
exercisable at a weighted average exercise price of $16.325 per share until
January 9, 2012. As a director of Leesha, Mr. Li shares the voting and
investment power as to the common shares held by Leesha.

(4) Consists of 1,535,000 common shares held of record by Leesha, 209,210 common
shares held of record by Mr. Leung and options to purchase 175,000 common shares
granted to Mr. Leung under the Company's Stock Option Plan. Mr. Leung's options
are exercisable at a weighted average exercise price of $16.55 per share until
January 9, 2012. As a director of Leesha, Mr. Leung shares the voting and
investment power as to the common shares held by Leesha.




                                       30
<PAGE>

(5) Leesha is an investment holding company organized as an International
Business Company under the laws of the British Virgin Islands. Messrs. Lau, Li
and Leung, who are its directors, wholly own Leesha in equal shares. Among other
investments, Leesha owns the 1,535,000 common shares of Deswell, which were
transferred to Leesha by Messrs. Lau, Li and Leung after Deswell's initial
public offering.

(6)     Based on a Schedule 13G/A filed with the SEC on February 13, 2002.

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

<TABLE>
<CAPTION>
                                      Percentage Ownership(1) at
                                   ---------------------------------
                                   June 30,    June 30,     June 28,
                                     2000        2001         2002
                                   --------    --------     --------
<S>                                <C>         <C>          <C>
Richard Lau                          42.2%       32.1%        33.2%
C. P. Li                             41.8%       32.1%        33.4%
C. W. Leung                          41.8%       31.4%        33.0%
Leesha Holdings Ltd.                 38.1%       27.4%        27.2%
Nam Tai Electronics, Inc                -         8.9%           -
Micropower Enterprises Limited        8.5%        8.1%         8.1%
Royce & Associates, Inc.                -         5.2%         6.3%
</TABLE>

-------------
(1) Based on 5,347,931, 5,597,931 and 5,646,831 common shares outstanding on
June 30, 2000 and 2001 and on June 28, 2002, respectively. However, in
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934,
common shares not outstanding but which are the subject of currently exercisable
options have been considered outstanding for the purpose of computing the
percentage of outstanding common shares owned by the listed person holding such
options, but are not considered outstanding for the purpose of computing the
percentage of common shares owned by any of the other listed persons.

        All of the holders of the Company's common shares (including Deswell's
major shareholders) have equal voting rights with respect to the common shares
held. As of June 28, 2002, approximately 34 holders of record, who, management
believes, held for more than 3,000 beneficial owners, held Deswell's common
shares. According to information supplied to the Company by its transfer agent,
26 holders of record with addresses in the United States held approximately 3.4
million of our outstanding common shares.




                                       31
<PAGE>

RELATED PARTY TRANSACTIONS

        During the years ended March 31, 2002, 2001 and 2000, sales to Nam Tai
Electronic (Shenzhen) Co. Limited ("Namtai Shenzhen") amounted to less than 10%
of our total sales. Namtai Shenzhen is an indirect wholly owned subsidiary of
Nam Tai Electronics, Inc. ("Nam Tai"), which, in September 2000, purchased an
aggregate of 500,000 common shares of the Company, equal to approximately 9% of
the Company's outstanding common shares. During the year ended March 31, 2002,
Nam Tai sold its shares of the Company in the open market.

        The Company rents staff quarters in China from Mr. S. K. Lee and Mr. M.
C. Tam, who are executive officers of the Company and minority shareholders of
Integrated. The charges for these premises approximate the amount negotiable, in
management's opinion, on an arms length basis. Rentals charged by these parties
to the Company are summarized as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED MARCH 31,
                                                   -----------------------------------
                                                     2000          2001          2002
                                                   -------       -------       -------
<S>                                                <C>           <C>           <C>
Rent charged by Mr. S. K. Lee and Mr. M.C. Tam     $12,000       $12,000       $12,000
</TABLE>

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

        In June 1995, the Company's Board of Directors adopted a policy
resolution prohibiting the Company from making any loan or advance of money or
property, or guaranteeing the obligation of any directors of the Company, and
limiting the Company's ability to make such loans, advances or guarantees to
officers of the Company or its subsidiaries unless approved by a majority of
independent disinterested outside directors.

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




                                       32
<PAGE>

ITEM 8.  FINANCIAL INFORMATION

FINANCIAL STATEMENTS

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

LEGAL PROCEEDINGS

        The Company is not involved in any material legal proceedings.

EXPORTS SALES

        Information regarding our export sales is provided in Item 4.
"Information on the Company -- "Business Overview -- Customers and Marketing."

DIVIDEND POLICY

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

    -   2000 aggregating $4,777,000, $3,012,000 of which was based on results
        for the second six months of the year ended March 31, 1999 and
        $1,765,000 of which was based on results for the first six months of the
        year ended March 31, 2000 and

    -   2001 aggregating $4,710,000, $2,942,000 of which was based on results
        for the second six months of the year ended March 31, 2000 and
        $1,768,000 of which was based on results for the first six months of the
        year ended March 31, 2001;

    -   2002 aggregating $7,229,000, $3,193,000 of which was based on results
        for the second six months of the year ended March 31, 2001 and
        $4,036,000 of which was based on results for the first nine months of
        the year ended March 31, 2002.

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




                                       33
<PAGE>

ITEM 9.  THE LISTING

        The Company's common shares are traded exclusively on The Nasdaq
National Market under the symbol "DSWL".

        The following table sets forth the high and low sale prices as reported
by The Nasdaq National Market for each of the last five years ended March 31:

<TABLE>
<CAPTION>
        YEAR ENDED                           HIGH         LOW
        ----------                         --------     -------
        <S>                                <C>          <C>
        March 31, 2002                     $22.12       $13.125
        March 31, 2001                      18.00        12.25
        March 31, 2000                      18.50         7.9375
        March 31, 1999                      21.6875       6.00
        March 31, 1998                      27.75        14.50
</TABLE>

        The following table sets forth the high and low sale prices as reported
by The Nasdaq National Market during each of the quarters in the two-year period
ended March 31, 2002 and the average daily trading volume during each of the
quarters.

<TABLE>
<CAPTION>
                                                                 AVERAGE
                                                                  DAILY
                                                                 TRADING
        QUARTER ENDED                    HIGH           LOW     VOLUME(1)
        -------------                  --------       -------   ---------
        <S>                            <C>            <C>        <C>
        March 31, 2002                 $22.12         $17.00     26,516
        December 31, 2001               19.62          13.80      6,262
        September 30, 2001              17.20          13.51      3,957
        June 30, 2001                   16.54          13.125     4,119
        March 31, 2001                  18.00          12.25      5,028
        December 31, 2000               17.4375        14.75      7,637
        September 30, 2000              18.00          12.25      7,189
        June 30, 2000                   16.1875        12.875     6,975
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                 AVERAGE
                                                                  DAILY
                                                                 TRADING
        MONTH ENDED                      HIGH           LOW     VOLUME(1)
        -----------                    --------       -------   ---------
        <S>                            <C>            <C>        <C>
        June 30, 2002                  $23.30         $18.51     13,489
        May 31, 2002                    23.50          21.361     5,034
        April 30, 2002                  23.65          21.68      7,425
        March 31, 2002                  22.12          20.00     40,910
        February 28, 2002               20.81          18.85     26,232
        January 31, 2002                21.00          17.00     13,064
</TABLE>

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




                                       34
<PAGE>

ITEM 10.  ADDITIONAL INFORMATION

SHARE CAPITAL

Not applicable.

MEMORANDUM AND ARTICLES OF ASSOCIATION

Objects and Purposes

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

Directors

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

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

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

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

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

        Deswell has one class and series of shares authorized or outstanding:
common shares, $0.01 par value per share. Our authorized capital consists of
20,000,000 common shares, $0.01 par value per share, of which 5,646,831

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




                                       35
<PAGE>

common shares were outstanding on June 28, 2002. On June 17, 2002, we announced
that we are effecting a three-for-two stock split of our outstanding shares to
holders record on July 8, 2002 and payable on July 22, 2002. In conjunction with
this stock split and proportionate to it, we are amending our Memorandum of
Association effective on July 8, 2002 to increase authorized capital to
30,000,000 common shares. We are also amending our Memorandum of Association
effective on July 8, 2002 to convert the par value of our shares from $0.01 par
value per share to no par value per share.

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

Calling Annual General Meetings and Extraordinary General Meetings of
Shareholders.

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

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

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

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

Limitations on Share Ownership

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

Potential Anti-Takeover Deterrence

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




                                       36
<PAGE>

Ownership Information

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

Differences from United States Law

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

MATERIAL CONTRACTS

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

Banking Facilities (Exhibit 4.1)

Date: December 13, 2001

Parties: The Sanwa Bank Limited ("Sanwa") and Jetcrown Industrial Limited
("Jetcrown")

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

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

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

Banking Facilities (Exhibit 4.2)

Date: March 2, 2001

Parties: Standard Chartered Bank ("Standard") and Jetcrown

Nature of Contract: Renewal of Facility Letter dated March 9, 2000 whereby
Standard made available to Jetcrown various working capital facilities.

Terms and Conditions: Working Capital Facilities (1) Current Account Overdraft
is HKD3,500,000; (2) Trade Finance Group 1 is HKD10,000,000; (3) Trade Finance
Group 2 is HKD3,500,000; (4) Trade Finance Group 3 HKD3,500,000 (the trade
finance groups are complementary and combined amounts outstanding are not to
exceed HKD10,000,000; combined amounts outstanding of Trade Finance Groups 2 and
3 are not to exceed HKD3,500,000); (5) Treasury Facilities to quote rates for
foreign exchange spot transactions and forward transactions; (6) Corporate Visa
Cards with limits of HKD450,000. Interest rate on all sums advanced will be
payable monthly at the prime rate. Default rate of prime plus 8% per annum.
Letters of Credit Opening Commission and Commission in lieu of Exchange is 1/8%
on the first USD100,000 and 1/32% on the balance. Commission in lieu for
Negotiation of Discrepant Documents is 1/8% for the first USD100,000 and 1/32%
on the balance.




                                       37
<PAGE>

Consideration: The interest and commissions set forth above.

