<PAGE>   1
                       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

[X]     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, 2001                                             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, 2001, there were 5,597,931 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>   2


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
<S>               <C>                                                             <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....................  25
    Item 7.       Major Shareholders and Related Party Transactions.............  28
    Item 8.       Financial Information.........................................  31
    Item 9.       The Listing...................................................  32
    Item 10.      Additional Information........................................  33
    Item 11.      Quantitative and Qualitative Disclosure about Market Risk.....  48
    Item 12.      Description of Securities Other than Equity Securities........  48
PART II
    Item 13.      Defaults, Dividend Arrearages and Delinquencies...............  49
    Item 14.      Material Modifications to the Rights of Security Holders and
                  Use of Proceeds...............................................  49
    Item 15       [Reserved]
    Item 16.      [Reserved]
PART III
    Item 17.      Financial Statements..........................................  49
    Item 18       Financial Statements..........................................  49
    Item 19       Exhibits......................................................  50
SIGNATURES .....................................................................  52
</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>   3


                                     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, 2001, and the balance
sheet data as of March 31, 2000 and 2001 are derived from our audited
consolidated financial statements included in this Report. The selected income
statement data for the year ended March 31, 1997 and 1998, and the balance sheet
data as of March 31, 1997, 1998 and 1999 are derived from our audited
consolidated financial statements, which are not included in this Report.

<TABLE>
<CAPTION>
                                                                    YEAR ENDED MARCH 31,
                                          ------------------------------------------------------------------------
        INCOME STATEMENT DATA                      (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
                                            1997            1998            1999            2000            2001
                                          --------        --------        --------        --------        --------
<S>                                       <C>             <C>             <C>             <C>             <C>
Net sales                                 $ 44,540        $ 66,169        $ 53,439        $ 60,958        $ 80,847
Cost of sales                               25,465          36,246          32,179          38,262          52,596
                                          --------        --------        --------        --------        --------
Gross profit                                19,075          29,923          21,260          22,696          28,251
Selling, general and administrative
 expenses                                    7,943          14,067          10,364          11,970          15,414
                                          --------        --------        --------        --------        --------
Operating income                            11,132          15,856          10,896          10,726          12,837
Interest expense                               (49)             (2)           (306)             (3)             (6)
Other income, net                              355           1,094             939             898             915
                                          --------        --------        --------        --------        --------
Income before income taxes                  11,438          16,948          11,529          11,621          13,746
Income taxes                                   528             688             462             890             315
                                          --------        --------        --------        --------        --------
Income before minority interests            10,910          16,260          11,067          10,731          13,431
Minority interests                           2,165           3,289           1,575             433             621
                                          --------        --------        --------        --------        --------
Net income                                $  8,745        $ 12,971        $  9,492        $ 10,298        $ 12,810
                                          ========        ========        ========        ========        ========
Basic earnings per share (2)              $   1.90        $   2.59        $   1.73        $   1.90        $   2.38
                                          ========        ========        ========        ========        ========
Average number of shares
  outstanding--basic (2)                     4,610           5,006           5,478           5,412           5,376
Diluted earnings per share                $   1.85        $   2.40        $   1.72        $   1.89        $   2.36
Average number of shares
  outstanding--diluted (2)                   4,737           5,394           5,524           5,449           5,435
          STATISTICAL DATA:
Gross margin                                  42.8%           45.2%           39.8%           37.2%           34.9%
Operating margin                              25.0%           24.0%           20.4%           17.6%           15.9%
Dividends per share                       $   0.60        $   0.70        $   1.08        $   0.88        $   0.88
         BALANCE SHEET DATA
</TABLE>

<TABLE>
<CAPTION>
                                          ------------------------------------------------------------------------
                                            1997            1998            1999            2000            2001
                                          --------        --------        --------        --------        --------
<S>                                       <C>             <C>             <C>             <C>             <C>
Working capital                           $ 21,375        $ 35,968        $ 41,066        $ 44,727        $ 47,356
Total assets                                40,879          59,144          64,273          71,841          83,466
Long-term debt, less current portion             -               -               -               -               -
Total debt                                       -               -               -               -               -
Shareholders' equity                        29,467          45,211          48,767          53,031          63,877
</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)  In February 1997, the Financial Accounting Standards Board ("FASB") issued
     SFAS No. 128, "Earnings Per Share," effective for financial statements
     issued after December 15, 1997. SFAS No. 128 requires that presentation of
     "Basic" and "Diluted" EPS by entities with complex capital structures,
     replacing "Primary" and "Fully Diluted" EPS under APB Opinion No. 15. 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, similar to fully
     diluted EPS, but uses only the average stock price during the period as
     part of the computation. The Company adopted the new method of reporting
     EPS for the year ended March 31, 1998 and the financial statements for the
     years ended March 31, 1997 have been restated to reflect the change.


