##### Table of Contents



OMB APPROVALOMB Number: 3235-0288Expires: September   30, 2008Estimated average burden hours per response...2611.00
    UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 20-F
 (Mark One)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)OF THE SECURITIES EXCHANGE ACT OF 1934
 or
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended March 31, 2008; or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to; or
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
For the transition period from to .
 Commission File Number: 001-33900
  
 DESWELL INDUSTRIES, INC.
  
     o þ
 o þ
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  U.S. GAAP þ
    
    International Financial Reporting Standards as issued by the International Accounting Standards Board o
    
    Other o
 If Other has been checked, indicate by check mark which financial statement item the registrant has elected to follow:
    
    o Item 17
    
    o Item 18
 o þ




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##### 



PageIntroduction
    
    
    3Financial Statements and Currency Presentation
    
    
    3Part I
    
    
    3Item 1. Identity of Directors, Senior Management and Advisors
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    15Item 4A. Unresolved Staff Comments
    
    
    25Item 5. Operating and Financial Review and Prospects
    
    
    26Item 6. Directors, Senior Management and Employees
    
    
    37Item 7. Major Shareholders and Related Party Transactions
    
    
    40Item 8. Financial Information
    
    
    42Item 9. The Offer and Listing
    
    
    43Item 10. Additional Information
    
    
    44Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 12. Description of Securities Other Than Equity Securities
    
    
    52Part II
    
    
    52Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    52Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
    
    
    52Item 15. Controls and Procedures
    
    
    52Item 16. Reserved
    
    
    54Item 16A. Audit Committee Financial Expert
    
    
    54Item 16B. Code of Ethics
    
    
    54Item 16C. Principal Accountant Fees and Services
    
    
    55Item 16D. Exemptions From the Listing Standards For the Audit Committee
    
    
    55Item 16E. Purchases of Equity Securities By the Issuer and Affiliate Purchasers
    
    
    55Part III
    
    
    56Item 17. Financial Statements
    
    
    56Item 18. Financial Statements
    
    
    56Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Income and Comprehensive Income
    
    
    F-3Consolidated Statements of Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6Item 19. Exhibits
    
    
    57Signatures
    
    
    58Certification of Chief Executive officer Required By Rule 13a-14(A) Or Rule 15d-14(A)
Under the Securities Exchange Act of 1934
    
    Exhibit 12.1Certification of Chief Financial officer Required By Rule 13a-14(A) Or Rule 15d-14(A)
Under the Securities Exchange Act of 1934
    
    Exhibit 12.2Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
    
    Exhibit 13.1Consent of Independent Registered Public Accounting Firm
    
    Exhibit 14.1EXHIBIT 4.3EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 14.1
  2




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
    
    we, us, our company, our, the Company or Deswell refers to Deswell
Industries, Inc. and, in the context of describing our operations, also include our
operating subsidiaries;
    
    shares refer to our common shares, no par value;
    
    China or PRC refers to the Peoples Republic of China, excluding Taiwan, Hong
Kong and Macao;
    
    Hong Kong refers to the Hong Kong Special Administrative Region of the Peoples
Republic of China;
    
    Macao refers to the Macao Special Administrative Region of the Peoples Republic
of China;
    
    all references to renminbi, RMB or yuan are to the legal currency of China, of
which yuan is the base unit;
    
    all references to HK dollars or HK$
are to the legal currency of Hong Kong; and
    
    all references to U.S. dollars, dollars, $ or US$ are to the legal currency
of the United States.
 
   
  
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
   
   3




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Selected Financial Data (1)
 (in thousands except per share data)Year ended March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Income Statement Data:Net sales
    
    $
    97,195
    
    
    $
    125,590
    
    
    $
    115,276
    
    
    $
    136,779
    
    
    $
    143,806Cost of sales
    
    
    66,105
    
    
    
    92,072
    
    
    
    89,850
    
    
    
    105,506
    
    
    
    117,373Gross profit
    
    
    31,090
    
    
    
    33,518
    
    
    
    25,426
    
    
    
    31,273
    
    
    
    26,433Selling, general and administrative expenses
    
    
    14,718
    
    
    
    15,759
    
    
    
    15,052
    
    
    
    18,957
    
    
    
    19,601Other income (expenses), net
    
    
    90
    
    
    
    (106
    )
    
    
    (823
    )
    
    
    1,376
    
    
    
    1,838Operating income (4)
    
    
    16,462
    
    
    
    17,653
    
    
    
    9,551
    
    
    
    13,692
    
    
    
    8,670Interest expense
    
    
    (16
    )
    
    
    (12
    )
    
    
    (6
    )
    
    
    
    
    
    
    Non-operating income (expenses), net
    
    
    820
    
    
    
    448
    
    
    
    447
    
    
    
    547
    
    
    
    521Income before income taxes
    
    
    17,266
    
    
    
    18,089
    
    
    
    9,992
    
    
    
    14,239
    
    
    
    9,191Income taxes
    
    
    589
    
    
    
    576
    
    
    
    (27
    )
    
    
    1,239
    
    
    
    104Income before minority interests
    
    
    16,677
    
    
    
    17,513
    
    
    
    10,019
    
    
    
    13,000
    
    
    
    9,087Minority interests
    
    
    1,957
    
    
    
    2,330
    
    
    
    1,240
    
    
    
    833
    
    
    
    228Net income
    
    $
    14,720
    
    
    $
    15,183
    
    
    $
    8,779
    
    
    $
    12,167
    
    
    $
    8,859Basic earnings per share (2)(3)
    
    $
    1.08
    
    
    $
    1.04
    
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57Average number of shares outstandingbasic (2)(3)
    
    
    13,664
    
    
    
    14,656
    
    
    
    14,908
    
    
    
    14,956
    
    
    
    15,517Diluted earnings per share (3)
    
    $
    1.04
    
    
    $
    1.02
    
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57Average number of shares outstandingdiluted (2)(3)
    
    
    14,160
    
    
    
    14,933
    
    
    
    14,936
    
    
    
    15,048
    
    
    
    15,556Statistical Data:Gross margin
    
    
    32.0
    %
    
    
    26.7
    %
    
    
    22.1
    %
    
    
    22.9
    %
    
    
    18.4
    %Operating margin (4)
    
    
    16.9
    %
    
    
    14.1
    %
    
    
    8.3
    %
    
    
    10.0
    %
    
    
    6.0
    %Dividends per share (3)
    
    $
    0.63
    
    
    $
    0.65
    
    
    $
    0.63
    
    
    $
    0.65
    
    
    $
    0.61
 At March 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Balance Sheet Data:Working capital
    
    $
    52,876
    
    
    $
    57,576
    
    
    $
    55,114
    
    
    $
    58,672
    
    
    $
    54,751Total assets
    
    
    113,534
    
    
    
    136,976
    
    
    
    130,670
    
    
    
    141,210
    
    
    
    140,407Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    89,730
    
    
    
    104,767
    
    
    
    106,768
    
    
    
    111,655
    
    
    
    121,257
 
 (1)
    
    Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America and are stated in U.S. dollars. See
Financial Statements and Currency Presentation.(2)
    
    Basic EPS excludes dilution from potential common shares and is computed by dividing income
available to common shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from potential common shares.(3)
    
    Share and per share amounts presented above have been adjusted to reflect the three-for-two
stock split effected in March 2005 (see Note 12 of Notes to Consolidated Financial Statements).(4)
    
    Other operating income (expenses) were reclassified in the consolidated statement of income for
the year ended March 31, 2007 for a comparable presentation. Comparative figures for the years
ended March 31, 2004 to 2006 were reclassified accordingly. The reclassification of operating
income has no impact on the net income on the consolidated statement of income the years ended
March 31, 2004 to 2006. 4




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Risk Factors
  We are dependent on a few major customers and have no long-term contracts with them. Our sales
would substantially decrease and we would suffer decreases in net income or losses if we lose any
of our major customers, if they substantially reduce their orders or if they are unable to pay us.
  We have no written agreements with suppliers to obtain components and our profit margins and net
income could suffer from an increase in component prices.
  Our gross margins fluctuate from year to year and may be adversely affected by a number of factors.
  Year ended March 31,2006
    
    2007
    
    2008Plastic product
    
    
    11.6
    %
    
    
    13.9
    %
    
    
    10.5
    %Electronic and metallic product
    
    
    10.5
    
    
    
    9.0
    
    
    