Banking Facilities (Exhibit 4.3)

Date: February 20, 2002

Parties: Standard and Kwanasia Electronics Co. Ltd. ("Kwanasia")

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

Terms and Conditions: Working Capital Facilities (1) Current Account Overdraft
is HKD1,000,000 ; (2) Trade Finance Group 1 is HKD10,000,000; (3) Trade Finance
Group 2 is HKD4,000,000; (4) Trade Finance Group 3 HKD4,0000,000 (the trade
finance groups are complementary and combined amounts outstanding are not to
exceed HKD10,000,000; combined amounts outstanding of Trade Finance Groups 2 and
3 are not to exceed HKD4,000,000) (5) Standby Letters of Credit is HKD5,000,000;
(6) Factoring Facility of HKD10,000,000 for the purchase of receivables in
accordance with the Receivables Purchase Agreement (7) Treasury Facilities to
quote rates for foreign exchange spot transactions and forward transactions;.
Interest rate on all sums advanced will be payable monthly at the prime rate per
annum. Default rate of 8% per annum over Prime or HIBOR, whichever is higher
will apply to amounts not paid when due or in excess of agreed facility amounts.
Export bills will be discounted and import bills will be financed at Bank's
standard bills finance rate minus 0.25% per annum for Hong Kong Dollar Bills and
at Bank's standard bills finance rate for foreign currency bills. All past due
bills shall bear interest at 4% per annum above the rates charged on regular
bills outstanding. Commission on Letters of Credit Opening is 1/4% on the first
USD50,000, 1/12% on USD50,001-USD100,000 and 1/24% on the balance. Commission in
Lieu of Exchange is 1/8%. Commission on Import Acceptance is 1/8% per month.

Consideration: An arrangement fee of HKD10,000. A handling fee in an amount to
be mutually agreed upon will be payable annually if the facilities are
continuing.

Banking Facilities (Exhibit 4.4)

Date: November 1, 2001

Parties: Fortis Bank Asia HK ("Fortis") and Kwanasia

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

Terms and Conditions: (1) Current Account Overdraft and/or standby letter of
credit issued on Kwanasia's behalf of limit HKD5,000,000; (2) Import facilities
against 100% sales contracts and/or invoice discounting facilities of limit
HKD5,000,0000.

Consideration: The interest and commissions set forth in the agreement dated
November 1, 2001. A set up fee of HKD5,000 and an annual facilities fee of
HKD8,000 per annum.

Banking Facilities (Exhibit 4.5)

Date: November 12, 2001

Parties: CITIC Ka Wah Bank Limited ("Ka Wah") and Kwanasia

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

Terms and Conditions: (1) Documentary Credit plus (90 days inclusive of usage
period) Trust Receipt Facility and Invoice Discount -- Export Facility on
approved buyers up to the total extent of HKD4,000,000; (2) Standby Letter of
Credit of HKD8,000,000.

Consideration: The interest and commissions set forth in the agreement dated
November 1, 2001. An arrangement fee of HKD8,000.




                                       38
<PAGE>

Banking Facilities (Exhibit 4.6)

Date: February 28, 2002

Parties: Dao Heng Bank Limited ("Dao Heng") and Kwanasia

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

Terms and Conditions: Letters of Credit, Trust Receipts, Import Loans,
Acceptance Bills plus Negotiation of Export Bills under letter of credit with
discrepancies of limit HKD10,000,000.

Consideration: The interest and commissions set forth in the agreement dated
February 28, 2002. An arrangement fee of HKD5,000.

Bank Loan (Exhibit 4.7)

Date: August 20, 2001

Parties: Industrial and Commercial Bank of China, Guangzhou City Branch ("ICCB")
and Dongguan Kwan Hong Electronics Co. Ltd. ("Kwan Hong")

Nature of Contract: ICCB to provide Kwan Hong with working capital bank loan.

Terms and Conditions: Short term bank loan of RMB2,000,000. The loan interest is
payable monthly at the rate of 4.875% per month.

Consideration: The bank loan shall be secured by standby letter of credit

Bank Loan (Exhibit 4.8)

Date: August 15, 2001

Parties: China Construction Bank, Dongguan City Branch ("CCB") and Kwan Hong

Nature of Contract: CCB to provide Kwan Hong with working capital bank loan.

Terms and Conditions: Short term bank loan of RMB2,000,000. The loan interest is
payable monthly at the rate of 4.875% per month.

Consideration: The bank loan shall be secured by standby letter of credit

Tenancy Agreement (Exhibit 4.9)

Date: February 14, 2001

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

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




                                       39
<PAGE>

Terms and Conditions: The construction area of the property is 1,838 square
meters. Originally three-year term, commencing February 20, 1998 to February 19,
2001 but extended two more years, commencing February 20, 2001 to February 19,
2003. Rent is RMB39,556 per month. Lessor is responsible for property tax, land
use fees and rental housing management fees. Lessee is to give a three-month
deposit in the amount of RMB118,668. Lessee can only sublet with Lessor's
approval. Lessee should inform Lessor of desire to renew lease one month before
expiration.

Consideration: Rent of RMB39,556 per month.

Sale and Purchase Agreement (Exhibit 4.10)

Date: October 25, 2000

Parties: Shenzhen Shekou Real Property Co. Ltd. (Seller) and Jetcrown Industrial
(Shenzhen) Limited (Purchaser).

Nature of Contract: Purchase of property located at 1-6/F., Block G, Wing
Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area is 10,368.50 square meters total.
The purchase consideration is RMB12 millions.

Consideration: Purchase consideration of RMB12 millions.

Tenancy Agreement (Exhibit 4.11)

Date: April 25, 2001

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

Nature of Contract: Lease of property located at 3/F and 4/F, Block E, Wing
Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area of 3/F and 4/F is 2,160 total square
meters. The rental period is two years, commencing May 1, 2001 to May 1, 2003.
Rent for the total property is RMB33,480 per month. The Lessor is responsible to
pay for property tax, land use fees and the rental housing management fee of the
property. The Lessee is responsible for the water, electricity, cleansing and
management charges. A deposit of RMB60,000 is required. Lessee is not allowed to
sublet the property without the Lessor's written agreement. Lessee should inform
Lessor of its desire to renew the lease one month before expiration and Lessee
should be given first priority to renew under the same conditions offered by any
third party. The delay charge on Lessee's payment of rent is 3% of the monthly
rent multiplied by the number of days the rent is overdue.

Consideration: Rent of RMB33,480 per month.

Tenancy Agreement (Exhibit 4.12)

Date: October 13, 1999

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

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

Terms and Conditions: The construction area of 2/F is 692 square meters. The
rental period is for three years, commencing September 15, 1999 to September 14,
2002. Rent for the total property is RMB8,996 per month. The Lessor is
responsible to pay for property tax, land use fees and the rental housing
management fee of the property. The Lessee is responsible for the water,
electricity, cleansing and management charges. A deposit of RMB17,992 is




                                       40
<PAGE>

required. Lessee is not allowed to sublet the property without the Lessor's
written agreement. Lessee should inform Lessor of its desire to renew the lease
one month before expiration and Lessee should be given first priority to renew
under the same conditions offered by any third party. Lessee should inform
Lessor in writing of its desire to renew the lease two months before the
expiration of the lease.

Consideration: Rent of RMB8,996 per month.

Tenancy Agreement (Exhibit 4.13)

Date: September 29, 2000

Parties: Shenzhen City Nin Fung Real Property Company Limited (Lessor) and
Jetcrown Industrial (Shenzhen) Limited (Lessee).

Nature of Contract: Rental of 1/F to 3/F., Block B, Wing Village Industrial
Estate, NanShan District, Shekou, Shenzhen.

Terms and Conditions: The construction area is 5,226 square meters. The rental
period is from January 1, 2001 until January 1, 2004. Rent for the total
property is RMB3,630,000 for three years. A deposit of RMB106,262 is required.
Lessor is responsible for the property tax, land use fees and the rental housing
management fees. Lessee is responsible for the water, electricity, cleansing and
management charges. Lessee should inform Lessor in writing of its desire to
renew the lease one month before the expiration of the lease.

Consideration:  Rent of RMB3,630,000 for three years rental period.

Tenancy Agreement (Exhibit 4.14)

Date:  April 9, 2001

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

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

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

Consideration: Rent of RMB63,860 per month.

Tenancy Agreement (Exhibit 4.15)

Date: December 11, 2000

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

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

Terms and Conditions: The construction area is 5,442 square meters. The rental
period is three years, commencing January 11, 2000 to December 31, 2002. The
total rent for the property is HKD108,840 per month. A deposit of




                                       41
<PAGE>

HKD300,000 is required. The Lessor is responsible to pay for the property tax,
land use fees and the rental housing management fees. The Lessee is responsible
for the water, electricity, cleansing and management charges. The Lessee may not
sublease the property without the written approval of the Lessor. Lessee should
inform Lessor in writing of its desire to renew the lease three months before
the expiration of the lease. Lessee should be given first priority to rent the
property under the same terms and conditions as offered by any third party. The
delay charge on Lessee's payment of rent is 3% of the monthly rent multiplied by
the number of days the rent is overdue.

Consideration:  Rent of RMB108,840 per month.

Tenancy Agreement (Exhibit 4.16)

Date:  January 20, 2000

Parties: DongGuan Houjie Town Huangguan Industrial Estate Committee (Lessor) and
Jetcrown Industrial (DongGuan) Limited (Lessee).

Nature of Contract: Lease of industrial building and dormitories for production
of electronics, plastics and metal precision.

Terms and Conditions: The total area of the factory and dormitory is 8,620
square meters. The rental period is two years, commencing February 16, 2000 to
February 15, 2002. Rent for the property is RMB73,270 per month. A deposit of
RMB200,000 is required. The Lessee should pay all taxes and government fees. The
Lessor will provide staff for the factory during the set-up period of the new
enterprise with the Lessee paying the staff's wages and salaries. The delay
charge on Lessee's payment of rent is 0.1% of the amount due multiplied by the
number of days the rent is overdue.

Consideration: Rent of RMB73,270 per month.

Tenancy Agreement (Exhibit 4.17)

Date: August 23, 2000 and May 11, 2000

Parties: DongGuan Houjie Town Chong Hing Trading Company (Lessor) and Jetcrown
Industrial (DongGuan) Limited (Lessee).

Nature of Contract: Lease of industrial building and dormitories at Huangguan
Industrial Estate, Ma Tsui, Dongguan, Shenzhen.

Terms and Conditions: The total area of the factory, dormitory and electricity
room is 7,390 square meters. The rental period is four years, commencing August
1, 2000 to July 30, 2004. Rent for the property is RMB62,815 per month. A
deposit of RMB200,000 is required. The Lessee should pay all taxes and
government fees. Rental shall be paid in arrears on or before the 10th day of
each month. If the rental becomes overdue, Lessor is entitled to charge a
penalty of daily rate 0.1% on the amount overdue.