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<PAGE>   4

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 be renewed, we would be
required 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 of 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, 2001, we maintained fire, casualty and theft
insurance aggregating approximately U.S. $25,534,000 covering certain 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

                                       4
<PAGE>   5

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 and we expect to be subject to increased taxation in China due to our
recent decision not to reinvest profits 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 have determined that we will reinvest
profits of $5,935,000, from our Chinese plastic manufacturing subsidiary for the
year ended December 31, 2000 and thus we will only be subject to taxes of 7.5%
on these operations for the remaining profits for tax year ended December 31,
2000 and quarter ended March 31, 2001. 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 preventative measures.

        Changes in the China's trade status with the United States could harm
our operations or depress our stock price.

        China currently enjoys most favored nation trade status, which provides
China with the trading privileges generally available to trading partners of the
United States. In 2000, Congress voted to make China's trade status permanent
when it formally entered the World Trade Organization. However, Congress may
again consider China's trade status in 2001 and thereafter as a result of the
delay in China's entry into the WTO. In May 2001, President Bush announced that
he would renew for another year China's most favored nation trade status and
recent reports indicate that the United States and China have concluded
negotiations that will result in the U.S. supporting China's entry into the WTO.
However, in the past, various interest groups have urged that the United States
not renew most favored nation trade status for China and may do so again before
China's entry in the WTO. Even after China joins the WTO, 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>   6

        We could be less competitive as a result of currency declines of other
countries in Southeast Asia.

        As result of the Asian economic crisis a few years ago, several
countries in Southeast Asia have experienced a significant devaluation of their
currencies and decline in the value of their capital markets. Some analysts have
predicted growth declines in 2001 for several Asian countries and currency
declines have continued recently in Thailand, Taiwan, South Korea and Singapore.
The decline in the currencies in these Southeast Asian countries could render
our products less competitive if competitors located in these countries are able
to manufacture competitive products at a lower effective cost.

        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,
2001 were Inter-Tel Incorporated, Kyocera Mita Industrial Co. (H.K.) Limited,
VTech Communications 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, 2001 and accounted for an aggregate of 60.8%, 71.4% and
69.3%, respectively, of our total net sales during the years ended March 31,
1999, 2000 and 2001, 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, 1999, 2000 and 2001:

<TABLE>
<CAPTION>
                                                          Year ended March 31,
                                                    --------------------------------
                                                     1999         2000         2001
                                                    ------       ------       ------
<S>                                                 <C>          <C>          <C>
Resins cost as a % of plastic products sold             50%          55%          58%
Resins cost as a % of total cost of goods sold          24%          31%          32%
</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.

                                       6
<PAGE>   7

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

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

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

     -  11.9%, from 45.2% during the year ended March 31, 1998 to 39.8% during
        the year ended March 31, 1999.

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; and

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

        -   Dickson Lam, our Director of Marketing for 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.


                                       7
<PAGE>   8

SALES OF SUBSTANTIAL AMOUNTS OF OUR SHARES BY NAM TAI ELECTRONICS, INC. COULD
CAUSE THE MARKET PRICE OF OUR SHARES TO DECLINE.

        In a registration statement that the SEC declared effective on February
14, 2001, we have registered for resale by Nam Tai Electronics, Inc. 500,000 of
our common shares. This represents approximately 9% of our outstanding shares.
Sales of substantial amounts of these shares at any one time or from time to
time, or even the availability of these shares for sale, could adversely affect
the market price of our shares.

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 40% of our shares at March 31,
2001. 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.

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>   9

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.

        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 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.

                                       9
<PAGE>   10

        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.