    7.9Total
    
    
    22.1
    %
    
    
    22.9
    %
    
    
    18.4
    %
  
    
    increasing competition in our market segments, which has forced us to maintain or
reduce unit prices or attempt to pass on our costs of materials and components on to
customers;
    
    costs of labor, particularly in recent years, which such costs have increased
substantially as consequence of increasing governmental regulation directed at labor
practices and policies;
    
    continuing appreciation of the renminbi, in which we pay our labor and manufacturing
costs, against the U.S. dollar, in which we present our financial statements;
    
    our cost of raw materials, especially our cost of plastic
resins;
 5




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
    
    changes in the prices or the availability of components needed to manufacture our
electronic products;
    
    changes in our customer mix or the mix of higher and lower margin products, or a
combination of both in any year;
    
    increases in value-added taxes as result of changes in the value-added tax policy of
the Chinese government for various categories of export products; and
    
    increased costs of conforming our products to consumer and product safety laws and
regulations of the various countries in which our products are sold.
  We have no long-term contracts to obtain plastic resins and our profit margins and net income could
suffer from an increase in resin prices.
  Year ended March 31, 20082006
    
    2007
    
    2008Average cost of ABS as a percentage of the total cost of:Plastic products sold
    
    
    53
    %
    
    
    52
    %
    
    
    46
    %Goods sold
    
    
    21
    %
    
    
    20
    %
    
    
    17
    %
  The Chinese government could change its policies toward or even nationalize private enterprise,
which could result in the total loss of our investment in that country.
  There may be a lack of remedies and impartiality under the Chinese legal system that prevents us
from enforcing the agreements under which we operate our factories.
  6




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If our business licenses in China were not renewed, we would be required to move our operations out
of China, which would impair our profitability, competitiveness and market position and jeopardize
our ability to continue operations.
  Our insurance coverage may not be adequate to cover loss related to major accidents or acts of God.
  We may be faced with product liability claims.
  Possible changes and uncertainties in economic policies in the Special Economic Zones of China in
which we operate could harm our operations by eliminating benefits we currently enjoy.
  Changes to PRC tax laws and heightened efforts by the Chinas tax authorities to increase revenues
are expected to subject us to greater taxes.
  7




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Payment of dividends by our subsidiaries in the PRC to us is subject to restrictions under PRC law.
The new PRC tax law could force us to reduce the amount of dividends we have historically paid to
our shareholders or possibly eliminate them or we may decide not pay dividends in the future.
   We could suffer losses from corrupt or fraudulent business practices. Conducting business in China
is inherently risky.
  Controversies affecting Chinas trade with the United States could harm our operations or depress
our stock price.
  8




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Changes in currency rates involving the Hong Kong dollar could increase our expenses or cause
economic or political problems affecting our business. Changes in currency rates involving the RMB
implemented in July 2005 have increased our expenses since they were implemented.
  Any future outbreak of severe acute respiratory syndrome or other diseases may have a negative
impact on our business and operating results.
   Political and economic instability of Hong Kong and Macao could harm our operations.
  9




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Labor shortages in Southern China have adversely affected our gross margins and will likely
continue to do so in the future.
  Recent changes in the PRCs labor law restrict our ability to reduce its workforce in the event of
an economic downturn.
  Our customers are dependent on shipping companies for delivery of our products and interruptions to
shipping could materially and adversely affect our business and operating results.
  Protecting, seeking licenses for or asserting claims over, intellectual property could be costly.
  10




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Because our operations are international, we are subject to significant worldwide political,
economic, legal and other uncertainties.
  
    
    changes in economic and political conditions and in governmental policies,
    
    changes in international and domestic customs regulations,
    
    wars, civil unrest, acts of terrorism and other conflicts,
    
    changes in tariffs, trade restrictions, trade agreements and taxation,
    
    difficulties in managing or overseeing foreign operations, and
    
    limitations on the repatriation of funds because of foreign exchange controls.
  Our loss of certain members of our senior management could cause disruptions in our business and
harm our customer relationships thereby adversely affecting sales.
  
    
    Richard Lau, our former Chief Executive Officer, who retired from this post in
January 2007, and remains Chairman of our Board of Directors;
    
    Franki S.F. Tse, our Chief Executive Officer, who in February 2007 succeeded Richard
Lau;
    
    C. P. Li, our Executive Director of Manufacturing and Administration for plastic
products;
    
    C. W. Leung, Executive Director of Engineering for Plastic Operations;
    
    S. K. Lee, our Director of Administration and Marketing for Electronic Operations;
and
    
    M. C. Tam, our Director of Engineering and Manufacturing for Electronic Operations.
  11




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Compliance with current and future environmental regulations may be costly which could impact our
future earnings. Our results could be adversely affected if we have to comply with new
environmental regulations.
    The concentration of share ownership in our Chairman of the Board and members of senior management
may allow them to control, and influence substantially, the outcome of matters requiring
shareholder approval if such individuals acted together.
  12




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In the course of preparing our consolidated financial statements for the fiscal year ended March
31, 2008, a material weakness in our internal controls over financial reporting was identified. If
we fail to implement, achieve and maintain an effective system of internal controls, and as a
result of this material weakness or others that may be identified, we may be unable to accurately
report our financial results, and investor confidence and the market price of our shares may be
adversely impacted.
   Potential new accounting pronouncements are likely to impact our future financial position and
results of operations and in the case of FASBs pronouncement regarding the expensing of stock
options have adversely impacted, and will in the future, adversely impact our financial results.
  Our boards ability to amend our charter without shareholder approval could have anti-takeover
effects that could prevent a change in control.
  13




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Our exemptions from certain of the reporting requirements under the Exchange Act limits the
protections and information afforded to investors.
  
    
    the rules under the Exchange Act requiring the filing with the Commission of
quarterly reports on Form 10-Q or current reports on Form 8-K;
    
    the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations in respect to a security registered under the Exchange Act;
    
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction (i.e., a purchase and sale, or sale
and purchase, of the issuers equity securities within less than six months); and
    
    Regulation FD, the SECs rules regulating disclosure of information by publicly
traded companies and other issuers and requiring that when an issuer discloses material
nonpublic information to certain individuals or entities such as stock analysts, or
holders of the issuers securities who may trade on the basis of the information, the
issuer must make public disclosure of that information.
  
    
    Rule4350(c)(1):A majority of our Board of Directors are not independent
directors within the definition of independent director in Nasdaq Marketplace Rule
4200(a)(15);
    
    Rule4350(c)(2): Our independent directors do not meet in executive session;
    
    Rule4350(c)(3): Our board does not have a compensation committee;
    
    Rule4350(c)(4): Nominees for appointment as our directors are not selected or
recommended by (i) a majority of our independent directors, or a nominating committee
composed solely of independent directors.
  14




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History and Development of Deswell
 Corporate Information
  Important Events in Deswells Development that Have Occurred since April 1, 2007
   15




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Organizational Structure
  
 16




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Capital Expenditures
  Year ended March 31,2006
    
    2007
    
    2008Purchase of property, plant and equipment
    
    $
    6,940,000
    
    
    $
    7,812,000
    
    
    $
    7,288,000Proceeds from the sale of property, plant and equipment
    
    
    50,000
    
    
    
    3,232,000
    
    
    
    333,000Acquisition of minority interest in a subsidiary
    
    
    
    
    
    
    
    
    
    
    414,000
       Business Overview
   
    
    cases and key tops for personal organizers and remote controls;
 17




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




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Operations
 Plastic Injection Molding
   Mold design and production.
        19




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Plastic Injection.
   Finishing
  Electronic Products and Assemblies
      20




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Metal Parts Manufacturing
  Quality Control
       21




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Raw Materials, Component Parts and Suppliers
 Plastic Resins.
  Year ended March 31, 2008Average cost of ABS as a percentage of the total cost of:
    
    2006
    
    2007
    
    2008Plastic products sold
    
    
    53
    %
    
    
    52
    %
    
    
    46
    %Goods sold
    
    
    21
    %
    
    
    20
    %
    
    
    17
    %
     Component Parts and Supplies
  Raw Metal
  Transportation
  22




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Customers and Marketing
  Year ended March 31,Geographic Areas
    
    2006
    
    2007
    
    2008United States
    
    
    49.0
    %
    
    
    42.4
    %
    
    
    46.8China
    
    
    37.5
    
    
    
    39.2
    
    
    
    37.0Europe
    
    
    7.0
    
    
    
    11.2
    
    
    
    10.7Hong Kong
    
    
    3.0
    
    
    
    3.4
    
    
    
    1.7Others
    
    
    3.5
    
    
    
    3.8
    
    
    
    3.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
 Modern Plastics International Injection Molding
 Major Customers
  Year ended March 31,Customer
    
    Product
    
    Business segment
    
    2006
    
    2007
    
    2008Digidesign, Inc.
    