Consideration: Rent of RMB62,815 per month.

Tenancy Agreement (Exhibit 4.18)

Date: January 1, 2002

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

Nature of Contract: Lease of Rooms 203, 205-208, 210-212, 214, 216-217, 302-305,
307, 309-310, 312-317, 401, 403-405, 407-416 of the Complex Building, Wan Ha
Village, Shekou, Shenzhen and Room 201-203, 205-208, 210-211, 305, 307-310, 402,
404-405, 407, 409, 502-504, 506-507, 510, 514-516, 601, 603-607, 609-614, 616,
Block C1, New Wing Village, Shekou. for use as a dormitory.




                                       42
<PAGE>

Terms and Conditions: The total construction area for all the rooms is 3,873.77
square meters. The rental period is one year, commencing January 1, 2002 to
December 31, 2002. The total rent for the property is RMB61,254.10 per month. A
deposit of RMB62,059.10 is required. The Lessee is responsible for the water,
electricity and garbage cleaning charges. If any delay of rental payment exceeds
5 days, a late charge penalty of 2% shall be levied on the rental.

Consideration: Rent of RMB61,254.10 per month.

Tenancy Agreement (Exhibit 4.19)

Date: February 15, 2002

Parties: Dongguan Houjie Town Huangguan Industrial Estate Committee (Lessor) and
Jetcrown Industrial (Dongguan) Limited (Lessee).

Nature of Contract: Lease of the block of industrial building of 5,210 square
meters at Huangguan Industrial Estate and the block of dormitories with an area
of 3,410 square meters for running of manufacturing production of electronics,
plastics and metal precision etc.

Terms and Conditions: The total area of factory and dormitories is 8,620 square
meters. The tenancy period is thirteen and a half months, commencing February
16, 2001 to March 31, 2003. The total rent for the property is RMB8 per square
meter per month. A deposit of RMB200,000 is required.

Consideration: Rent of RMB68,960.00 per month.

Tenancy Agreement of Lan Wang Building (Exhibit 4.20)

Date:  January 18, 2000 and December 31, 2001

Parties: Kwanasia Electronics Co. Ltd. (Lessor) and Dongguan Cheung On Lan Wang
Electronics Development Co. (Lessee).

Nature of Contract: Lease of factory, office and dormitories located at Siu Pin
Second Industrial Zone, Cheung On, Dongguan.

Terms and Conditions: The total area for factory is 5,961.72 square meters. The
total area for the office is 2,831.34 square meters. The total area for the
dormitory is 4,107.97 square meters. The total floor area of the guardroom and
lobby is 106.76. The total aggregate floor area is 13,007.79 square meters. The
rental period is three years, commencing February 15, 2000 to February 14, 2003.
2/F and 3/F of office of area 1,138.41 square meters are for the use of the
landlord. Therefore, the new total net area under this tenancy is 11,869.38
square meters. Rental is RMB8.50 per square meter per month. The total net
amount of rent for the property is RMB 100,889.73 per month. A deposit of RMB
104,872.32 is required. The Lessor is responsible for the property tax, land use
fees and the rental housing management fees. The Lessee is responsible for the
water and electricity charges. Upon the expiration of the rental period, Lessee
has priority to renew the lease for another three-year period. The Lessee may
not transfer or assign the property to a third party. If there is early
termination requested by either party, the party that requested the early
termination shall indemnify the other party the full rental compensation up to
the expiration date.

Consideration: Rent of RMB 100,889.73 per month.

Tenancy Agreement (Exhibit 4.21)

Date: October 1, 2001

Parties: Lee Shu Kwan (Lessor) and Kwanasia Electronics Co. Limited (Lessee).




                                       43
<PAGE>

Nature of Contract: Lease of Room 402, Block A, To Fa Court, NanShan District,
Shenzhen for a dormitory.

Terms and Conditions: The rental period is two years, commencing October 1, 2001
to September 30, 2003. The rent for the property is HK$2,500 per month. The
Lessee is responsible for all rates, property tax, crown rent and other
miscellaneous expenses related to the property. The Lessee may not transfer or
assign the property to a third party. If the Lessee desires to renew the lease,
the new agreement must be exercised in writing one month before the expiration
of the current rental period. If there is early termination requested by either
party, the party that requested the early termination shall indemnify the other
party the balance of the rental payments of the rental period.

Consideration: Rent of HK$2,500 per month.

Tenancy Agreement (Exhibit 4.22)

Date:  April 1, 2000

Parties: Tam Man Chi (Lessor) and Kwanasia Electronics Co. Limited (Lessee).

Nature of Contract: Lease of Flat A, 11/F, Ho Wah House, Sun Ho City, Shenzhen
for a dormitory.

Terms and Conditions: The rental period is two years, commencing April 1, 2000
to March 31, 2002. The rent for the property is HK$5,000 per month. The Lessee
is responsible for all rates, property tax, crown rent and other miscellaneous
expenses related to the property. The Lessee may not transfer or assign the
property to a third party. If the Lessee desires to renew the lease, the new
agreement must be exercised in writing one month before the expiration of the
current rental period. If there is early termination requested by either party,
the party that requested the early termination shall indemnify the other party
the balance of the rental payments of the rental period.

Consideration:  Rent of HK$5,000 per month.

"Right of Land Use" Transfer Agreement and Supplementary Agreement (Exhibit
4.23)

Date: January 3, 2000 and July 18, 2000

Parties: Dongguan Houjie Town Huangguan Industrial Estate Committee (Transferor)
and Jetcrown Industrial (Dongguan) Limited (Transferee).

Nature of Contract: Sale of Industrial Land located at formerly known as Kam
Ngai Po Garden of Huangguan Industrial Estate Committee, Dongguan, Shenzhen for
use as factory premises.

Terms and Conditions: The construction area is 117,978 square meters total. The
period of right of land use is 50 years, from January 1, 2000 to December 31,
2049. The purchase consideration is RMB135.00 per square meter. The total
consideration is RMB15,927,030. The right of land use certificate shall be
issued before August 2000.

Consideration: Purchase consideration of RMB15,927,030 in total.




                                       44
<PAGE>

TAXATION

                  UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

General

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

    -   a dealer in securities or currencies;

    -   a trader in securities that elects to use a market-to-market method of
        accounting for your securities holdings;

    -   a financial institution;

    -   a life insurance company;

    -   a tax-exempt organization;

    -   a person that holds our common shares in a hedging transaction or as
        part of a straddle or a conversion transaction;

    -   a person whose functional currency for tax purposes is not the U.S.
        dollar;

    -   a person liable for alternative minimum tax;

    -   a person that owns, or is treated as owning, 10% or more of our common
        shares; or

    -   a person who receives our shares pursuant to the exercise of employee
        stock options or otherwise as compensation.

Tax Consequences to U.S. Holders

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

    -   an individual U.S. citizen or resident alien of the United States (as
        specifically defined for tax purposes);

    -   a corporation created or organized in or under the laws of the United
        States or any State or political subdivision thereof;




                                       45
<PAGE>

    -   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 the common shares.

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

        Distributions

        Subject to the passive foreign investment company rules discussed below,
for cash dividends, the gross amount of any such distribution (other than in
liquidation) that you receive with respect to our common shares generally will
be taxed to you as dividend income to the extent such distribution does not
exceed our current or accumulated earnings and profits ("E&P"), as calculated
for U.S. federal income tax purposes. Such income will be includable in your
gross income as ordinary income on the date of receipt. To the extent any
distribution exceeds our E&P, the distribution will first be treated as a
tax-free return of capital to the extent of your adjusted tax basis in our
common shares and will be applied against and reduce such basis on a
dollar-for-dollar basis (thereby increasing the amount of gain and decreasing
the amount of loss recognized on a subsequent disposition of such shares). To
the extent that such distribution exceeds your adjusted tax basis, the
distribution will be taxed as gain recognized on a sale or exchange of our
common shares. See "Sale or Other Disposition of Our Common Shares," below.
Because we are not a U.S. corporation, no dividends-received deduction will be
allowed to corporations with respect to dividends paid by us.

        Sale or Other Disposition of Our Common Shares

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

    -   you will recognize gain or loss equal to the difference (if any)
        between:

           -   the amount realized on such sale or other taxable disposition and

           -   your adjusted tax basis in such common shares (your adjusted tax
               basis in the shares you hold generally will equal your U.S.
               dollar cost of such shares);

    -   such gain or loss will be capital gain or loss and will be long-term
        capital gain or loss if your holding period for our common shares is
        more than one year at the time of such sale or other disposition;

    -   such gain or loss will generally be treated as having U.S. source for
        U.S. foreign tax credit purposes; and

    -   your ability to deduct capital losses is subject to limitations.

        Passive Foreign Investment Company

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




                                       46
<PAGE>

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

    -   75 percent or more of our gross income in a taxable year is passive
        income (including our pro-rata share of the gross income of any company
        in which we own, or are treated as owning, 25 percent or more of the
        shares by value), which includes dividends, interests, royalties, rents,
        annuities, and some types of gains; or

    -   the average percentage of the value of our assets in a taxable year
        (including our pro-rata share of the assets of any company in which we
        own, or are treated as owning, 25 percent or more of the shares by
        value) that produce or are held for the production of passive income is
        at least 50 percent.

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

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

    -   any "excess distribution", which would be your share of distributions in
        any year that are greater than 125 percent of the average annual
        distributions received by you in the three preceding years before the
        current taxable year (or during your holding period for the shares, if
        shorter) and

    -   any gain realized on the sale or other disposition of our common shares.

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

    -   the excess distribution or gain would be allocated ratably to each day
        that you have held our common shares,

    -   the amount allocated to the taxable year in which you realize the excess
        distribution or gain would be taxed as ordinary income,

    -   the amount allocated to the taxable years prior to the first taxable
        year in which we are a PFIC would be taxed as ordinary income for the
        taxable year in which you realize the excess distribution or gain, and

    -   the amounts allocated to each of the prior taxable years for which we
        were a PFIC would be taxed as ordinary income at the highest applicable
        tax rate in effect for that year, and, in addition, an interest charge
        generally applicable to underpayments of tax would be imposed on you for
        the tax deferred.