        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 had successfully obtained a
registration certificate to allow it to do business from the Chinese Government
and we expect it will commence business in July 2001.

                                       10
<PAGE>   11

CAPITAL EXPENDITURES

        Principal capital expenditures and divestitures made by Deswell during
the three years in the period ended March 31, 2001 include the following:

<TABLE>
<CAPTION>
                                                                1999             2000             2001
                                                             -----------      -----------      -----------
<S>                                                          <C>              <C>              <C>
Purchase of property, plant and equipment                    $ 4,282,000      $ 6,019,000      $13,926,000
Proceeds from the sale of property, plant and equipment           18,000          176,000          113,000
</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 $11 million for the first phase
of construction, which will begin in September or October 2001 and is expected
to take eight months. Baring unforeseen delays, we expect that the new factory
built from the Phase I portion of the project will commence operations about 12
months after construction begins.

        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

               -      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

                                       11
<PAGE>   12

of increased competition, Deswell has been forced to reduce the sales prices of
its products during the years ended March 31, 1999, 2000 and 2001, 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 55.9%, 62.9% and
62.2% of the Company's total sales during the years ended March 31, 1999, 2000
and 2001, respectively. At March 31, 2001, the Company conducted its plastic
manufacturing operations in approximately 413,600 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.

        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, 2001, the Company used 22 EDMs (electrical
discharge machines), 23 CNC (computer numerical control) milling machines and 53
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 6 sets of EDM, 14 sets
of CNC milling machines and 11 sets of NC milling machines for approximately
$995,000. Molds produced by the Company generally weigh from 220 to 12,000
pounds and generally cost between $3,000 and $500,000.

                                       12
<PAGE>   13

        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, 2001, the Company made on average about
60 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, 2001, the Company had 252 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 2-1/2 ft. x 2 ft. case for a copy machine.

        Using separate shifts, injection molding is 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 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 300,100 square feet of factory space at
March 31, 2001 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, 1999, 2000 and 2001,
manufacturing of electronic products accounted for approximately 40.7%, 30.6%
and 35.4%, respectively, of the Company's total sales. During the same periods,
manufacturing of finished products accounted for 98%, 95% and 91%, 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.

                                       13
<PAGE>   14

        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 131,700 square feet of factory space at
March 31, 2001 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 3.4%, 6.5% and 2.4%
of the Company's total sales during the years ended March 31, 1999, 2000 and
2001, respectively.

        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, 1999, 2000 and 2001.

        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, 1999, 2000
and 2001 averaged approximately 50%, 55% and 58%, respectively, of the Company's
cost of plastic products sold and 24%, 31% and 32%, 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.

                                       14
<PAGE>   15

        The Company used in excess of 16,700,000 pounds of plastic resins during
the year ended March 31, 2001. 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.

        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,
1999, 2000 or 2001. 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, 1999, 2000 and
2001. Net sales as a percentage of total sales to customers by geographic area
consisted of the following for the years ended March 31, 1999, 2000 and 2001:

                                       15
<PAGE>   16


<TABLE>
<CAPTION>
GEOGRAPHIC AREAS                  1999           2000            2001
----------------               ---------       ---------       ---------
<S>                            <C>             <C>             <C>
China ...................           32.5%           42.6%           54.5%

North America ...........           24.4            27.0            22.6

Hong Kong ...............           25.9            24.1            19.2

Europe ..................           15.9             5.1             2.2

Japan ...................            1.3             1.2             1.0

Others ..................              -               -             0.5
                               ---------       ---------       ---------
         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, 2001 the
products purchased and the percentage of total Company net sales accounted for
by such customers during the years ended March 31, 1999, 2000 and 2001.

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED MARCH 31,
                                                                                   ------------------------------
CUSTOMER                                        PRODUCT                             1999       2000        2001
------------------------------------------      -------------------------------    -------    -------     -------
<S>                                             <C>                                <C>        <C>         <C>
Inter-Tel Incorporated                          Telephones                           23.5%      25.3%       20.0%

Kyocera Mita Industrial Co. (H.K.) Limited      Plastic components and assembly      24.9%      24.0%       18.7%

VTech Communications Limited                    Telephones and organizers            12.4%      22.1%       17.6%

Epson Precision (H.K.) Limited                  Plastic components                       *          *       13.0%
</TABLE>

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

        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.