    Professional audio equipment
    
    EPA and MPM(1)
    
    17.4      %
    
    13.3       %
    
    17.0      %Line 6 Manufacturing
    
    Professional audio equipment
    
    EPA and MPM(1)
    
    14.5
    
    15.1
    
    14.3N&J company Limited
    
    Plastic Component
    
    PIM(2)
    
    N/A
    
    *
    
    11.8Inter-Tel Incorporated
    
    Professional audio equipment
    
    EPA and MPM(1)
    
    *
    
    *
    
    10.2
 
 *
    
    Less than 10%.N/A
    
    Not a customer during the year.(1)
    
    Electronic products assembling and metallic parts manufacturing segment.(2)
    
    Plastic injection molding segment  23




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




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25




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Operating Results
  General
    Rate under EIT for enterprises previously subject to tax rate ofTax Year
    
    15 percent
    
    24 percent2008
    
    
    18
    %
    
    
    25
    %2009
    
    
    20
    %
    
    
    25
    %2010
    
    
    22
    %
    
    
    25
    %2011
    
    
    24
    %
    
    
    25
    %2012
    
    
    25
    %
    
    
    25
    %
 26




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Year ended March 31, 2006
    
    Year ended March 31, 2007
    
    Year ended March 31, 2008Plastic
    
    
    
    
    
    
    
    
    
    Plastic
    
    
    
    
    
    
    
    
    
    PlasticInjection
    
    Electronic &
    
    
    
    
    
    Injection
    
    Electronic &
    
    
    
    
    
    Injection
    
    Electronic &Molding
    
    Metallic
    
    
    
    
    
    Molding
    
    Metallic
    
    
    
    
    
    Molding
    
    MetallicSegment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    Total
    
    Segment
    
    Segment
    
    TotalNet sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    72.5
    
    
    
    81.9
    
    
    
    77.9
    
    
    
    68.1
    
    
    
    84.1
    
    
    
    77.1
    
    
    
    74.4
    
    
    
    86.6
    
    
    
    81.6Gross profit
    
    
    27.5
    
    
    
    18.1
    
    
    
    22.1
    
    
    
    31.9
    
    
    
    15.9
    
    
    
    22.9
    
    
    
    25.6
    
    
    
    13.4
    
    
    
    18.4Selling, general
and administrative
expenses
    
    
    17.7
    
    
    
    9.7
    
    
    
    13.1
    
    
    
    17.4
    
    
    
    11.2
    
    
    
    13.9
    
    
    
    18.4
    
    
    
    10.3
    
    
    
    13.6Other income, net
    
    
    (1.4
    )
    
    
    (0.3
    )
    
    
    (0.7
    )
    
    
    2.5
    
    
    
    (0.1
    )
    
    
    1.0
    
    
    
    4.0
    
    
    
    (0.6
    )
    
    
    1.3Operating income
    
    
    8.5
    
    
    
    8.1
    
    
    
    8.3
    
    
    
    17.0
    
    
    
    4.6
    
    
    
    10.0
    
    
    
    11.2
    
    
    
    2.5
    
    
    
    6.1Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-operating
income, net
    
    
    0.8
    
    
    
    
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.4Income before
income taxes and
minority interest
    
    
    9.4
    
    
    
    8.2
    
    
    
    8.7
    
    
    
    17.8
    
    
    
    4.8
    
    
    
    10.4
    
    
    
    12.0
    
    
    
    2.6
    
    
    
    6.5Income taxes
    
    
    (0.6
    )
    
    
    0.4
    
    
    
    
    
    
    
    1.8
    
    
    
    0.2
    
    
    
    0.9
    
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    0.1Income before
minority interests
    
    
    10.0
    
    
    
    7.8
    
    
    
    8.7
    
    
    
    15.9
    
    
    
    4.6
    
    
    
    9.5
    
    
    
    11.5
    
    
    
    2.8
    
    
    
    6.4Minority interests
    
    
    
    
    
    
    1.9
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1
    
    
    
    0.6
    
    
    
    
    
    
    
    0.3
    
    
    
    0.2Net income
    
    
    10.0
    %
    
    
    5.9
    %
    
    
    7.6
    %
    
    
    15.9
    %
    
    
    3.5
    %
    
    
    8.9
    %
    
    
    11.5
    %
    
    
    2.5
    %
    
    
    6.2
    %
 Year ended March 31, 2008 Compared to Year Ended March 31, 2007
 Net Sales
    Gross Profit
 27




---



##### Table of Contents



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




---



##### Table of Contents



Non-operating income
 Income Taxes
  Minority Interest
 Net Income
   Year ended March 31, 2007 Compared to Year Ended March 31, 2006
 Net Sales 
   29




---



##### Table of Contents



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




---



##### Table of Contents



Operating Income 
  Income Taxes
  Minority Interest
 Net Income
   31




---



##### Table of Contents



Seasonality
  Year ended March 31,2006
    
    2007
    
    2008Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Net sales
    
    $
    30,075
    
    
    $
    29,046
    
    
    $
    29,972
    
    
    $
    26,183
    
    
    $
    31,689
    
    
    $
    35,715
    
    
    $
    39,002
    
    
    $
    30,373
    
    
    $
    38,452
    
    
    $
    38,414
    
    
    $
    35,416
    
    
    $
    31,524Gross profit
    
    
    7,640
    
    
    
    6,209
    
    
    
    6,561
    
    
    
    5,016
    
    
    
    8,446
    
    
    
    8,865
    
    
    
    8,754
    
    
    
    5,208
    
    
    
    6,762
    
    
    
    6,698
    
    
    
    7,923
    
    
    
    5,050Operating
income
    
    
    3,600
    
    
    
    3,126
    
    
    
    2,632
    
    
    
    193
    
    
    
    3,866
    
    
    
    3,973
    
    
    
    4,016
    
    
    
    1,837
    
    
    
    3,304
    
    
    
    1,681
    
    
    
    3,033
    
    
    
    652Net income
    
    
    3,151
    
    
    
    2,795
    
    
    
    2,380
    
    
    
    453
    
    
    
    3,403
    
    
    
    3,597
    
    
    
    3,605
    
    
    
    1,562
    
    
    
    3,111
    
    
    
    1,755
    
    
    
    2,955
    
    
    
    1,038
  Impact of Inflation
  Exchange Rates
     32




---



##### Table of Contents



Liquidity and Capital Resources
        33




---



##### Table of Contents



Payments due by period (in thousands)Period from
    
    
    Period from
    
    
    PeriodYear ending
    
    
    April 1, 2009
    
    
    April 1, 2010
    
    
    afterMarch 31,
    
    
    to March 31,
    
    
    to March 31,
    
    
    March 31,Contractual obligations
    
    Total
    
    
    2009
    
    
    2011
    
    
    2013
    
    
    2013Long-term bank borrowing
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital (finance) lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    363
    
    
    
    230
    
    
    
    133
    
    
    
    
    
    
    
    Capital expenditures
    
    
    777
    
    
    
    777
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    11,004
    
    
    
    11,003
    
    
    
    1
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,144
    
    
    $
    12,010
    
    
    $
    134
    
    
    $
    
    
    
    $
    
 Off Balance Sheet Arrangements
  Critical Accounting Policies
   Inventories
 Valuation of long-lived assets
 Foreign currency translation
   34




---



##### Table of Contents



Allowance for doubtful account
 Income taxes
 Recent Changes in Accounting Standards
     35




---



##### Table of Contents



36




---



##### Table of Contents



Name
    
    Age
    
    Position(s) with CompanyLau Pui Hon (Richard Lau)
    
    
    63
    
    
    Chairman of the Board of DirectorsFranki S. F. Tse
    
    
    44
    
    
    Chief Executive OfficerLi Chin Pang (C. P. Li)
    
    
    62
    
    
    Executive Director of Manufacturing
and Administration for Plastic
Operations and Member of the Board of
DirectorsLeung Chi Wai (C. W. Leung)
    
    
    53
    
    
    Executive Director of Engineering for
Plastic Operations and Member of the
Board of DirectorsHung-Hum Leung
    
    
    62
    
    
    Non-Executive Director and Member of
Audit CommitteeAllen Yau-Nam Cham
    
    
    61
    
    
    Non-Executive Director and Chairman
of Audit CommitteeWing-Ki Hui
    
    
    62
    
    
    Non-Executive Director and Member of
Audit CommitteeBetty Lam
    
    
    46
    
    
    Chief Financial OfficerLee Shu Kwan (S. K. Lee)
    
    
    61
    
    
    Director of Administration and
Marketing for Electronic OperationsTam Man Chi (M. C. Tam)
    
    
    58
    
    
    Director of Engineering and
Manufacturing for Electronic
Operations
 Richard Lau
 Franki S. F. Tse.
 C. P. Li.
 C. W. Leung.
 Hung-Hum Leung.
 Allen Yau-Nam Cham
 37




---



##### Table of Contents



Wing-Ki Hui.
 Betty Lam
 S. K. Lee
 M. C. Tam.
   Executive Officers
  Directors
  38