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

        In lieu of making a mark-to-market election, you may make a qualifying
electing fund election. In many situations, it would be desirable to make this
election. However, even if your tax advisor determines that this




                                       47
<PAGE>

election is beneficial to you, if we are or were to become a PFIC, we may not be
able or willing to satisfy the record-keeping and other requirements that would
enable you to make a qualified electing fund election.

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

Tax Consequences to Non-U.S. Holders

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

        Distributions

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

    -   you conduct a trade or business in the United States and

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

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

        Sale or Other Disposition of Our Common Shares

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

    -   your gain is effectively connected with a trade or business that you
        conduct in the United States (and, if an applicable income tax treaty so
        requires as a condition for you to be subject to U.S. federal income tax
        on a net income basis in respect of gain from the sale or other
        disposition of our common shares, such gain is attributable to a
        permanent establishment maintained by you in the United States), or

    -   you are an individual Non-U.S. Holder and are present in the United
        States for at least 183 days in the taxable year of the sale or other
        disposition, and certain other conditions exist.

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

Backup Withholding and Information Reporting

        Payments (or other taxable distributions) in respect of our common
shares that are made in the United States or by a U.S. related financial
intermediary will be subject to U.S. information reporting rules. In addition,
such payments may be subject to U.S. federal backup withholding at a rate of 30
percent for payments made in 2002. You will not be subject to backup withholding
provided that:

    -   you are a corporation or other exempt recipient, or




                                       48
<PAGE>

    -   you provide your correct U.S. federal taxpayer identification number and
        certify that no loss of exemption from backup withholding has occurred.

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

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

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

U.S. FEDERAL INCOME TAX CONSEQUENCES RELATING TO THREE-FOR-TWO STOCK SPLIT

        On June 17, 2002, Deswell announced that it is effecting a three-for-two
stock split of its outstanding shares to holders record on July 8, 2002 and
payable on July 22, 2002. For United States income tax purposes, the receipt of
additional common shares by the shareholders in the stock split should be
treated as a tax-free stock dividend. Accordingly, no gain or loss should be
recognized by our shareholders on the receipt of new common shares. The
aggregate tax basis in the old common shares held by a shareholder immediately
before the stock split should be allocated between the old and the new common
shares in proportion to the relative fair market value of the old and the new
shares on the date of the distribution, reduced by the basis allocable to any
fractional shares that the shareholder is treated as having redeemed for cash.
See -- "Cash in Lieu of Fractional Shares" below. The holding period of the new
common shares should include the holding period of the old common shares,
provided such shares were held as a capital asset for United States tax
purposes.

        Cash in Lieu of Fractional Shares. Subject to the PFIC rules (see --
"Passive Foreign Investment Company" above), shareholders who receive cash in
lieu of fractional shares should be treated for U.S. income tax purposes as if
the fractional share interest had been issued in the stock split and then had
been redeemed by us for cash. The amount of any gain or loss should be equal to
the difference between the portion of the tax basis allocated to such fractional
share and the cash received in lieu thereof. Any such gain or loss should
constitute long-term capital gain or loss provided old common shares were held
for more than one year at the time of the stock split.

        If we were a PFIC as to a U.S. Holder, gain recognized by such Holder as
a result of the receipt of cash in lieu of fractional share would be treated as
ordinary income subject to the "excess distributions" rules (see -- "Passive
Foreign Investment Company" above).

        THE DISCUSSIONS ABOVE ARE FOR GENERAL INFORMATION ONLY. YOU SHOULD
CONSULT YOUR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL
INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY STATE, LOCAL,
FOREIGN TAX AND THE U.S. FEDERAL ESTATE AND GIFT TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES AND THE STOCK SPLIT.


                     BRITISH VIRGIN ISLANDS TAX CONSEQUENCES

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

There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands on companies incorporated under the International Business
Companies Act. In addition, our common shares are not subject to




                                       49
<PAGE>

transfer taxes, stamp duties or similar charges. There is no income tax treaty
or convention currently in effect between the United States and the British
Virgin Islands.

ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

EXCHANGE CONTROLS

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

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

FOREIGN CURRENCY RISK

        At March 31, 2000, 2001 and 2002 the Company had no open forward
exchange contracts or option contracts.

        Cash on hand at March 31, 2002 of $34,395.000 was held in the following
currencies:

<TABLE>
<CAPTION>
                                                                    Equivalent
                                                                       U.S.
                                                                      Dollar
                                                                     Holdings
                                                                   -----------
<S>                                                                <C>
United States dollars                                              $18,552,000
Hong Kong dollar                                                     7,613,000
Euro dollar                                                          5,706,000
Chinese renminbi                                                     2,524,000
</TABLE>

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

INTEREST RATE RISK

        Our interest expenses and income are sensitive to changes in interest
rates, as all of our cash reserves and borrowings are subject to interest rate
changes. Cash on hand of $26,845,000 as at March 31, 2002 was invested in
short-term interest bearing investments. As such, interest income will fluctuate
with changes in short term interest rates. As of March 31, 2002 we had no
long-term debt, short-term bank loans of $482,000 and $2,452,000 outstanding on
our credit facilities resulting in minimal interest rate risk.

ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

        Not applicable.




                                       50
<PAGE>

                                     PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

        Not Applicable.

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
          USE OF PROCEEDS

        Not Applicable.

ITEM 15.  [RESERVED]

ITEM 16.  [RESERVED]


                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

        Not Applicable.

ITEM 18.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        --------
<S>                                                                                     <C>
Independent Auditors' Report...............................................................F-1

Consolidated Balance Sheets as of March 31, 2001 and March 31, 2002........................F-2

Consolidated Statements of Income for the years ended March 31, 2000,
        March 31, 2001 and March 31, 2002..................................................F-3

Consolidated Statements of Shareholders' Equity for the years
        ended March 31, 2000, March 31, 2001 and March 31, 2002............................F-4

Consolidated Statements of Cash Flows for the years ended March 31, 2000,
        March 31, 2001 and March 31, 2002..................................................F-5

Notes to Consolidated Financial Statements.................................................F-6
</TABLE>

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




                                       51
<PAGE>
                     [DELOITTE TOUCHE TOHMATSU LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Deswell
Industries, Inc. and subsidiaries as of March 31, 2001 and 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Deswell Industries, Inc. and
subsidiaries at March 31, 2001 and 2002, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.



/s/ DELOITTE TOUCHE TOHMATSU


June 28, 2002

Hong Kong




                                      F-1

<PAGE>

                            DESWELL INDUSTRIES, INC.

                           CONSOLIDATED BALANCE SHEETS
                  (U.S. DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)



<TABLE>
<CAPTION>
                                                                          MARCH 31,
                                                                   --------------------
                                                                     2001         2002
                                                                   -------      -------
<S>                                                                <C>          <C>
                                     ASSETS

Current assets:
  Cash and cash equivalents                                        $25,330      $31,534
  Restricted cash (note 6)                                           1,988        2,861
  Marketable securities (note 3)                                        --        1,115
  Accounts receivable                                               15,777       16,888
  Inventories (note 4)                                              12,034       13,225
  Prepaid expenses and other current assets                          1,833        3,421
  Income taxes receivable (note 7)                                     428          428
                                                                   -------      -------
        Total current assets                                        57,390       69,472
Property, plant and equipment-net (notes 5 and 6)                   25,563       24,794
Goodwill - net of accumulated amortization
  of 2001 - $177 and 2002 - $212                                       513          478
                                                                   -------      -------
        Total assets                                               $83,466      $94,744
                                                                   =======      =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term bank loans (note 6)                                        --          482
  Accounts payable                                                 $ 4,274      $ 7,583
  Accrued payroll and employee benefits                              1,837        1,877
  Customer deposits                                                  1,850        2,694
  Other accrued liabilities                                          1,776        1,749
  Income taxes payable                                                 297          165
                                                                   -------      -------
        Total current liabilities                                   10,034       14,550
                                                                   -------      -------
Deferred income taxes (note 7)                                          15           15
                                                                   -------      -------
Commitments and contingencies (note 9)                                  --           --
Minority interests                                                   9,540       10,528
                                                                   -------      -------
Shareholders' equity:
  Common Shares $0.01 par value-authorized 20,000,000 shares,
    shares issued and outstanding March 31, 2001 - 5,597,931;
    March 31, 2002 - 5,580,331                                          56           56
  Additional paid-in capital                                        26,843       26,522
  Retained earnings                                                 36,978       43,073
                                                                   -------      -------
        Total shareholders' equity                                  63,877       69,651
                                                                   -------      -------
        Total liabilities and shareholders' equity                 $83,466      $94,744
                                                                   =======      =======
</TABLE>


          See accompanying notes to consolidated financial statements.




                                      F-2
<PAGE>

                            DESWELL INDUSTRIES, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                    YEAR ENDED MARCH 31,
                                                           --------------------------------------
                                                             2000           2001           2002
                                                           --------       --------       --------
<S>                                                        <C>            <C>            <C>
Net sales                                                  $ 60,958       $ 80,847       $ 83,320
Cost of sales                                                38,262         52,596         54,448
                                                           --------       --------       --------
Gross profit                                                 22,696         28,251         28,872
Selling, general and administrative expenses                 11,970         15,414         14,939
                                                           --------       --------       --------
Operating income                                             10,726         12,837         13,933
Interest expense                                                 (3)            (6)           (26)
Other income, net                                               898            915            877
                                                           --------       --------       --------
Income before income taxes and minority interests            11,621         13,746         14,784
Income taxes (note 7)                                           890            315            535
                                                           --------       --------       --------
Income before minority interests                             10,731         13,431         14,249
Minority interests                                              433            621            925
                                                           --------       --------       --------
Net income                                                 $ 10,298       $ 12,810       $ 13,324
                                                           ========       ========       ========

Net income per share (note 2)

Basic:
  Net income per share(1)                                  $   1.90       $   2.38       $   2.38
                                                           ========       ========       ========
  Weighted average common shares outstanding                  5,412          5,376          5,602
                                                           ========       ========       ========

Diluted:
  Net income per share(1)                                  $   1.89       $   2.36       $   2.36
                                                           ========       ========       ========
  Weighted average common and potential common shares         5,449          5,435          5,644
                                                           ========       ========       ========
</TABLE>


(1)   Net income per share amounts presented above are calculated without regard
      to the effects of the three-for-two stock split payable on July 22, 2002
      (see note 15). Net income per share information calculated on a post split
      basis is as follows:

<TABLE>
      <S>                                       <C>            <C>            <C>
      Basic:
        Net income per share                    $1.27          $1.59          $1.59
                                                =====          =====          =====
        Weighted average common shares          8,118          8,064          8,403
                                                =====          =====          =====

      Diluted:
        Net income per share                    $1.26          $1.57          $1.57
                                                =====          =====          =====
        Weighted average common shares          8,174          8,153          8,466
                                                =====          =====          =====
</TABLE>


          See accompanying notes to consolidated financial statements.