                                       16
<PAGE>   17

        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, 2001.


                                       17
<PAGE>   18
<TABLE>
<CAPTION>
<S>                <C>               <C>             <C>                  <C>                  <C>                  <C>
                                                 ------------------------------
                                                /   Deswell Industries, Inc.   /
                                                /   A British Virgin Islands   /
                                                /International Business Company/
                                                 ------------------------------
                                                             /
                                                             /
        -----------------------------------------------------/--------------------------------------------------------------
        /                  /                /                /                    /                    /                   /
   100% /             100% /           100% /           100% /              51%   /               100% /              100% /
 --------------     -------------    ------------     ----------------    ------------------    ---------------     ------------
/ Blue Collar  /  /    Marcon    /  /  Jetcrown  /   /Richtex Services/  /   Integrated     /  /Star Peace Ltd./   /  Jetcrown  /
/Holdings Ltd. /  / Enterprises, /  / Industrial /   /    Limited     /  /International Ltd./  /  (A British   /   / Industrial /
/ (A British   /  /      Inc.    /  /   Limited  /   /  (A Hong Kong  /  /    (A Samoa      /  /Virgin Islands /   /  Sdn. Bhd  /
/Virgin Islands/  /  (A British  /  /(A Hong Kong/   /    Limited     /  /  Corporation)    /  / International /   /(A Malaysian/
/International /  /Virgin Islands/  /   Limited  /   /   Liability    /   ------------------   /  Business     /   /  Limited   /
/   Business   /  / International/  /  Liability /   /    Company)    /           /            /  Company)     /   / Liability  /
/  Company)    /  /   Business   /  /  Company)  /    ----------------            /            ---------------     /  Company)  /
 --------------   /   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%  /                             100%   /
                                --------------------      ------------------                  --------------------
                               /    Dongguan Kwan   /    /Bright Ace Limited/                /  Shenzhen Kwanam   /
                               /   Hong Electronics /    /   (A Hong Kong   /                /    Electronics     /
                               /      Co. Ltd.      /    / Limited Liability/                /  Company Limited   /
                               /(A limited liability/    /      Company)    /                /(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 December 2001 to July 2002.

        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. In January 2000, the Company leased from an unaffiliated party Unit
8, 9/F., Kwong Sang Hong Centre, 151-153 Hoi Bun Road, Kwun Tong, Hong Kong for
use as an office for its contract electronic manufacturing operation. The
monthly rent under the lease is approximately $1,200. The lease was terminated
in March 2001.


                                       18

<PAGE>   19

        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, 2001, the Company leased approximately 300,700 square feet
of manufacturing space at Block A, 1/F-2/F, Block B, 1/F-3/F, Block C, 1/F &
2/F, Block D, 1/F-5/F, Block E, 2/F-5/F, Block F, 1/F-5/F, and Block H, 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
November 2001 to December 2005. The aggregate monthly rent is approximately
$63,300.

        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 96,200 square feet and 28,900 square feet at March 31,
2001 in Shekou and Dongguan, respectively. The facilities are leased for periods
of one year to two years, expiring from December 2001 to March 2003. The
aggregate monthly rental is approximately $21,000. 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, 2001, the Company leased approximately

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

        -   2,100 square feet of office space in Nan Tau Building, Nanshan,
            Shenzhen, China for its contract electronic manufacturing
            operations;

        -   96,000 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

        -   69,500 square feet of manufacturing space in Kwanta Building, Cheung
            On, Dongguan, China, and

        -   38,300 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 September 2008. The aggregate monthly rental is
            approximately $77,700.

        In addition, the Company leases approximately 150,500 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 five years and
expire from April 2001 to May 2002. The aggregate monthly rental is
approximately $6,500.

        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 September 2001 to March 2002. 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.

                                       19
<PAGE>   20

        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. Kwanasia 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 4.0%, 7.7% and 2.3% for the years ended March 31, 1999, 2000
and 2001, 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 have determined that we will reinvest profits of
$5,935,000, from our Chinese plastic manufacturing subsidiary for the year ended
December 31, 2000 and thus we will only be subject to taxes of 7.5% on these
operations for the remaining profits for tax year ended December 31, 2000 and
quarter ended March 31, 2001. 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 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 and we expect to be subject
to increased taxation in China due to our recent decision not to reinvest
profits 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, 2001.