---



##### Table of Contents



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




---



##### Table of Contents



Number of sharesbeneficially owned (1)Name of beneficial owner or identity of group
    
    Amount
    
    PercentWellington Management Company, LLP (2)
    
    
    1,795,762
    
    
    
    11.4
    %Richard Lau (3)
    
    
    1,641,545
    
    
    
    10.2
    %C. P. Li (4)
    
    
    1,446,250
    
    
    
    9.0
    %Royce & Associates, Inc. (5)
    
    
    1,364,969
    
    
    
    8.6
    %C. W. Leung (6)
    
    
    1,335,000
    
    
    
    8.4
    %FMR Corp./ Edward C. Johnson 3d (7)
    
    
    867,268
    
    
    
    5.5
    %M. C. Tam
    
    
    362,225
    
    
    
    2.3
    %S. K. Lee
    
    
    331,040
    
    
    
    2.1
    %Franki S. K. Tse
    
    
    *
    
    
    
    *Betty Lam (8)
    
    
    
    
    
    
    Eliza Y. P. Pang(9)
    
    
    *
    
    
    
    *Hung-Hum Leung
    
    Nil
    
    
    NilAllen Yau-Nam Cham
    
    Nil
    
    
    NilWing-Ki Hui
    
    Nil
    
    
    Nil
 
 *
    
    Less than 1%.(1)
    
    Based on 15,790,810 shares outstanding on June 30, 2008. However, in accordance with Rule
13d-3(d)(1) under the Securities Exchange Act of 1934, shares not outstanding but which are
the subject of currently exercisable options have been considered outstanding for the purpose
of computing the percentage of outstanding shares owned by the listed person holding such
options, but are not considered outstanding for the purpose of computing the percentage of
shares owned by any of the other listed persons.(2)
    
    Based on Amendment No. 5 to Schedule 13G filed with the SEC on February 14, 2008.(3)
    
    Consists of 1,346,545 held of record by Mr. Lau and options to purchase 295,000 shares
granted to Mr. Lau under the Companys stock option plans. Mr. Laus options are exercisable
at a weighted average exercise price of $10.41 per share until January 20, 2018.(4)
    
    Consists of 1,151,250 held of record by Mr. Li and options to purchase 295,000 shares granted
to Mr. Li under the Companys stock option plans. Mr. Lis options are exercisable at a
weighted average exercise price of $11.52 per share until January 20, 2018.(5)
    
    Based on Amendment No. 7 to a Schedule 13G filed with the SEC on February 1, 2008. 40




---



##### Table of Contents



(6)
    
    Consists of 1,140,000 held of record by Mr. Leung and options to purchase 195,000 shares
granted to Mr. Leung under the Companys stock option plans. Mr. Leungs options are
exercisable at a weighted average exercise price of $11.52 per share until January 20, 2018.(7)
    
    Based on Amendment No. 5 to a Schedule 13G filed with the SEC on February 14, 2008.(8)
    
    Ms. Lam joined the Company as its Chief Financial Officer effective August 1, 2008.(9)
    
    Ms. Pang resigned as Chief Financial Officer effective on July 31, 2008. Change in the Percentage Ownership Held by Major Shareholders
  Percentage Ownership at June 30,(1)2006
    
    2007
    
    2008Wellington Management Company, LLP
    
    
    9.6
    %
    
    
    10.6
    %
    
    
    11.4
    %Richard Lau(2)
    
    
    26.0
    %
    
    
    25.3
    %
    
    
    10.2
    %C. P. Li(2)
    
    
    25.2
    %
    
    
    24.0
    %
    
    
    9.0
    %Royce & Associates, Inc.
    
    
    10.4
    %
    
    
    8.1
    %
    
    
    8.6
    %C. W. Leung(2)
    
    
    24.3
    %
    
    
    24.1
    %
    
    
    8.4
    %FMR Corp./ Edward C. Johnson 3d/ Abigail P. Johnson
    
    
    6.3
    %
    
    
    6.0
    %
    
    
    5.5
    %Leesha Holdings Ltd.(2)
    
    
    23.1
    %
    
    
    22.8
    %
    
    
    Micropower Enterprises Limited
    
    
    7.7
    %
    
    
    7.6
    %
    
    
    
 
 (1)
    
    Based on 14,923,730, 15,143,730 and 15,790,810 shares outstanding on June 30, 2006, 2007 and
2008, 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.(2)
    
    Leesha Holding Ltd. 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 owned 3,453,750
common shares of Deswell, which were transferred to Leesha by Messrs. Lau, Li and Leung
shortly after Deswells initial public offering in 1996. On September 14, 2007, Leesha
declared a dividend to its shareholders of all 3,453,750 common shares of Deswell,
distributing 1,151,250 shares of the Company to each of Messrs. Lau, Li and Leung.
Accordingly, effective when Leesha distributed its Deswell shares, the beneficial ownership of
Leesha in Deswell, and the attribution of such ownership to each of Messrs. Lau, Li and Leung,
as Leeshas directors and principal shareholders, terminated.  Related Party Transactions
  41




---



##### Table of Contents



Financial Statements
  Legal Proceedings
  Exports Sales
  Dividend Policy
  
    
    2006 aggregating $9,400,000, $2,535,000 of which was based on results for the last
quarter of the year ended March 31, 2005 and $6,865,000 of which was based on results
for the first three quarters of the year ended March 31, 2006;
 
    
    2007 aggregating $9,720,000, $2,089,000 of which was based on results for the last
quarter of the year ended March 31, 2006 and $7,631,000 of which was based on results
for the first three quarters of the year ended March 31, 2007; and
 
    
    2008 aggregating $9,523,000, $2,574,000 of which was based on results for the last
quarter of the year ended March 31, 2007 and $6,949,000 of which was based on results
for the first three quarters of the year ended March 31, 2008.
  42




---



##### Table of Contents



Year Ended March 31,
    
    
    
    High
    
    Low2008
    
    
    
    
    $
    13.04
    
    
    $
    6.002007
    
    
    
    
    
    12.50
    
    
    
    8.102006
    
    
    
    
    
    16.48
    
    
    
    9.002005
    
    
    
    
    
    18.167
    
    
    
    12.8672004
    
    
    
    
    
    20.40
    
    
    
    10.43
  Quarter ended
    
    High
    
    LowMarch 31, 2008
    
    $
    6.96
    
    
    $
    6.07December 31, 2007
    
    
    7.47
    
    
    
    6.00September 30, 2007
    
    
    10.13
    
    
    
    9.24June 30, 2007
    
    
    13.04
    
    
    
    10.92March 31, 2007
    
    
    12.50
    
    
    
    11.21December 31, 2006
    
    
    11.70
    
    
    
    10.46September 30, 2006
    
    
    10.96
    
    
    
    8.40June 30, 2006
    
    
    9.90
    
    
    
    8.10
  Month ended
    
    High
    
    LowJune 30, 2008
    
    $
    7.41
    
    
    $
    5.60May 31, 2008
    
    
    7.65
    
    
    
    6.35April 30, 2008
    
    
    6.52
    
    
    
    5.98March 31, 2008
    
    
    6.96
    
    
    
    6.07February 29, 2008
    
    
    6.97
    
    
    
    5.90January 31, 2008
    
    
    6.19
    
    
    
    5.39
 43




---



##### Table of Contents



Share Capital
  Memorandum and Articles of Association
       
    
    Continue to be entitled to one vote for each whole share on all matters to be voted
upon by shareholders, including the election of directors;
 
    
    Continue not to have cumulative voting rights in the election of directors; and
 
    
    Continue to be entitled to receive dividends if and when declared by our board of
directors out of funds legally available under British Virgin Islands law.
 