                                      F-3
<PAGE>

                            DESWELL INDUSTRIES, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                   COMMON STOCK
                                               --------------------  ADDITIONAL
                                                  SHARES               PAID-IN      RETAINED   SHAREHOLDERS'
                                               OUTSTANDING   AMOUNT    CAPITAL      EARNINGS      EQUITY
                                               -----------   ------    --------     --------   -------------
<S>                                            <C>           <C>       <C>          <C>        <C>
Balance at April 1, 1999                        5,476,131     $ 55     $ 25,355     $ 23,357     $ 48,767
Repurchase and cancellation of common stock      (128,200)      (2)      (1,255)          --       (1,257)
Net income                                             --       --           --       10,298       10,298
Dividends ($0.88 per share)                            --       --           --       (4,777)      (4,777)
                                                ---------     ----     --------     --------     --------
Balance at March 31, 2000                       5,347,931       53       24,100       28,878       53,031
Exercise of stock options                         250,000        3        2,743           --        2,746
Net income                                             --       --           --       12,810       12,810
Dividends ($0.88 per share)                            --       --           --       (4,710)      (4,710)
                                                ---------     ----     --------     --------     --------
Balance at March 31, 2001                       5,597,931       56       26,843       36,978       63,877
Exercise of stock options                          16,500       --          243           --          243
Repurchase and cancellation of common stock       (34,100)      --         (564)          --         (564)
Net income                                             --       --           --       13,324       13,324
Dividends ($1.29 per share)                            --       --           --       (7,229)      (7,229)
                                                ---------     ----     --------     --------     --------
Balance at March 31, 2002                       5,580,331     $ 56     $ 26,522     $ 43,073     $ 69,651
                                                =========     ====     ========     ========     ========
</TABLE>

The comprehensive income of the Company for the years ended March 31, 2000, 2001
and 2002 was represented by the net income of the respective years.


          See accompanying notes to consolidated financial statements.




                                      F-4
<PAGE>

                            DESWELL INDUSTRIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (U.S. DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                    YEAR ENDED MARCH 31,
                                                             ----------------------------------
                                                               2000         2001         2002
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Cash flows from operating activities
Net income                                                   $ 10,298     $ 12,810     $ 13,324
Adjustments to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization                                 4,784        5,039        4,918
  Loss (gain) on sale of property, plant and equipment             35          (52)           7
  Minority interests                                              433          609          925
  Changes in operating assets and liabilities:
    Accounts receivable                                        (2,811)      (5,170)      (1,111)
    Marketable securities                                      (1,174)       1,308       (1,115)
    Inventories                                                (5,030)      (1,102)      (1,191)
    Prepaid expenses and other current assets                   1,815          462       (1,588)
    Income taxes receivable                                       233         (264)          --
    Accounts payable                                            2,528       (1,127)       3,309
    Accrued payroll and employee benefits                          67          420           40
    Customer deposits                                            (420)         105          844
    Other accrued liabilities                                     577          576          (27)
    Income taxes payable                                          (99)         196         (132)
                                                             --------     --------     --------
Net cash provided by operating activities                      11,236       13,810       18,203
                                                             --------     --------     --------

Cash flows from investing activities
  Purchase of property, plant and equipment                    (6,019)     (13,926)      (4,397)
  Proceeds from sale of property, plant and equipment             176          113          276
  Additional interest in a subsidiary (note 2)                     (6)          --           --
  (Increase) decrease in restricted cash                          247          141         (873)
                                                             --------     --------     --------
Net cash used in investing activities                          (5,602)     (13,672)      (4,994)
                                                             --------     --------     --------

Cash flows from financing activities
  Dividends paid                                               (4,777)      (4,710)      (7,229)
  Repurchase of common stock                                   (1,257)          --         (564)
  Increase in bank loans                                           --           --          482
  Issue of common stock                                            --        2,746          243
  Contribution from minority shareholders of a subsidiary          --           --           63
                                                             --------     --------     --------
Net cash used in financing activities                          (6,034)      (1,964)      (7,005)
                                                             --------     --------     --------

Net (decrease) increase in cash and cash equivalents             (400)      (1,826)       6,204
Cash and cash equivalents, beginning of year                   27,556       27,156       25,330
                                                             --------     --------     --------
Cash and cash equivalents, end of year                       $ 27,156     $ 25,330     $ 31,534
                                                             ========     ========     ========

Supplementary disclosures of cash flow information:
Additional interest in a subsidiary:

  Goodwill                                                   $    224     $     --     $     --
  Minority interests                                             (218)          --           --
                                                             --------     --------     --------
Cash paid                                                    $      6     $     --     $     --
                                                             ========     ========     ========

Cash paid during the year for:
  Interest                                                   $      3     $      6     $     26
  Income taxes                                               $    756     $    383     $    669
</TABLE>


          See accompanying notes to consolidated financial statements.




                                      F-5
<PAGE>

                            DESWELL INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1.  ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS

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

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

        The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP"), which differ from those used in the statutory accounts of its
subsidiaries. The principal adjustment made by the Company to conform the
statutory accounts of the subsidiaries to U.S. GAAP relates to the
capitalization of pre-operating expenses for the subsidiaries in China.

        As the Company is a holding company, the amount of any dividends
declared by the Company will be dependent upon the amount which can be
dividended up from its subsidiaries. Dividends from subsidiaries will be
declared based on profits as reported in their statutory accounts. Such profits
will differ from the amounts reported under U.S. GAAP. At March 31, 2002, the
retained earnings available for distribution as reflected in the statutory books
of the subsidiaries were $71,171 of which $4,940 relates to a subsidiary in
China, certain of whose retained earnings are intended to be reinvested rather
than used to fund dividends in order to obtain favorable tax concessions (note
7).

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of consolidation-The consolidated financial statements
include the assets, liabilities, revenues, expenses and cash flows of all
subsidiaries. Intercompany balances, transactions and cash flows are eliminated
on consolidation.

        Goodwill-The excess purchase price over the fair value of net assets
acquired is recorded on the balance sheet as goodwill and is amortized to
expense on a straight line basis over 20 years. Amortization expense was $32 and
$36 and $35 for the years ended March 31, 2000, 2001 and 2002, respectively.

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

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

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

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

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

<TABLE>
<S>                                             <C>
Leasehold land and buildings                    40 - 50 years
Plant and machinery                             4 - 5 years
Furniture, fixtures and equipment               4 - 5 years
Motor vehicles                                  3 - 4 years
Leasehold improvements                          over the term of the lease
</TABLE>

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




                                      F-6
<PAGE>

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

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

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

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

        The Company's operations in China are integrated with the Company and
the majority of their transactions are in Hong Kong dollars. Therefore, the
Company's China operations use the Hong Kong dollar as their functional currency
and all translation adjustments resulting from the conversion of the financial
statements of the Company's China operations to Hong Kong dollars are included
in income.

        Aggregate net foreign currency transaction losses included in income
were $465, $644 and $306 for the years ended March 31, 2000, 2001 and 2002,
respectively.

        On consolidation, the financial statements of subsidiaries are
translated from Hong Kong dollars, being the functional currency of all of the
Company's subsidiaries, into U.S. dollars in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation".
Accordingly all assets and liabilities are translated at the exchange rate
prevailing at the balance sheet date and all income and expenditure items are
translated at the average rates for each of the years. The exchange rate between
the Hong Kong dollar and the U.S. dollar used for the years ended March 31,
2000, 2001 and 2002 were HK$7.74 to US$1.00, HK$7.75 to US$1.00 and HK$7.75 to
US$1.00, respectively.

        Post-retirement and post-employment benefits-The Company does not
provide post-retirement benefits other than pensions, and post-employment
benefits are not material.

        Stock-based compensation-SFAS No. 123 "Accounting for Stock-Based
Compensation" allows companies which have stock-based awards to employees to
adopt a new fair value basis of accounting for stock options and other equity
instruments or to continue to apply the existing accounting rules under
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees", but with additional financial statement disclosure. The Company
accounts for stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25 and provides additional disclosures required by SFAS
No. 123 in note 11.

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

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




                                      F-7
<PAGE>
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED


<TABLE>
<CAPTION>
                                                              YEAR ENDED MARCH 31,
                                                        -----------------------------
                                                         2000       2001       2002
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Net income                                              $10,298    $12,810    $13,324
                                                        -------    -------    -------
Basic net income per share                              $  1.90    $  2.38    $  2.38
                                                        -------    -------    -------
Basic weighted average common shares outstanding          5,412      5,376      5,602
Effect of dilutive securities - Options                      37         59         42
                                                        -------    -------    -------
Diluted weighted average common and potential common
  shares outstanding                                      5,449      5,435      5,644
                                                        -------    -------    -------
Diluted net income per share                            $  1.89    $  2.36    $  2.36
                                                        =======    =======    =======
</TABLE>

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

        Recent changes in accounting standards-In June 2001, the Financial
Accounting Standard Board (the "FASB") issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 provides that goodwill and other intangible
assets with indefinite lives will not be amortized, but will be tested for
impairment on an annual basis. This statement is effective for fiscal years
beginning after December 15, 2001. The Company will adopt this statement on
April 1, 2002 and the management is reviewing this statement to determine what
effect they will have, if any, on its financial position and results of
operations.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses the diverse accounting
practices for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company will be required
to adopt this standard on April 1, 2003. The Company is reviewing the statement
to determine what effect it will have, if any, on its financial position and
results of operations.

        In August 2001, the FASB also issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and portions of APB Option No. 30, "Reporting the Results for Operations". The
statement requires a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. The statement also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The Company is reviewing the statement
to determine what effect it will have, if any, on its financial position and
results of operations.