                                       20
<PAGE>   21

<TABLE>
<CAPTION>
                                                               YEAR ENDED MARCH 31,
                                                  ---------------------------------------------
                                                     1999              2000             2001
                                                  ----------        ----------       ----------
<S>                                               <C>               <C>              <C>
Net sales                                              100.0%            100.0%           100.0%
Cost of sales                                           60.2              62.8             65.1
                                                  ----------        ----------       ----------
Gross profit                                            39.8              37.2             34.9
Selling, general and administrative expenses            19.4              19.6             19.0
                                                  ----------        ----------       ----------
Operating income                                        20.4              17.6             15.9
Interest expense                                        (0.6)              0.0              0.0
Other income, net                                        1.8               1.5              1.1
                                                  ----------        ----------       ----------
Income before income taxes                              21.6              19.1             17.0
Income taxes                                             0.9               1.5              0.4
                                                  ----------        ----------       ----------
Income before minority interests                        20.7              17.6             16.6
Minority interests                                       2.9               0.7              0.8
                                                  ----------        ----------       ----------
Net income                                              17.8%             16.9%            15.8%
                                                  ==========        ==========       ==========
</TABLE>

        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 Incorporated ("Inter-Tel"), Kyocera Mita Industrial
Co. (H.K.) Ltd. ("Mita"), VTech Communications Ltd. ("VTech") and Epson
Precision (H.K.) Ltd. ("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 of 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 prior year.
The increase in net sales in both operations was attributed to the substantial
increase in orders from existing strong customer base together with the new
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 19.1% 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%.

                                       21
<PAGE>   22

        YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999

        The Company's net sales for the year ended March 31, 2000 were
$60,958,000, an increase of $7,519,000 or 14.1% as compared to year ended March
31, 1999. Sales to Inter-Tel, Mita and VTech , the Company's three largest
customers during the year ended March 31, 2000, represented approximately 71.4%
of net sales for the year. See Item 4. "Information of the Company -- Major
Customers".

        The increase in sales was mainly related to an increase in sales of
injection-molded plastic products of $8,250,000, offset by a decrease in sales
of electronic and metallic products of $731,000. This represented an increase of
27.4% and a decrease of 3.1% respectively, as compared with the net sales of
such products in the year ended March 31, 1999. The increase in net sales from
plastic operations was attributed to the increase in orders from its existing
customer base together with the new orders from new customers. The decrease in
net sales of electronic and metallic products was mainly attributed to the
decrease in demand from its customers, especially customers that subcontracted
for PCB product assembly, coupled with the reduction in selling prices in both
OEM and subcontracted sales as compared to the year ended March 31, 1999.

        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, 2000, sales to China, North America, Hong Kong and Japan
increased by $8,667,000, $3,415,000, $848,000 and $65,000, respectively, and
sales to Europe decreased by $5,476,000, over fiscal 1999 levels.

        The overall gross profit for the year ended March 31, 2000 was
$22,696,000, representing a gross profit margin of 37.2%. This compares with the
overall gross profit and gross profit margin of $21,260,000 or 39.8% for the
year ended March 31, 1999. The decrease in gross margin of 2.6% was mainly
attributable to the reduction in selling prices on both OEM and subcontracted
sales as a result of intense competition in the Company's markets.

        Selling, general and administrative expenses for the year ended March
31, 2000 were $11,970,000, amounting to 19.6% of total net sales, as compared to
$10,364,000 or 19.4% of total net sales for the year ended March 31, 1999. The
increase in selling, general and administrative expenses of $1,606,000 over
fiscal 1999 was the increase in general and administrative expenses resulting
from the improved business in fiscal 2000 over fiscal 1999.

        As a result, operating income was $10,726,000 for the year ended March
31, 2000, a decrease of $170,000 or 1.6% as compared with the prior year.

        During the year ended March 31, 2000, the Company acquired an additional
17.9% equity interest in its metal manufacturing subsidiary. As a result,
minority interests represent the Company's 49% minority interest in both the
electronics and metallic subsidiaries. The decrease in minority interest to
$433,000 for the year ended March 31, 2000 from $1,575,000 for the year ended
March 31, 1999 reflects the fact that the electronic and metallic businesses
generated less profits in fiscal 2000 as compared to fiscal 1999.