    
    The 2007 Charter did not change that
 
    
    all of common shares are equal to each other with respect to liquidation and
dividend rights;
 
    
    in the event of our liquidation, all assets available for distribution to the
holders of our common shares are distributable among them according to their respective
holdings; or
 
    
    holders of our common shares have no preemptive rights to purchase any additional,
unissued common shares.
 Objects and Purposes
  Directors
  44




---



##### Table of Contents



Rights, Preferences and Restrictions of Authorized and Outstanding Shares and Changes to Rights of
Shareholders
        45




---



##### Table of Contents



Limitations on Share Ownership
  Potential Anti-Takeover Deterrence
        Ownership Information
  Differences from United States Law
  Material Contracts
  Integrated Stock Purchase Agreement (Exhibit 4.3)
  46




---



##### Table of Contents



Taxation
 United States Federal Income Tax Consequences
 General
  
    
    a dealer in securities or currencies;
 
    
    a trader in securities that elects to use a market-to-market method of accounting
for your securities holdings;
 
    
    a financial institution;
 
    
    an insurance company;
 
    
    a tax-exempt organization;
 
    
    a person that holds our common shares in a hedging transaction or as part of a
straddle or a conversion transaction;
 
    
    a person whose functional currency for tax purposes is not the U.S. dollar;
 
    
    a person liable for alternative minimum tax;
 
    
    a person that owns, or is treated as owning, 10 percent
or more of our common shares;
 
    
    certain former U.S. citizens and residents who have expatriated to avoid U.S.
taxation; or
 
    
    a person who receives our shares pursuant to the exercise of employee stock options
or otherwise as compensation.
 Tax Consequences to U.S. Holders
  
    
    an individual U.S. citizen or resident alien of the United States (as specifically
defined for tax purposes);
 
    
    a corporation, or other entity treated as a corporation for U.S. Federal income tax
purposes, created or organized in or under the laws of the United States or any State
or political subdivision thereof;
 
    
    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
 47




---



##### Table of Contents




    
    any other person or entity that would be subject to U.S. federal income tax on a net
income basis in respect of our common shares.
  Distributions
   Sale or Other Disposition of Our Shares
  
    
    you will recognize gain or loss equal to the difference (if any) between:
 
    
    the amount realized on such sale or other taxable disposition and
 
    
    your adjusted tax basis in such common shares (your adjusted tax basis in the shares
you hold generally will equal your U.S. dollar cost of such shares);
 
    
    such gain or loss will be capital gain or loss and will be long-term capital gain or
loss if your holding period for our common shares is more than one year at the time of
such sale or other disposition;
 
    
    net long-term capital gains derived by individual U.S. Holders from sales or other
taxable dispositions of our shares before January 1, 2011 will generally be taxed at
the rate of 5 percent (zero, in 2008, 2009 and 2010) or 15 percent, depending upon the
particular taxpayers U.S. federal income tax bracket;
 
    
    such gain or loss will generally be treated as having U.S. source for U.S. foreign
tax credit purposes; and
 
    
    your ability to deduct capital losses is subject to limitations.
 48




---



##### Table of Contents



Passive Foreign Investment Company
   
    
    75 percent or more of our gross income in that year is passive income (including our
pro-rata share of the gross income of any company in which we own, or are treated as
owning, 25 percent or more of the shares by value), which includes dividends,
interests, royalties, rents, annuities, and some types of gains; or
 
    
    the average percentage of the value of our assets in that year (including our
pro-rata share of the assets of any company in which we own, or are treated as owning,
25 percent or more of the shares by value) that produce or are held for the production
of passive income is at least 50 percent.
   
    
    any excess distribution, which would be your share of distributions in any year
that are greater than 125 percent of the average annual distributions received by you
in the three preceding years before the current taxable year (or during your holding
period for the shares, if shorter), and
 
    
    any gain realized on the sale or other disposition of our common shares.
  
    
    the excess distribution or gain would be allocated ratably to each day that you have
held our common shares,
 
    
    the amount allocated to the taxable year in which you realize the excess
distribution or gain would be taxed as ordinary income,
 
    
    the amount allocated to the taxable years prior to the first taxable year in which
we are a PFIC would be taxed as ordinary income for the taxable year in which you
realize the excess distribution or gain, and
 
    
    the amounts allocated to each of the prior taxable years for which we were a PFIC
would be taxed as ordinary income at the highest applicable tax rate in effect for that
year, and, in addition, an interest charge generally applicable to underpayments of tax
would be imposed on you, as if the tax had been due for the tax year to which such
amounts were allocated under these rules.
   49




---



##### Table of Contents



Tax Consequences to Non-U.S. Holders
  Distributions
  
    
    you conduct a trade or business in the United States and
 
    
    the distributions are effectively connected with the conduct of that trade or
business (and, if an applicable income tax treaty so requires as a condition for you to
be subject to U.S. federal income tax on a net income basis in respect of income from
our common shares, such distributions are attributable to a permanent establishment
that you maintain in the United States).
  Sale or Other Disposition of Our Shares
  
    
    your gain is effectively connected with a trade or business that you conduct in the
United States (and, if an applicable income tax treaty so requires as a condition for
you to be subject to U.S. federal income tax on a net income basis in respect of gain
from the sale or other disposition of our common shares, such gain is attributable to a
permanent establishment maintained by you in the United States), or
 
    
    you are an individual Non-U.S. Holder and are present in the United States for at
least 183 days in the taxable year of the sale or other disposition, and certain other
conditions exist.
  Backup Withholding and Information Reporting
  
    
    you are a corporation or other exempt recipient, or
 
    
    you provide your correct U.S. federal taxpayer identification number and certify,
under penalties of perjury, that no loss of exemption from backup withholding has
occurred.
   50




---



##### Table of Contents



British Virgin Islands Tax Consequences
   
  Exchange Controls
    Foreign Currency Risk
   EquivalentU.S. DollarHoldingsUnited States dollars
    
    $
    10,267,000Chinese RMB
    
    
    7,243,000Hong Kong dollars
    
    
    5,122,000Macao dollars
    
    
    54,000Euro
    
    
    21,000Japanese yen
    
    
    9,000Pounds sterling
    
    
    2,000
  51




---



##### Table of Contents



Interest Rate Risk
  
   
  
   
   
  Disclosure Controls and Procedures
   Report of Management on Internal Control over Financial Reporting
   52




---



##### Table of Contents



Attestation Report of the Registered Public Accounting Firm
   To the Shareholders and the Board of Directors of Deswell Industries, Inc.
      53




---



##### Table of Contents



Changes in Internal Controls
  
    
    Installed and implemented a new resource planning software system in our electronic
manufacturing segment since October 2007 which we expect to produce more reliable and
free of inaccuracies resulting from computational or other output errors.
 
    
    Established new end user manuals and trainings through which we have introduced and
strengthened controls over financial reporting outputs.
 
    
    Implemented a revised inventory valuation method in our plastic manufacturing
operations to more accurately record the cost of work in process and finished goods
inventories in the preparation of our financial statements.
    
  
   
   54




---



##### Table of Contents



Year ended March 31,2007
    
    
    2008(In thousands)Audit fees (1)
    
    $
    122
    
    
    $
    244Audit-related fees(2)
    
    
    
    
    
    
    Tax fees(3)
    
    
    
    
    
    
    All other fees(4)
    
    
    
    
    
    
    $
    122
    
    
    $
    244
 
 (1)
    
    Audit Fees consist of fees billed for the annual audit of our consolidated financial
statements and the statutory financial statements of our subsidiaries. They also include fees
billed for other audit services, which are those services that only the external auditor
reasonably can provide, and include the provision for consents relating to the review of
documents filed with the SEC.(2)
    
    There were no other audit-related fees billed by the principal accountant during the last two
fiscal years for assurance and related services that were reasonably related to the
performance of the audit not reported under Audit Fees above.(3)
    
    There were no tax fees billed by the principal accountant during the last two fiscal years.(4)
    
    There were no other fees billed by the principal accountant during the last two fiscal years
for products and services provided by BDO. Audit Committee Pre-approval Policies and Procedures
  
   
   55




---



##### Table of Contents



PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Income and Comprehensive Income
    
    
    F-3Consolidated Statements of Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
  56




---



##### Table of Contents



BDO McCabe Lo Limited
  F-1




---



##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (U.S. dollars in thousands)
 March 31,2007
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,549
    
    
    $
    22,718Marketable securities (note 3)
    
    
    107
    
    
    
    116Accounts receivable, less allowances for doubtful amounts of $1,230 and $74
at March 31, 2007 and 2008, respectively
    
    
    21,063
    
    
    
    21,397Inventories (note 4)
    
    
    29,495
    
    
    
    26,462Prepaid expenses and other current assets (note 5)
    
    
    4,999
    
    
    
    3,205Income taxes receivable
    
    
    130
    
    
    
    3Total current assets
    
    
    80,343
    
    
    
    73,901Property, plant and equipment-net (notes 6)
    
    
    60,157
    
    
    
    65,885Deferred income tax assets (note 10)
    
    
    
    
    
    
    230Goodwill (note 8)
    
    
    710
    
    
    
    391Total assets
    
    $
    141,210
    
    
    $
    140,407LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,865
    
    
    $
    12,527Accrued payroll and employee benefits
    
    
    2,746
    
    
    
    2,769Customer deposits
    
    
    783
    
    
    
    1,125Other accrued liabilities (note 9)
    
    
    1,506
    
    
    
    2,100Income taxes payable
    
    
    450
    
    
    
    629Deferred income tax liability (note 10)
    
    
    321
    
    
    
    Total current liabilities
    
    
    21,671
    
    
    
    19,150Commitments and contingencies (note 11)
    