        In April 2002, the FASB also issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", to update, clarify, and simplify certain existing accounting
pronouncements. Specifically, SFAS No. 145: (i) Rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", an amendment of APB Opinion No.
30, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", which amended SFAS No. 4, as these two standards required that
all gains and losses from the extinguishment of debt be aggregate and, if
material, classified as an extraordinary item. Consequently, such gains and
losses will now be classified as extraordinary only if they meet the criteria
for extraordinary treatment set forth in APB Opinion 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extra-ordinary, Unusual and Infrequently Occurring Events and Transactions;
(ii) Rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers",
an amendment of Chapter 5 of Accounting Research Bulletins No. 43 and an
interpretation of APB Opinions 17 and 30, because the discrete event to which
the Statement relates is no longer relevant; (iii) Amends SFAS No. 13,
"Accounting for leases", to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as such transactions; (iv) Makes certain technical corrections,
which the FASB deemed to be non-substantive, to a number of existing accounting
pronouncements. The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 and No. 64 are effective for fiscal years beginning after May 15, 2002.
The provisions related to the amendment of SFAS No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of SFAS No. 145
are effective for financial statements issued on or after May 15, 2002. The
Company adopted SFAS No. 145 during the year ended March 31, 2002 and it did not
impact the Company's financial statements.




                                      F-8
<PAGE>

3.  MARKETABLE SECURITIES

        The Company acquired equity securities listed in Hong Kong.

<TABLE>
<CAPTION>
                                                            MARCH 31,
                                                     -----------------------
                                                       2001           2002
                                                     --------       --------
<S>                                                  <C>            <C>
Cost                                                 $     --       $  1,081
Unrealized gain                                            --             34
                                                     --------       --------
Market value                                         $     --       $  1,115
                                                     ========       ========
</TABLE>


        Net proceeds from sale of marketable securities for the year ended March
31, 2001 and 2002 were $1,419 and $578, and realized gains from sale of
marketable securities for the year ended March 31, 2001 and 2002 were $111 and
$85, respectively. For the purposes of determining realized gains and losses,
the cost of securities sold was determined based on the average cost method.

4.  INVENTORIES

        Inventories by major categories are summarized as follows:

<TABLE>
<CAPTION>
                                                            MARCH 31,
                                                     -----------------------
                                                       2001           2002
                                                     --------       --------
<S>                                                  <C>            <C>
Raw materials                                        $  6,130       $  7,368
Work in progress                                        2,946          3,213
Finished goods                                          2,958          2,644
                                                     --------       --------
                                                     $ 12,034       $ 13,225
                                                     ========       ========
</TABLE>

5.  PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                            MARCH 31,
                                                     -----------------------
                                                       2001           2002
                                                     --------       --------
<S>                                                  <C>            <C>
Leasehold land and buildings                         $  4,940       $  4,957
Plant and machinery                                    21,571         21,953
Furniture, fixtures and equipment                       9,722         10,773
Motor vehicles                                          2,355          2,526
Leasehold improvements                                  3,187          3,628
                                                     --------       --------
Total                                                  41,775         43,837
Less: accumulated depreciation and amortization       (18,952)       (23,025)
Construction in progress                                2,740          3,982
                                                     --------       --------
Net book value                                       $ 25,563       $ 24,794
                                                     ========       ========
</TABLE>

6.  CREDIT FACILITIES AND PLEDGED ASSETS

        The Company has credit lines with various banks representing trade
acceptances, loans and overdrafts. At March 31, 2001 and 2002 these facilities
totalled $17,097, and $19,515, respectively, of which short-term bank loans,
interest bearing at 5.85% per annum, of $482 was utilized at March 31, 2002
while none of the amount was utilized at March 31, 2001. The maturities of these
facilities are generally up to 90 days. Interest rates are generally based on
the banks' prime lending rates and the credit lines are normally subject to
annual review. There are no significant covenants or other financial
restrictions relating to the Company's facilities except that at March 31, 2001
and 2002, cash of $1,826 and $2,762, respectively, and leasehold land and
buildings of $1,378 and $1,348, respectively, have been pledged as collateral
for the above facilities. At March 31, 2002, the Company also issued standby
letters of credit of $516 and $1,936 as a guarantee for the short-term bank
loans and a guarantee to certain non-trade creditors respectively.

        The restricted cash at March 31, 2001 and 2002 also included $162 and
$99 deposited into a bank account designated by the Chinese customs department
as a guarantee for the payment of customs duties.




                                      F-9
<PAGE>

7.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                 YEAR ENDED MARCH 31,
                                       -----------------------------------------
                                        2000             2001             2002
                                       -------          -------          -------
<S>                                    <C>              <C>              <C>
Hong Kong                              $ 2,395          $ 1,462          $ 1,245
China and others                         9,226           12,284           13,539
                                       -------          -------          -------
                                       $11,621          $13,746          $14,784
                                       =======          =======          =======
</TABLE>

        HONG KONG

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

        CHINA

        The Company's subsidiaries incorporated in China are subject to Chinese
income taxes at the applicable tax rate (currently 10-15%) on the taxable income
as reported in their Chinese statutory accounts in accordance with the relevant
income tax laws applicable to foreign enterprises. Pursuant to the same income
tax laws, the subsidiaries are fully exempt from Chinese income tax for two
years starting from the first profit-making year, followed by a 50% exemption
for the next three years. The 50% exemption for Jetcrown Industrial (Shenzhen)
Limited ("Jetcrown Shenzhen") (a subsidiary of the Company) expired on December
31, 1995 but was further extended from 1999 to 2001. A special exemption was
granted and Jetcrown Shenzhen was subject to Chinese income taxes at 10% on the
taxable income for the year ended March 31, 2002. The Company's other Chinese
subsidiaries were either loss making or exempt from income tax in the years
ended March 31, 2000, 2001 and 2002.

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

        During the years ended March 31, 2000, 2001 and 2002, the Company
recorded a benefit relating to its decision to reinvest earnings of its Chinese
subsidiary, Jetcrown Shenzhen, totaling $158, $428 and $nil, respectively.

        Had these tax holidays and concessions not been available, the tax
charge would have been higher by $487, $866 and $272 and the basic net income
per share would have been lower by $0.09, $0.16 and $0.05 and for the years
ended March 31, 2000, 2001 and 2002 respectively, and diluted net income per
share for the years ended March 31, 2000, 2001 and 2002 would have been lower by
$0.09, $0.16 and $0.05, respectively.

        OTHERS

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

        The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                   YEAR ENDED MARCH 31,
                                        ----------------------------------------
                                         2000             2001              2002
                                        -----            -----             -----
<S>                                     <C>              <C>               <C>
Hong Kong                               $ 403            $ 387             $ 251
China                                     487              (72)              284
                                        -----            -----             -----
                                        $ 890            $ 315             $ 535
                                        =====            =====             =====
</TABLE>




                                      F-10
<PAGE>

7.  INCOME TAXES - CONTINUED

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED MARCH 31,
                                                           ----------------------------------
                                                            2000          2001           2002
                                                           -----         -----          -----
<S>                                                        <C>           <C>            <C>
Statutory tax rate in Hong Kong                            16.0%         16.0%          16.0%
Tax holidays and concessions                               (1.0)         (6.3)           0.2
Income not subject to taxation                             (8.4)         (9.3)         (13.1)
Increase in valuation allowances                            0.7           1.1            0.2
Underprovision of income tax in previous year               0.6           0.3            0.1
Others                                                     (0.2)          0.5            0.2
                                                           -----         -----          -----
Effective rate                                              7.7%          2.3%           3.6%
                                                           =====         =====          =====
</TABLE>


        The components of deferred income tax are as follows:

<TABLE>
<CAPTION>
                                                                MARCH 31,
                                                          ---------------------
                                                           2001            2002
                                                          -----           -----
<S>                                                       <C>             <C>
Deferred tax asset:
  Net operating loss carryforwards                        $ 399           $ 342
  Less: Valuation allowances                               (310)           (310)
                                                          -----           -----
                                                             89              32

Deferred tax liability:
  Property, plant and equipment                            (104)            (47)
                                                          -----           -----
Net deferred tax liability                                $ (15)          $ (15)
                                                          =====           =====
</TABLE>

        At March 31, 2002, the net operating loss carryforwards principally
related to Kwanta Precision Metal Products Co., Limited ("Kwanta") (a subsidiary
of the Company) and can be carried forward indefinitely and applied to reduce
Kwanta's future taxable income.

8.  RELATED PARTY TRANSACTIONS

        The Company rents employee accommodation in China from Mr. S.K. Lee and
Mr. M.C. Tam, executive officers of the Company and minority shareholders of
Kwanasia (a subsidiary of the Company). The charges for these premises
approximate the amount negotiated, in management's opinion, on an arms length
basis. Rentals charged by them to the Company are $12, $12 and $12, for the
years ended March 31, 2000, 2001 and 2002, respectively.

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

9.  COMMITMENTS AND CONTINGENCIES

        The Company leases premises under various operating leases, certain of
which contain escalation clauses. Rental expenses under operating leases
included in the statement of income were $1,833, $2,262 and $2,169 for the years
ended March 31, 2000, 2001 and 2002, respectively.

        At March 31, 2002, the Company was obligated under operating leases
requiring minimum rentals as follows:

<TABLE>
<S>                                                            <C>
Years ending March 31
2003                                                           $1,971
2004                                                            1,195
2005                                                              987
2006                                                            1,004
2007                                                            1,047
2008 and after                                                  1,506
                                                              -------
Total minimum lease payments                                   $7,710
                                                               ======
</TABLE>

        At March 31, 2002, the Company had capital commitments for plant and
machinery totalling $3,363 which are expected to be disbursed during the year
ending March 31, 2003.




                                      F-11
<PAGE>

10.  EMPLOYEE BENEFITS

        The Company contributes to a state pension scheme run by the Chinese
government in respect of its employees in China. The expense related to this
plan, which is calculated at 16% of the average monthly salary, was $83, $142
and $281 for the years ended March 31, 2000, 2001 and 2002, respectively. In
December 1996, the Company established a defined contribution plan for certain
of the employees in Hong Kong. The plan provides for annual contributions by the
Company at the rate of 5% of eligible compensation of employees based on length
of service and requires contribution by employees at the rate of 5% of eligible
compensation. The plan ceased on November 30, 2000. According to the Mandatory
Provident Fund ("MPF") legislation regulated by the Mandatory Provident Fund
Schemes Authority in Hong Kong, with effect from December 1, 2000, the Company
is required to participate in a MPF scheme operated by approved trustees in Hong
Kong and to make contributions for its eligible employees. The contributions
borne by the Company are calculated at 5% of the salaries and wages (monthly
contribution is limited to 5% of HK$20 for each eligible employees) as
calculated under the MPF legislation. The expense related to the plan in the
year ended March 31, 2000, that related to the plan and MPF in the year ended
March 31, 2001 and that related to MPF in the year ended March 31, 2002 amounted
to $26, $30 and $66, respectively.