        As a result of the above factors, net income was $10,298,000 for the
year ended March 31, 2000, an increase of $806,000 or 8.5%, as compared to the
year ended March 31, 1999 and net income as a percentage of net sales decreased
to 16.9% from 17.8%.

SEASONALITY

        The following table sets forth certain unaudited quarterly financial
information for the twelve quarters in the three-year period ended March 31,
2001 (in thousands):


<TABLE>
<CAPTION>
                                                         YEAR ENDED MARCH 31,
                      -------------------------------------------------------------------- -----------------------------
                                            1999                                                2000
                      ----------------------------------------------      ----------------------------------------------
                        Q1            Q2           Q3          Q4           Q1           Q2           Q3           Q4
                      -------      -------      -------      -------      -------      -------      -------      -------
<S>                   <C>          <C>          <C>          <C>           <C>         <C>          <C>          <C>
Net sales             $15,447      $15,795      $12,612      $ 9,585       $12,08      $16,110      $17,809      $14,958
Gross profit            6,676        6,436        4,810        3,338        4,592        6,727        6,255        5,122
Operating income        3,639        3,943        2,288        1,026        1,925        3,450        3,201        2,150
Net income              3,162        3,330        2,148          852        2,113        3,336        2,944        1,905
</TABLE>

<TABLE>
<CAPTION>
                                             2001
                      ----------------------------------------------
                        Q1            Q2          Q3            Q4
                      -------      -------      -------      -------
<S>                   <C>          <C>          <C>          <C>
Net sales             $17,786      $24,809      $21,376      $16,876
Gross profit            6,255        9,155        7,619        5,222
Operating income        2,820        5,071        3,337        1,609
Net income              2,757        4,011        3,589        2,453
</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


                                       22
<PAGE>   23

for the Chinese New Year holidays. This seasonality is masked, in part, by the
steady growth in the Company's operations. 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.

        Labor and overhead expenses of the Company's China operations amounted
to approximately 24%, 27% and 24% of the Company's total expenses during the
years ended March 31, 1999, 2000 and 2001, respectively. 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, 1999, 2000 and
2001. 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 or 2001 and at March 31, 2001, the Company had no open forward currency
contracts. During the year ended March 31, 1999, the Company hedged its currency
exchange risk, which primarily arose from materials purchases in currencies
other than U.S. dollars in the event that the Hong Kong dollar was allowed to
depreciate against the U.S. dollar. The hedge resulted in a charge of $305,000
on the write-off of a premium for the foreign currency option contract that the
Company purchased. In the fiscal years prior to the year ended March 31, 1999,
the Company did not engage in exchange rate-hedging activities. 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, 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 result of increases in sales and the general increase in business
activities. Accounts payable decreased by $1,127,000 over March 31, 2000. For
the year ended March 31, 2000, net cash generated from operations totaled
$11,236,000, including net income of $10,298,000 and depreciation and
amortization of $4,784,000. Accounts receivable and inventories increased by
$2,811,000 and $5,030,000, respectively, over levels at March 31, 1999,
primarily as a result of increases in sales and the general increase in business
activities. Accounts payable increased by $2,528,000 over March 31, 1999.

        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 $2,585,100.

                                       23
<PAGE>   24

        Net cash used in investing activities amounted to $13,672,000 and
$5,602,000 for the years ended March 31, 2001 and 2000, respectively. Capital
expenditures during these periods totaled $13,926,000 and $6,019,000,
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 $126,000 was
released as security for the short-term borrowing facilities and $15,000 was
released as deposit for customs duty in Dongguan, China during the year ended
March 31, 2001.

        Net cash used in financing activities for the years ended March 31, 2001
and 2000 was $1,964,000 and $6,034,000, respectively. 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. Net
cash used in financing activities during the year ended March 31, 2000 was
primarily to fund the Company's dividend payments to its shareholders and the
repurchase of common stock by the Company. The Company repurchased 128,200
shares for an aggregate of $1,257,000 during the year ended March 31, 2000.