    
    
    
    
    
    Minority interests
    
    
    7,884
    
    
    
    Shareholders equity:Common shares nil par value-authorized 30,000,000 shares,
shares issued and outstanding March 31, 2007 - 15,038,730;
March 31, 2008 - 15,790,810 (note 12)
    
    
    42,393
    
    
    
    49,923Additional paid-in capital
    
    
    7,601
    
    
    
    7,709Accumulated other comprehensive income
    
    
    1,106
    
    
    
    3,734Retained earnings
    
    
    60,555
    
    
    
    59,891Total shareholders equity
    
    
    111,655
    
    
    
    121,257Total liabilities and shareholders equity
    
    $
    141,210
    
    
    $
    140,407
  F-2




---



##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (U.S. dollars in thousands, except per share data)
 Year ended March 31,2006
    
    
    2007
    
    
    2008Net sales
    
    $
    115,276
    
    
    $
    136,779
    
    
    $
    143,806Cost of sales
    
    
    89,850
    
    
    
    105,506
    
    
    
    117,373Gross profit
    
    
    25,426
    
    
    
    31,273
    
    
    
    26,433Selling, general and administrative expenses
    
    
    15,052
    
    
    
    18,957
    
    
    
    19,601Other income (expenses), net
    
    
    (823
    )
    
    
    1,376
    
    
    
    1,838Operating income (note 2)
    
    
    9,551
    
    
    
    13,692
    
    
    
    8,670Interest expense
    
    
    (6
    )
    
    
    
    
    
    
    Non-operating income, net
    
    
    447
    
    
    
    547
    
    
    
    521Income before income taxes and minority interests
    
    
    9,992
    
    
    
    14,239
    
    
    
    9,191Income taxes (note 10)
    
    
    (27
    )
    
    
    1,239
    
    
    
    104Income before minority interests
    
    
    10,019
    
    
    
    13,000
    
    
    
    9,087Minority interests
    
    
    1,240
    
    
    
    833
    
    
    
    228Net income
    
    
    8,779
    
    
    
    12,167
    
    
    
    8,859Other comprehensive incomeForeign currency translation adjustment
    
    
    436
    
    
    
    670
    
    
    
    2,628Comprehensive income
    
    $
    9,215
    
    
    $
    12,837
    
    
    $
    11,487Net income per share (note 2)Basic:Net income per share
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57Weighted average common shares outstanding
(shares in thousands)
    
    
    14,908
    
    
    
    14,956
    
    
    
    15,517Diluted:Net income per share
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57Weighted average common and potential common shares
(shares in thousands)
    
    
    14,936
    
    
    
    15,048
    
    
    
    15,556
  F-3




---



##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (U.S. dollars in thousands, except per share data)
 AccumulatedCommon stock
    
    Additional
    
    otherShares
    
    
    
    
    
    paid-in
    
    comprehensive
    
    Retained
    
    Shareholdersoutstanding
    
    Amount
    
    capital
    
    income
    
    earnings
    
    equityBalance at March 31, 2005
    
    
    14,778,730
    
    
    
    39,068
    
    
    
    6,970
    
    
    
    
    
    
    
    58,729
    
    
    
    104,767Exercise of stock options
    
    
    25,000
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352Issue of common stock for
acquisition of additional
interest in a subsidiary
    
    
    120,000
    
    
    
    1,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,834Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    436Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,779
    
    
    
    8,779Dividends ($0.63 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,400
    )
    
    
    (9,400
    )Balance at March 31, 2006
    
    
    14,923,730
    
    
    
    41,254
    
    
    
    6,970
    
    
    
    436
    
    
    
    58,108
    
    
    
    106,768Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    820
    
    
    
    
    
    
    
    
    
    
    
    820Exercise of stock options
    
    
    115,000
    
    
    
    1,139
    
    
    
    (189
    )
    
    
    
    
    
    
    
    
    
    
    950Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    670
    
    
    
    
    
    
    
    670Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,167
    
    
    
    12,167Dividends ($0.65 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,720
    )
    
    
    (9,720
    )Balance at March 31, 2007
    
    
    15,038,730
    
    
    
    42,393
    
    
    
    7,601
    
    
    
    1,106
    
    
    
    60,555
    
    
    
    111,655Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    310Exercise of stock options
    
    
    120,000
    
    
    
    1,188
    
    
    
    (202
    )
    
    
    
    
    
    
    
    
    
    
    986Issue of common stock for
acquisition of additional
interest in a subsidiary
    
    
    632,080
    
    
    
    6,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,342Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,628
    
    
    
    
    
    
    
    2,628Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,859
    
    
    
    8,859Dividends ($0.61 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,523
    )
    
    
    (9,523
    )Balance at March 31, 2008
    
    
    15,790,810
    
    
    
    49,923
    
    
    
    7,709
    
    
    
    3,734
    
    
    
    59,891
    
    
    
    121,257
  F-4




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (U.S. dollars in thousands)
 Year ended March 31,2006
    
    
    2007
    
    
    2008Cash flows from operating activitiesNet income
    
    $
    8,779
    
    
    $
    12,167
    
    
    $
    8,859Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,299
    
    
    
    5,274
    
    
    
    6,940Loss (gain) on sale of property, plant and equipment
    
    
    45
    
    
    
    (643
    )
    
    
    43Unrealized holding (gain) loss on marketable securities
    
    
    80
    
    
    
    57
    
    
    
    (9
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    317Stock-based compensation
    
    
    
    
    
    
    820
    
    
    
    310Minority interests
    
    
    1,215
    
    
    
    833
    
    
    
    228Deferred tax
    
    
    (294
    )
    
    
    615
    
    
    
    (551
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    6,773
    
    
    
    (2,745
    )
    
    
    (334
    )Inventories
    
    
    (709
    )
    
    
    (7,650
    )
    
    
    3,033Prepaid expenses and other current assets
    
    
    (274
    )
    
    
    36
    
    
    
    (345
    )Income taxes receivable
    
    
    20
    
    
    
    (130
    )
    
    
    127Accounts payable
    
    
    (5,563
    )
    
    
    4,979
    
    
    
    (3,338
    )Accrued payroll and employee benefits
    
    
    (605
    )
    
    
    1,331
    
    
    
    23Customer deposits
    
    
    (194
    )
    
    
    109
    
    
    
    342Other accrued liabilities
    
    
    (2,109
    )
    
    
    488
    
    
    
    594Income taxes payable
    
    
    (141
    )
    
    
    266
    
    
    
    179Net cash provided by operating activities
    
    
    12,322
    
    
    
    15,807
    
    
    
    16,418Cash flows from investing activitiesPurchase of property, plant and equipment
    
    
    (6,940
    )
    
    
    (7,812
    )
    
    
    (7,288
    )Acquisition of minority interest in a subsidiary
    
    
    
    
    
    
    
    
    
    
    (414
    )Proceeds from sale of property, plant and equipment
    
    
    50
    
    
    
    3,232
    
    
    
    333Net cash used in investing activities
    
    
    (6,890
    )
    
    
    (4,580
    )
    
    
    (7,369
    )Cash flows from financing activitiesDividends paid
    
    
    (7,311
    )
    
    
    (11,809
    )
    
    
    (9,523
    )Dividends paid to minority shareholders of a subsidiary
    
    
    (1,229
    )
    
    
    (582
    )
    
    
    Exercise of stock options
    
    
    352
    
    
    
    950
    
    
    
    986Decrease in restricted cash
    
    
    391
    
    
    
    649
    
    
    
    Loan to minority shareholders of subsidiaries
    
    
    (170
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (7,967
    )
    
    
    (10,792
    )
    
    
    (8,537
    )Effect of exchange rate changes
    
    
    (169
    )
    
    
    (1,255
    )
    
    
    (2,343
    )Net decrease in cash and cash equivalents
    
    
    (2,704
    )
    
    
    (820
    )
    
    
    (1,831
    )Cash and cash equivalents, beginning of year
    
    
    28,073
    
    
    
    25,369
    
    
    
    24,549Cash and cash equivalents, end of year
    
    $
    25,369
    
    
    $
    24,549
    
    
    $
    22,718Supplementary disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    6
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    387
    
    
    $
    487
    
    
    $
    365Supplementary disclosures of significant non-cash transactions:Issuance of common stock in connection with acquisition of
additional 24% (2006: 5%) shareholding in a subsidiary
    
    $
    1,834
    
    
    $
    
    
    
    $
    6,342Excess of acquisition cost over the fair value of acquired
net assets of additional shareholding of a subsidiary
    
    $
    234
    
    
    $
    
    
    
    $
    (1,314
    )
  F-5




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 1. Organization and Basis of Financial Statements
       2. Summary of Significant Accounting Policies
 Principles of consolidation
 Goodwill
  Cash and cash equivalents
 Marketable
securities
 Inventories
 F-6