11.  STOCK OPTION PLAN

        On March 15, 1995, the Company adopted a stock option plan that permits
the Company to grant options to officers, directors, employees and others to
purchase up to 450,000 shares of Common Stock. On September 29, 1998, the
Company approved an increase of 244,000 shares making a total of 694,000 shares
of common stock available under the stock option plan. On January 10, 2002, the
Company adopted another stock option plan to purchase up to 500,000 shares of
Common Stock. Options granted under the stock option plans will be exercisable
for a period of up to 10 years commencing on the date of grant, at a price equal
to at least the fair market value of the Common Stock at the date of grant, and
may contain such other terms as the Board of Directors or a committee appointed
to administer the plan may determine. A summary of the option activity (with
parenthetical weighted average prices per share) is as follows:

<TABLE>
<CAPTION>
                                                                         NUMBER OF STOCK OPTIONS
                                                                    --------------------------------
                                                                      2000        2001         2002
                                                                    -------     -------      -------
<S>                                                                 <C>         <C>          <C>
Outstanding at beginning of the year ($12.59 for 2000, 2001
  and $14.75 for 2002)                                              440,000        440,000        200,000
Granted during the year ($15.80 for 2001 and $17.00 for 2002)            --         10,000        534,000
Exercised during the year ($10.98 for 2001 and $14.75 for 2002)          --       (250,000)       (16,500)
                                                                    -------        -------        -------
Outstanding and exercisable at end of the year
  ($12.59 for 2000, $14.75 for 2001 and $16.42 for 2002)            440,000        200,000        717,500
                                                                    =======        =======        =======
Range of exercise price per share                             $10 to $14.75  $10 to $14.75  $14.75 to $17
</TABLE>

        The weighted average remaining contractual life of the share options
outstanding at March 31, 2002 was 8.76 years. At March 31, 2001 and March 31,
2002, there were 34,000 and nil options available for future grant under the
plans respectively.

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

<TABLE>
<CAPTION>
                                                2000          2001          2002
                                              -------       -------       -------
<S>                                           <C>           <C>           <C>
Net income:
  As reported                                 $10,298       $12,810       $13,324
  Pro forma                                    10,298        12,766        11,775

Basic net income per share:
  As reported                                   $1.90         $2.38         $2.38
  Pro forma                                      1.90          2.37          2.10

Diluted net income per share:
  As reported                                   $1.89         $2.36         $2.36
  Pro forma                                      1.89          2.35          2.09
</TABLE>

        The fair value of options granted in the year ended March 31, 2001 and
2002 was estimated to be approximately $2.92 and $2.90 per share respectively
using the Black-Scholes option pricing model with the following assumptions:

<TABLE>
                                                                        2001         2002
                                                                      -------      --------
<S>                                                                   <C>          <C>
Risk-free interest rate - weighted average                              4.99%         5.42%
Expected life of options - weighted average                           3 years      10 years
Expected volatility                                                       53%           32%
Expected dividend yield                                                 6.17%         7.57%
</TABLE>




                                      F-12
<PAGE>

12.  CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

        A substantial percentage of the Company's sales are made to a small
number of customers and are typically sold either under letter of credit or on
an open account basis. Details of customers accounting for 10% or more of total
net sales for each of the three years ended March 31, 2000, 2001 and 2002 are as
follows:

<TABLE>
<CAPTION>
                                                    PERCENTAGE OF NET SALES
                                                      YEAR ENDED MARCH 31,
                                                  ---------------------------
                                                   2000       2001       2002
                                                  -----      -----      -----
<S>                                               <C>        <C>        <C>
Epson Precision (H.K.) Limited                       *       13.0%      17.5%
VTech Telecommunications Limited                  22.1%      17.6%      15.3%
Kyocera Mita Industrial Co. (H.K.) Limited        24.0%      18.7%      13.6%
Inter-Tel Incorporated                            25.3%      20.0%      11.6%
</TABLE>

* Less than 10%

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

        Details of the amounts receivable from the five customers with the
largest receivable balances at March 31, 2001 and 2002, respectively, are as
follows:

<TABLE>
<CAPTION>
                                                      PERCENTAGE OF
                                                        ACCOUNTS
                                                       RECEIVABLE
                                                        MARCH 31,
                                                  -------------------
                                                   2001          2002
                                                  -----         -----
<S>                                               <C>           <C>
Largest receivable balances                       80.5%         67.0%
</TABLE>

        The Company has not experienced any significant difficulty in collecting
its accounts receivable in the past and is not aware of any financial
difficulties being experienced by its major customers. There has been no
significant bad debt expense during each of the three years ended March 31,
2000, 2001 and 2002 and there was no provision for bad debts at the beginning
and end of the three years ended March 31, 2000, 2001 and 2002.

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

        The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. The estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.

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




                                      F-13
<PAGE>

14.  SEGMENT INFORMATION

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

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

        Contributions of the major activities, profitability information and
asset information of the Company's reportable segments for the years ended March
31, 2000, 2001 and 2002 are as follows:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED MARCH 31,
                         --------------------------------------------------------------------------------------------------------
                                       2000                                 2001                                2002
                         --------------------------------    --------------------------------    --------------------------------
                           NET      INTERSEGMENT  PROFIT       NET     INTERSEGMENT   PROFIT       NET     INTERSEGMENT   PROFIT
                          SALES        SALES      (LOSS)      SALES       SALES       (LOSS)      SALES        SALES      (LOSS)
                         --------    --------    --------    --------    --------    --------    --------    --------    --------
<S>                      <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
SEGMENT:
Injection molded
  plastic parts          $ 13,010    $ 39,272    $     --    $ 10,571    $ 50,531    $    270    $ 12,360    $ 47,504    $     --
Electronic products        21,140         123       2,145      28,647          25       3,003      33,672          15       2,067
Metallic parts              3,968       3,299      (1,063)      5,906       3,942      (1,581)      4,987       2,828        (258)
                         --------    --------    --------    --------    --------    --------    --------    --------    --------
SEGMENT TOTAL            $ 64,380    $  3,422    $ 11,653    $ 85,084    $  4,237    $ 13,782    $ 86,163    $  2,843    $ 14,819

RECONCILIATION TO
  CONSOLIDATED TOTALS:

Sales eliminations         (3,422)     (3,422)         --      (4,237)     (4,237)         --      (2,843)     (2,843)         --
Goodwill amortization
  not allocated to
  segment                      --          --         (32)         --          --         (36)         --          --         (35)
                         --------    --------    --------    --------    --------    --------    --------    --------    --------
CONSOLIDATED TOTALS:
  NET SALES              $ 60,958    $     --                $ 80,847    $     --                $ 83,320    $     --
                         ========    ========                ========    ========                ========    ========
INCOME BEFORE
  INCOME TAXES
  AND MINORITY
  INTERESTS                                      $ 11,621                            $ 13,746                            $ 14,784
                                                 ========                            ========                            ========
</TABLE>

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                              --------------------------------------------------------------------------------------
                                                 2000                                     2001
                               -----------------------------------------  -------------------------------------------
                                                          DEPRECIATION                                 DEPRECIATION
                              IDENTIFIABLE      CAPITAL        AND       IDENTIFIABLE    CAPITAL          AND
                                  ASSETS      EXPENDITURE  AMORTIZATION     ASSETS      EXPENDITURE    AMORTIZATION
                              ------------    -----------  ------------  ------------   ------------   -------------
<S>                           <C>             <C>          <C>           <C>            <C>            <C>
SEGMENT:
Injection molded plastic
  parts                         $ 50,112       $  5,119      $  2,535      $ 60,704       $ 11,817      $  2,625
Electronic products               23,431            600         1,361        26,821          1,589         1,437
Metallic parts                     5,037            300           856         6,149            520           941
                                --------       --------      --------      --------       --------      --------
SEGMENT TOTALS                  $ 78,580       $  6,019      $  4,752      $ 93,674       $ 13,926      $  5,003

RECONCILIATION TO
  CONSOLIDATED TOTALS:
Elimination of receivables
  from intersegments              (7,288)            --            --       (10,721)            --            --
Goodwill not allocated to
  segments                           549             --            32           513             --            36
                                --------       --------      --------      --------       --------      --------
CONSOLIDATED TOTALS             $ 71,841       $  6,019      $  4,784      $ 83,466       $ 13,926      $  5,039
                                ========       ========      ========      ========       ========      ========
</TABLE>

<TABLE>
<CAPTION>

                                             YEAR ENDED MARCH 31,
                                ---------------------------------------------
                                                     2002
                                ---------------------------------------------
                                                                 DEPRECIATION
                                IDENTIFIABLE       CAPITAL            AND
                                   ASSETS        EXPENDITURE     AMORTIZATION
                                ------------     -----------     ------------
<S>                               <C>              <C>             <C>
SEGMENT:
Injection molded plastic
  parts                           $ 68,165         $  3,916        $  2,921
Electronic products                 24,508              335           1,444
Metallic parts                       4,477              146             518
                                  --------         --------        --------
SEGMENT TOTALS                    $ 97,150         $  4,397        $  4,883

RECONCILIATION TO
  CONSOLIDATED TOTALS:
Elimination of receivables
  from intersegments                (2,884)              --              --
Goodwill not allocated to
  segments                             478               --              35
                                  --------         --------        --------
CONSOLIDATED TOTALS               $ 94,744         $  4,397        $  4,918
                                  ========         ========        ========
</TABLE>




                                      F-14
<PAGE>


14.  SEGMENT INFORMATION - CONTINUED

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

<TABLE>
<CAPTION>
                                                    YEAR ENDED MARCH 31,
                                         ---------------------------------------
                                           2000            2001            2002
                                         -------         -------         -------
<S>                                      <C>             <C>             <C>
Net sales
  China                                  $25,958         $44,078         $46,876
  North America                           16,488          18,282          19,375
  Hong Kong                               14,704          15,557          11,690
  Europe                                   3,056           1,763           4,053
  Others                                     752           1,167           1,326
                                         -------         -------         -------
Total net sales                          $60,958         $80,847         $83,320
                                         =======         =======         =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                    YEAR ENDED MARCH 31,
                                         ---------------------------------------
                                           2000            2001            2002
                                         -------         -------         -------
<S>                                      <C>             <C>             <C>
Hong Kong                                $46,982         $47,520         $53,156
China                                     24,310          35,433          41,110
Goodwill                                     549             513             478
                                         -------         -------         -------
Total identifiable assets                $71,841         $83,466         $94,744
                                         =======         =======         =======
</TABLE>

15.  SUBSEQUENT EVENT

        On June 17, 2002, the Company announced that it is effecting a
three-for-two stock split of its outstanding shares to holders record on July 8,
2002 and payable on July 22, 2002. In conjunction with this stock split and
proportionate to it, the Memorandum of Association will be amended effective on
July 8, 2002 to increase authorized capital to 30,000,000 common shares. This
amendment will also result in the par value of its shares converting to no par
value per share.