        The Company generates sufficient funds from its operating activities to
finance its operations and there is little need for external financing. The
Company had no outstanding short-term borrowings or long-term debt at March 31,
2001 or 2000.

        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, 2000, increasing from 9% at the beginning of the year to 9.5%
and then decreased to 8% at March 31, 2001.

        At March 31, 2001, the Company had cash and cash equivalents of
$25,330,000 and committed credit facilities of $17,097,000, none of which had
been used. The Company also had restricted cash of $1,988,000 and leasehold land
and buildings of $1,378,000, which were pledged as collateral for those credit
facilities and $162,000 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 $375,000 as of March 31, 2001. The Company expects that
internally generated funds will be sufficient to satisfy its cash needs for at
least the next 12 months.

        In June 1998, the Financial Accounting Standards Board ("FASB") has
issued a new standard Statement of Financial Accounting Standards ("SFAS") No.
133 "Derivative Instruments and Hedging Activities". SFAS No. 133, as amended,
will be effective for fiscal years beginning after June 15, 2000. Management has
completed the analysis of the impact and concluded that there was no significant
effect on the consolidated financial statements of the Company on adoption of
SFAS No. 133 on April 1, 2001.

        In June 2001, the FASB has issued two new standards SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets".
SFAS Nos. 141 and 142 will be effective for the Company's fiscal year ending
March 31, 2003. Management has not yet completed the analysis of the impact
these would have on the financial statements of the Company.


                                       24
<PAGE>   25

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

        The directors and executive officers of the Company at June 30, 2001 are
as follows:

<TABLE>
<CAPTION>
          Name                      Age                    Position(s) with Company
          ----                      ---                    ------------------------
<S>                                 <C>    <C>
Lau Pui Hon (Richard Lau)           56     Chief Executive Officer and Chairman of the Board of
                                           Directors

Li Chin Pang (C. P.  Li)            57     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)         46     Executive Director of Engineering for Plastic Operations
                                           and Member of the Board of Directors

Lee Shu Kwan (S. K. Lee)            55     Director of Administration and Marketing for Electronic
                                           Operations

Tam Man Chi (M. C. Tam)             51     Director of Engineering and Manufacturing for Electronic
                                           Operations

Dickson Lam                         59     Director of Marketing for Electronics Operations

Eliza Y. P. Pang                    39     Financial Controller

Stephen K. Seung                    54     Member of Board of Directors and Audit Committee

Hung-Hum Leung                      55     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.

        DICKSON LAM. Mr. Lam joined the Company as Director of Marketing in
April 1990 and assumed the title of Director of Marketing for 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.

                                       25
<PAGE>   26

        ELIZA Y. P. PANG. Ms. Pang, a registered fellow member of The Chartered
Association of 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
Peat Marwick 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, 2001 to all
directors and executive officers as a group for services in all capacities was
approximately $3,367,000. This excludes amounts paid by the Company to
shareholders as dividends during the year ended March 31, 2001. 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.

                                       26
<PAGE>   27

        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 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, 2001, the Company employed 4,089 persons on a full-time
basis, of which 43 were located in Hong Kong and 4,046 in China. Of the
Company's employees 2,512, 1,216 and 361 were engaged in plastic injection
molding manufacturing, contract electronic manufacturing and metal molds and
parts manufacturing, respectively, at March 31, 2001. 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 PLAN

        In 1995, the Company adopted its 1995 Stock Option Plan (the "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. The Option
Plan is 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 Plan 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 Plan is 10 years.

        At June 30, 2001, options to purchase an aggregate of 660,000 common
shares had been granted under the Option Plan, options to purchase an aggregate
of 200,000 common shares were outstanding and options to purchase an aggregate
of 34,000 common shares were available for future grant under the Option Plan.


                                       27
<PAGE>   28

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, Inc., The Company is not directly owned or controlled by
another corporation or by any foreign government. The following table sets
forth, as of June 30, 2001, 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                                            1,813,610(2)            32.1%

C. P. Li                                               1,814,810(3)            32.1%

C. W. Leung                                            1,779,210(4)            31.4%

Leesha Holdings Ltd.                                   1,535,000(5)            27.4%

Nam Tai Electronics, Inc.                                500,000                8.9%

Micropower Enterprises Limited                           455,000                8.1%
Group consisting of Royce & Associates, Inc.             291,000(6)             5.2%
("Royce"), Royce Management Company ("RMC"), and
Charles M. Royce (6)
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 5,597,931 common shares outstanding on June 30, 2001. 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, 218,610
common shares held of record by Mr. Lau and options to purchase 60,000 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 $14.75 per share
until January 21, 2008. 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 60,000 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 $14.75 per share
until January 21, 2008. As a director of Leesha, Mr. Li shares the voting and
investment power as to the common shares held by Leesha.