---



##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Property, plant and equipment
 Leasehold land and buildings
    
    40-50 yearsPlant and machinery
    
    4-10 yearsFurniture, fixtures and equipment
    
    4-5 yearsMotor vehicles
    
    3-4 yearsLeasehold improvements
    
    the shorter of 5 years or the lease term
 Valuation of long-lived assets
 Revenue recognition
 Comprehensive income
 Allowance for doubtful account
 Reclassification of financial statements 
 Shipping
and handling cost
 Income taxes
  F-7




---



##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Foreign currency translation
    Post-retirement and post-employment benefits
 Stock-based compensation
     2007
    
    2008Risk-free interest rate  weighted average
    
    
    5.22
    %
    
    
    3.63
    %Expected life of options  weighted average
    
    10 years
    
    10 yearsStock volatility
    
    
    44.1
    %
    
    
    41.28
    %Expected dividend yield
    
    
    4.75
    %
    
    
    5.04
    %
  F-8




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
 Net
income per share
  Year ended March 31,2006
    
    
    2007
    
    
    2008Net income
    
    $
    8,779
    
    
    $
    12,167
    
    
    $
    8,859Basic net income per share
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57Basic weighted average common shares outstanding
    
    
    14,908
    
    
    
    14,956
    
    
    
    15,517Effect of dilutive securities  Options
    
    
    28
    
    
    
    92
    
    
    
    39Diluted weighted average common and potential common
shares outstanding
    
    
    14,936
    
    
    
    15,048
    
    
    
    15,556Diluted net income per share
    
    $
    0.59
    
    
    $
    0.81
    
    
    $
    0.57
 Use
of estimates
    F-9




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 2. Summary of Significant Accounting Policies  continued
     3. Marketable Securities
  March 31,2007
    
    2008Cost
    
    $
    297
    
    
    $
    297Market value
    
    $
    107
    
    
    $
    116
   F-10




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 4. Inventories
  March 31,2007
    
    2008Raw materials
    
    $
    13,267
    
    
    $
    14,855Work in progress
    
    
    10,227
    
    
    
    6,259Finished goods
    
    
    6,001
    
    
    
    5,348$
    29,495
    
    
    $
    26,462
 5. Prepaid Expenses and Other Current Assets
  March 31,2007
    
    2008Value added tax receivable
    
    $
    2,723
    
    
    $
    1,396Deposit for purchase of plant and equipment
    
    
    82
    
    
    
    286Rental and utility deposit
    
    
    139
    
    
    
    43Advance to suppliers
    
    
    587
    
    
    
    896Prepayment
    
    
    353
    
    
    
    215Others
    
    
    1,115
    
    
    
    369$
    4,999
    
    
    $
    3,205
 6. Property, Plant and Equipment
  March 31,2007
    
    2008At cost:Land and buildings
    
    $
    30,553
    
    
    $
    34,236Plant and machinery
    
    
    39,488
    
    
    
    45,068Furniture, fixtures and equipment
    
    
    18,721
    
    
    
    21,839Motor vehicles
    
    
    2,775
    
    
    
    2,917Leasehold improvements
    
    
    5,305
    
    
    
    6,357Total
    
    
    96,842
    
    
    
    110,417Less: accumulated depreciation and amortization
    
    
    (37,869
    )
    
    
    (45,488
    )Construction in progress
    
    
    1,184
    
    
    
    956Net book value
    
    $
    60,157
    
    
    $
    65,885
  March 31,2007
    
    2008Land use right of state-owned land and buildings erected thereon (a)
    
    $
    24,911
    
    
    $
    28,580Long term leased land and buildings erected thereon (b)
    
    
    4,170
    
    
    
    4,169Other buildings (c)
    
    
    1,472
    
    
    
    1,487$
    30,553
    
    
    $
    34,236
 F-11




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 6. Property, Plant and Equipment  continued
    7. Credit Facilities and Pledged Assets
  8. Goodwill
  Acquisitions
    
    March 31,2007
    
    2008Electronic division
    
    $
    393
    
    
    $
    393Metallic division
    
    
    317
    
    
    
    317Foreign exchange differences
    
    
    
    
    
    
    (2
    )Impairment  metallic division
    
    
    
    
    
    
    (317
    )$
    710
    
    
    $
    391
 9. Other Accrued Liabilities
  March 31,2007
    
    2008Accrued expenses
    
    $
    777
    
    
    $
    1,013Commission expenses
    
    
    254
    
    
    
    260Others
    
    
    475
    
    
    
    827$
    1,506
    
    
    $
    2,100
 F-12




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 10. Income Taxes
  Year ended March 31,2006
    
    2007
    
    2008Hong Kong
    
    $
    4
    
    
    $
    (1
    )
    
    $
    (1
    )China and others
    
    
    9,988
    
    
    
    14,240
    
    
    
    9,192$
    9,992
    
    
    $
    14,239
    
    
    $
    9,191
       F-13




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 10. Income Taxes  continued
        Year ended March 31,2006
    
    2007
    
    2008Current tax- Hong Kong
    
    $
    29
    
    
    $
    9
    
    
    $
    - China
    
    
    238
    
    
    
    615
    
    
    
    654Deferred tax
    
    
    (294
    )
    
    
    615
    
    
    
    (550
    )$
    (27
    )
    
    $
    1,239
    
    
    $
    104
 F-14




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 10. Income Taxes  continued
  Year ended March 31,2006
    
    2007
    
    2008Provision for income taxes at statutory tax rate in China
    
    $
    2,698
    
    
    $
    3,837
    
    
    $
    2,988Effect of different tax rate in various jurisdictions
    
    
    6
    
    
    
    212
    
    
    
    Tax holidays and concessions
    
    
    99
    
    
    
    (351
    )
    
    
    (89
    )Effect of income for which no income tax is chargeable
    
    
    (2,853
    )
    
    
    (3,007
    )
    
    
    (3,204
    )Net change in valuation allowances
    
    
    
    
    
    
    264
    
    
    
    (16
    )Under provision of income tax in previous year
    
    
    8
    
    
    
    273
    
    
    
    477Others
    
    
    15
    
    
    
    11
    
    
    
    (52
    )Effective tax
    
    $
    (27
    )
    
    $
    1,239
    
    
    $
    104
  March 31, 20082007
    
    2008Deferred tax asset:Net operating loss carryforwards
    
    $
    264
    
    
    $
    478Less: Valuation allowances
    
    
    (264
    )
    
    
    (248
    )
    
    
    
    230Deferred tax liabilityRevenue recognized for financial reporting
purpose before being recognized for tax purpose
    
    
    (321
    )
    
    
    Net deferred tax asset (liability)
    
    $
    (321
    )
    
    $
    230
 11. Commitments and Contingencies
   Years ending March 312009
    
    $
    2302010
    
    
    1162011
    
    
    17Total minimum lease payments
    
    $
    363
   F-15




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 12. Shareholders Equity
  13. Employee Benefits
  14. Stock Option Plan
   Year ended March 31,2006
    
    2007
    
    2008Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    average
    
    Number
    
    average
    
    Number
    
    averageof stock
    
    exercise
    
    of stock
    
    exercise
    
    of stock
    
    exerciseoptions
    
    price
    
    options
    
    price
    
    options
    
    priceOutstanding at beginning of the year
    
    
    669,000
    
    
    $
    14.10
    
    
    
    644,000
    
    
    $
    14.10
    
    
    
    1,029,000
    
    
    $
    11.91Granted during the year
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    8.26
    
    
    
    210,000
    
    
    
    5.71Exercised during the year
    
    
    (25,000
    )
    
    
    14.10
    
    
    
    (115,000
    )
    
    
    8.26
    
    
    
    (120,000
    )
    
    
    8.26Outstanding and exercisable at the end of the year
    
    
    644,000
    
    
    
    14.10
    
    
    
    1,029,000
    
    
    
    11.91
    
    
    
    1,119,000
    
    
    
    11.14Range of exercise price per share
    
    
    
    
    
    $
    14.10
    
    
    
    
    

    $8.26 to $14.10
    
    
    
    
    
    $5.71 to $14.10
   F-16




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 15. Operating Risk
  Percentage of net salesYear ended March 31,2006
    
    2007
    
    2008Digidesign, Inc.
    
    
    17.4
    %
    
    
    13.3
    %
    
    
    17.0
    %Line 6 Manufacturing
    
    
    14.5
    %
    
    
    15.1
    %
    
    
    14.3
    %N&J Company Limited
    
    
    *
    
    
    
    *
    
    
    
    11.8
    %Inter-Tel Incorporated
    
    
    *
    
    
    
    *
    
    
    
    10.2
    %VTech Telecommunications Limited
    
    
    *
    
    
    
    12.7
    %
    
    
    *Peavey Electronic Corp.
    