                                      F-15
<PAGE>

ITEM 19.  EXHIBITS

        The following documents are filed as exhibits herewith:


<TABLE>
<CAPTION>
EXHIBIT NO.                                   DESCRIPTION
-----------   ------------------------------------------------------------------
<S>           <C>
1.1           Memorandum and Articles of Association (as amended through March
              7, 1995) (incorporated by reference to Exhibit 3.1 to Deswell's
              Registration Statement on Form F-1 filed with the SEC on June 19,
              1995).

1.2           Amendment to Memorandum and Articles of Association filed with BVI
              Registry of Companies on July 19, 1995 (incorporated by reference
              to Exhibit 1.2 to Deswell's Annual Report on Form 20-F for the
              year ended March 31, 2001 filed with the SEC on July 10, 2001).

1.3           Form of Amendment to Memorandum of Association to be filed with
              BVI Registry of Companies to effect three-for-two stock split and
              related matters.

2.1           Form of common share certificate (incorporated by reference to
              Exhibit 4.1 of Amendment No. 1 to Deswell's Registration Statement
              on Form F-1 filed with the SEC on July 13, 1995).

4.1           Facility letter dated December 13, 2001 between The Sanwa Bank
              Limited and Jetcrown Industrial Limited.

4.2           Facility letter dated March 2, 2001 between Standard Chartered
              Bank and Jetcrown Industrial Limited (incorporated by reference to
              Exhibit 4.2 to Deswell's Annual Report on Form 20-F for the year
              ended March 31, 2001 filed with the SEC on July 10, 2001).

4.3           Facility letter dated February 20, 2002 between Standard Chartered
              Bank and Kwanasia Electronics Company Limited.

4.4           Facility letter dated November 1, 2001 between Fortis Bank Asia HK
              and Kwanasia Electronics Company Limited.

4.5           Facility letter dated November 12, 2001 between CITIC Ka Wah Bank
              Limited and Kwanasia Electronics Company Limited.

4.6           Facility letter dated February 28, 2002 between Dao Heng Bank
              Limited and Kwanasia Electronics Company Limited.

4.7           Bank loan letter dated August 20, 2001 between Industrial and
              Commercial Bank of China and Dongguan Kwan Hong Electronics
              Company Limited.

4.8           Bank loan letter dated August 15, 2001 between China Construction
              Bank, Dongguan City Branch and Dongguan Kwan Hong Electronics
              Company Limited.

4.9           Tenancy Agreement dated February 14, 2001 between Shekou Yu Yi
              Shareholding Co. Ltd. and Jetcrown Industrial (Shenzhen) Limited
              for the 1st and 2nd Floor, Block A, Wing Village Industrial
              Estate, Shekou, Shenzhen (incorporated by reference to Exhibit 4.4
              to Deswell's Annual Report on Form 20-F for the year ended March
              31, 2001 filed with the SEC on July 10, 2001).

4.10          Sale and Purchase Agreement dated October 25, 2000 between Shekou
              Real Property Company and Jetcrown Industrial (Shenzhen) Limited
              for the 1st to 6th Floor, Block G, Wing Village Industrial Estate,
              Shekou, Shenzhen (incorporated by reference to the Exhibit 4.5 to
              Deswell's Annual Report on Form 20-F for the year ended March 31,
              2001 filed with the SEC on July 10, 2001).

4.11          Tenancy Agreement dated April 25, 2001 between Shekou NanShui
              Enterprises Shareholding Co. Ltd. and Jetcrown Industrial
              (Shenzhen) Limited for the 3rd and 4th Floor, Block E, Wing
              Village Industrial Estate, Shekou, Shenzhen.

4.12          Tenancy Agreement dated October 13, 1999 between Shekou NanShui
              Enterprises Shareholding Co. Ltd. and Jetcrown Industrial
              (Shenzhen) Limited for the 2nd Floor, Block E, Wing Village
              Industrial Estate, Shekou, Shenzhen (incorporated by reference to
              the Exhibit 4.8 to Deswell's Annual Report on Form 20-F for the
              year ended March 31, 2001 filed with the SEC on July 10, 2001).

4.13          Tenancy Agreement dated September 29, 2000 between Shenzhen City
              Nin Fung Real Property Co., Ltd. and Jetcrown Industrial
              (Shenzhen) Limited for the 1st to 3rd Floor, Block B, Wing Village
              Industrial Estate, Shekou, Shenzhen (incorporated by reference to
              Exhibit 4.11 to
</TABLE>




                                      -52-
<PAGE>

<TABLE>
<S>           <C>
              Deswell's Annual Report on Form 20-F for the year ended March 31,
              2001 filed with the SEC on July 10, 2001).

4.14          Tenancy Agreement dated April 9, 2001 between Shekou East Empire
              Industrial Company Limited and Jetcrown Industrial (Shenzhen)
              Limited for the 2nd Floor to 5th Floor, Block H, Wing Village
              Industrial Estate, Shekou, Shenzhen (incorporated by reference to
              Exhibit 4.15 to Deswell's Annual Report on Form 20-F for the year
              ended March 31, 2001 filed with the SEC on July 10, 2001).

4.15          Tenancy Agreement dated December 11, 2000 between Shekou Tai Shen
              Enterprises Shareholding Co. Ltd. and Jetcrown Industrial
              (Shenzhen) Limited for the 1st Floor to 5th Floor, Block D Wing
              Village Industrial Estate, Shekou, Shenzhen (incorporated by
              reference to Exhibit 4.16 to Deswell's Annual Report on Form 20-F
              for the year ended March 31, 2001 filed with the SEC on July 10,
              2001).

4.16          Tenancy Agreement dated January 20, 2000 between Dongguan Houjie
              Town Huangguan Estate Committee and Jetcrown Industrial (Dongguan)
              Limited for the industrial building and dormitory building of the
              Huangguan Industrial Estate, Houji Town, Dongguan (incorporated by
              reference to Exhibit 4.17 to Deswell's Annual Report on Form 20-F
              for the year ended March 31, 2001 filed with the SEC on July 10,
              2001).

4.17          Tenancy Agreement dated May 11, 2000 and August 23, 2000 between
              Dongguan Houjie Town Chong Hing Trading Company and Jetcrown
              Industrial (Dongguan) Limited for the Industrial building,
              dormitory building and an electricity room of the Huangguan
              Industrial Estate, Ma Tsui, Houjie Town, Dongguan, Shenzhen
              (incorporated by reference to Exhibit 4.19 to Deswell's Annual
              Report on Form 20-F for the year ended March 31, 2001 filed with
              the SEC on July 10, 2001).

4.18          Tenancy Agreement dated January 1, 2002 between Shekou Wan Ha
              Enterprises Shareholding Co. Ltd. and Jetcrown Industrial
              (Shenzhen) Limited for Room 203, 205-208, 210-212, 214, 216-217,
              302-305, 307, 309, 310, 312-317, 401, 403-405, 407-416, Complex
              Building, Wan Sha Village, Shekou, Shenzhen and Room 201-203,
              205-208, 210-211, 305, 307-310, 402, 404-405, 407, 409, 502-504,
              506-507, 510, 514-516, 601, 603-607, 609-614, 616, Block C1, New
              Wing Village, Shekou.

4.19          Tenancy Agreement dated February 15, 2002 between Dongguan Houjie
              Town Huangguan Industrial Estate Committee and Jetcrown Industrial
              (Dongguan) Limited for a factory building and a block of dormitory
              at Huangguan Industrial Estate, Houjie Town, Dongguan.

4.20          Tenancy Agreement dated January 18, 2000 and December 30, 2001
              between Dong Guan Cheung On Lan Wang Electronics Development Co.
              and Kwanasia Electronics Co. Ltd. for 1st to 6th Floor, factory
              building; 2nd to 6th Floor, office building; 1st, 2nd, 4th to 7th
              Floor, dormitory building; security guard room and lobby of Lan
              Wang Building, Siu Bin Second Industrial District, Cheung On,
              Dongguan.

4.21          Tenancy Agreement dated October 1, 2001 between Lee Shu Kwan and
              Kwanasia Electronics Co. Ltd. for Room 402, Block A, To Fa Court,
              Nanshan District, Shenzhen.

4.22          Tenancy Agreement dated April 1, 2000 between Tam Man Chi and
              Kwanasia Electronic Co. Ltd. for Flat A, 11th Floor, Ho Wah House,
              Sun Ho City, Shenzhen (incorporated by reference to Exhibit 4.22
              of Deswell's Form 20-F for the year ended March 31, 2001 filed
              with the SEC on July 10, 2001).

4.23          Right of Land Use Transfer Agreement and Supplementary Agreement
              dated January 3, 2000 and July 18, 2000 between Dongguan Houjie
              Town Huangguan Industrial Estate Committee and Jetcrown Industrial
              (Dongguan) Limited for the Industrial Land located at formerly
              known as Kam Ngai Po Garden of Huangguan Industrial Estate
              Committee, Dongguan, Shenzhen (incorporated by reference to
              Exhibit 4.23 to Deswell's Annual Report on Form 20-F for the year
              ended March 31, 2001 filed with the SEC on July 10, 2001).

4.24          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.)

8.1           Diagram of the Company's operating subsidiaries and affiliates -
              (see page 18 of this report)

10.1          Consent of Independent Auditors' to incorporation of report on the
              Company's consolidated financial statements into Registrant's
              Registration Statements on Form S-8.
</TABLE>




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<PAGE>

                                   SIGNATURES


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



                                            DESWELL INDUSTRIES, INC.



Date: July 9, 2002                         By:   /s/ Richard Lau
                                               ---------------------------------
                                                 Richard Lau
                                                 Chairman of the Board and
                                                 Chief Executive Officer


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