    
    *
    
    
    
    10.4
    %
    
    
    *Epson Precision (H.K.) Limited
    
    
    14.6
    %
    
    
    *
    
    
    
    *
 
 *
    
    Less than 10%   Percentage ofaccountsreceivableMarch 31,2007
    
    2008Largest receivable balances
    
    
    57.8
    %
    
    
    60.0
    %
  Country risk
 16. Fair Value of Financial Instruments
  17. Segment Information
   F-17




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 17. Segment Information  Continued
  Year ended March 31,2006
    
    
    2007
    
    
    2008Net
    
    
    Intersegment
    
    
    Profit
    
    
    Net
    
    
    Intersegment
    
    
    Profit
    
    
    Net
    
    
    Intersegment
    
    
    Profitsales
    
    
    Sales
    
    
    (loss)
    
    
    sales
    
    
    Sales
    
    
    (loss)
    
    
    sales
    
    
    Sales
    
    
    (loss)Segment:Injection molded plastic parts
    
    $
    49,429
    
    
    $
    1,152
    
    
    $
    4,521
    
    
    $
    59,587
    
    
    $
    150
    
    
    $
    10,554
    
    
    $
    58,858
    
    
    $
    28
    
    
    $
    7,049Electronic products
    
    
    66,563
    
    
    
    1,926
    
    
    
    7,282
    
    
    
    77,970
    
    
    
    2,969
    
    
    
    3,551
    
    
    
    85,494
    
    
    
    3,940
    
    
    
    2,412Metallic parts
    
    
    2,362
    
    
    
    
    
    
    
    (1,811
    )
    
    
    2,341
    
    
    
    
    
    
    
    134
    
    
    
    3,422
    
    
    
    
    
    
    
    (270
    )Segment total
    
    $
    118,354
    
    
    $
    3,078
    
    
    $
    9,992
    
    
    $
    139,898
    
    
    $
    3,119
    
    
    $
    14,239
    
    
    $
    147,774
    
    
    $
    3,968
    
    
    $
    9,191Reconciliation to consolidated
totals:Sales eliminations
    
    
    (3,078
    )
    
    
    (3,078
    )
    
    
    
    
    
    
    (3,119
    )
    
    
    (3,119
    )
    
    
    
    
    
    
    (3,968
    )
    
    
    (3,968
    )
    
    
    Consolidated totals:Net sales
    
    $
    115,276
    
    
    $
    
    
    
    
    
    
    
    $
    136,779
    
    
    $
    
    
    
    
    
    
    
    $
    143,806
    
    
    $
    -Income before income taxes
and minority interests
    
    
    
    
    
    
    
    
    
    $
    9,992
    
    
    
    
    
    
    
    
    
    
    $
    14,239
    
    
    
    
    
    
    
    
    
    
    $
    9,191
 Year ended March 31,2006
    
    
    2007
    
    
    2008Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interestincome
    
    
    expenses
    
    
    income
    
    
    expenses
    
    
    income
    
    
    expensesSegment:Injection molded plastic parts
    
    $
    407
    
    
    $
    
    
    
    $
    436
    
    
    $
    
    
    
    $
    458
    
    
    $
    Electronic products
    
    
    64
    
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    49
    
    
    
    Metallic parts
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated total
    
    $
    471
    
    
    $
    6
    
    
    $
    527
    
    
    $
    
    
    
    $
    507
    
    
    $
    
 Year ended March 31,2006
    
    
    2007
    
    
    2008Depreciation
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    
    
    
    
    DepreciationIdentifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    and
    
    
    Identifiable
    
    
    Capital
    
    
    andassets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortization
    
    
    assets
    
    
    expenditure
    
    
    amortizationSegment:Injection molded
plastic parts
    
    $
    89,622
    
    
    $
    6,156
    
    
    $
    3,844
    
    
    $
    93,633
    
    
    $
    7,080
    
    
    $
    4,064
    
    
    $
    96,463
    
    
    $
    5,050
    
    
    $
    5,613Electronic products
    
    
    33,796
    
    
    
    555
    
    
    
    993
    
    
    
    45,108
    
    
    
    595
    
    
    
    903
    
    
    
    42,583
    
    
    
    1,994
    
    
    
    1,048Metallic parts
    
    
    6,768
    
    
    
    230
    
    
    
    462
    
    
    
    2,279
    
    
    
    137
    
    
    
    307
    
    
    
    1,540
    
    
    
    244
    
    
    
    279Segment totals
    
    $
    130,186
    
    
    $
    6,941
    
    
    $
    5,299
    
    
    $
    141,020
    
    
    $
    7,812
    
    
    $
    5,274
    
    
    $
    140,586
    
    
    $
    7,288
    
    
    $
    6,940Reconciliation to
consolidated
totals:Elimination of
receivables
from intersegments
    
    
    (226
    )
    
    
    
    
    
    
    
    
    
    
    (520
    )
    
    
    
    
    
    
    
    
    
    
    (570
    )
    
    
    
    
    
    
    Goodwill not
allocated to
segments
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    Consolidated totals
    
    $
    130,670
    
    
    $
    6,941
    
    
    $
    5,299
    
    
    $
    141,210
    
    
    $
    7,812
    
    
    $
    5,274
    
    
    $
    140,407
    
    
    $
    7,288
    
    
    $
    6,940
 F-18




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##### Table of Contents



DESWELL INDUSTRIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
 17. Segment Information  Continued
 The Companys sales are coordinated through the Macau subsidiaries and a breakdown of sales by
destination is as follows:
 Year ended March 31,2006
    
    
    2007
    
    
    2008Net salesUnited States of America
    
    $
    56,514
    
    
    $
    57,968
    
    
    $
    67,302China
    
    
    43,220
    
    
    
    53,573
    
    
    
    53,231United Kingdom
    
    
    7,335
    
    
    
    14,379
    
    
    
    13,055Hong Kong
    
    
    3,409
    
    
    
    4,670
    
    
    
    2,486Europe
    
    
    763
    
    
    
    971
    
    
    
    2,227Others
    
    
    4,035
    
    
    
    5,218
    
    
    
    5,505Total net sales
    
    $
    115,276
    
    
    $
    136,779
    
    
    $
    143,806
  March 31,2006
    
    
    2007
    
    
    2008Hong Kong and Macau
    
    $
    41,933
    
    
    $
    41,749
    
    
    $
    37,800China
    
    
    88,027
    
    
    
    98,751
    
    
    
    102,216Total identifiable assets
    
    
    129,960
    
    
    $
    140,500
    
    
    $
    140,016Goodwill
    
    
    710
    
    
    
    710
    
    
    
    391Total assets
    
    $
    130,670
    
    
    $
    141,210
    
    
    $
    140,407
 F-19




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##### Table of Contents



Exhibit No.
    
    Description1.1
    
    Memorandum and Articles of Association (as amended and restated on 13th December,
2007) (incorporated by reference to Exhibit 1.1 to Deswells Registration Statement on Form
8-A filed with the SEC on December 31, 2007).2.1
    
    Form of common share certificate (incorporated by reference to Exhibit 4.1 of Amendment No.
1 to Deswells Registration Statement on Form F-1 filed with the SEC on July 13, 1995).4.1
    
    2001 Stock Option Plan (incorporated by reference to Exhibit A to the Companys Proxy
Statement for its 2001 Annual Meeting of Stockholders filed with the SEC under cover of Form
6-K on December 12, 2001.)4.2
    
    2003 Stock Option Plan of Deswell Industries, Inc. (as adopted August 20, 2003 and amended
August 1, 2005 and August 17, 2007) (incorporated by reference to Exhibit A to the Companys
Proxy Statement filed with the Securities and Exchange Commission on Form 6-K on September
11, 2007).4.3
    
    Stock Purchase Agreement dated as of August 17, 2007 by and among Lee Shu Kwan (S. K. Lee),
Tam Man Chi (M. C. Tam), shareholders of Integrated International Ltd., and Deswell
Industries, Inc.8.1
    
    Diagram of the Companys operating subsidiaries and affiliates  (see page 16 of this report)11.1
    
    Code of Ethics (incorporated by reference to Exhibit 11.1 of registrants Form 20-F for the
year ended March 31, 2004, filed with the SEC on July 16, 2004)12.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 193412.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 193413.1
    
    Certification Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act Of 200214.1
    
    Consent of BDO International to incorporation of its report on the Companys consolidated
financial statements into Registrants Registration Statements on Form S-8.
 57




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##### Table of Contents



DESWELL INDUSTRIES, INC.By:

/s/
Franki S. F. TseFranki S. F. Tse,Chief Executive Officer  58