                                       28
<PAGE>   29

(4)     Consists of 1,535,000 common shares held of record by Leesha, 184,210
common shares held of record by Mr. Leung and options to purchase 60,000 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 $14.75 per share
until January 21, 2008. As a director of Leesha, Mr. Leung shares the voting and
investment power as to the common shares held by Leesha.

(5)     Leesha is an investment holding company organized as an International
Business Company under the laws of the British Virgin Islands. Messrs. Lau, Li
and Leung, who are its directors, wholly own Leesha in equal shares. Among 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 filed with the SEC on February 8, 2001.
According to this 13G: Royce owed 288,000 common shares (5.1% at June 30, 2001)
and RMC owned 3,000 common shares (0.1% at June 30, 2001); Mr. Royce may be
deemed to be a controlling person of Royce and RMC, and as such may be deemed to
beneficially own the common shares beneficially owned by Royce and RMC; and Mr.
Royce does not own any shares outside of Royce and RMC, and disclaims beneficial
ownership of the shares held by Royce and RMC.

        Nam Tai purchased the 500,000 common shares of the Company reflected in
the table from Leesha on September 26, 2000. As a result of this sale, the
beneficial ownership of the Company's common shares

        -   by Mr. Lau was reduced from 48.4% to 32.1%;

        -   by Mr. Li was reduced from 48.8% to 32.1%

        -   by Mr. Leung was reduced from 48.4% to 31.4%; and

        -   by Leesha was reduced from 44.2% to 27.4%.

Similarly, the beneficial ownership of the Company's common shares by Nam Tai
was increased from zero to 8.9%

        Except for this transaction between Leesha and Nam Tai, there has been
no significant change in the percentage ownership held by any major shareholders
of the Company during the past three years.

        All of the holders of the Company's common shares have equal voting
rights with respect to the common shares held. As of June 30, 2001,
approximately 36 holders of record, who, management believes, held for more than
2,600 beneficial owners, held Deswell's common shares. According to information
supplied to the Company by its transfer agent, 25 holders of record with
addresses in the United States held approximately 2.4 million of our outstanding
common shares.


                                       29
<PAGE>   30

RELATED PARTY TRANSACTIONS

        During the year ended March 31, 1999, Namtai Electronic (Shenzhen) Co.
Limited accounted for 11.2% of our total sales. During the years ended March 31,
2001 and 2000, sales to Nam Tai amounted to less than 10% of our total sales.
Namtai Shenzhen is an indirect wholly owned subsidiary of Nam Tai Electronics,
Inc., 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.

        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,
                                                     ------------------------------------------
                                                        1999            2000            2001
                                                     ----------      ----------      ----------
<S>                                                  <C>             <C>             <C>
Rent charged by Mr. S. K. Lee and Mr. M.C. Tam       $   15,000      $   12,000      $   12,000
</TABLE>


        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.


                                       30
<PAGE>   31

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:

     -  1999 aggregating $5,917,000, $4,110,000 of which was based on results
        for the second six months of the year ended March 31, 1998 and
        $1,807,000 of which was based on results for the first six months of the
        year ended March 31, 1999;

     -  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.

        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 depend 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.



                                       31
<PAGE>   32

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, 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
March 31, 1997                  21.875          7.50
</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, 2001 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, 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
March 31, 2000                    17.50         14.00         9,645
December 31, 1999                 18.50         12.00         9,711
September 30, 1999               13.375       9.65625        10,456
June 30, 1999                     14.25        7.9375        21,274
</TABLE>

---------
(1)  Determined by dividing the reported daily volume 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
QUARTER ENDED                    HIGH           LOW        VOLUME(1)
-------------                   -------       -------      --------
<S>                             <C>           <C>          <C>
June 30, 2001                   $17.35        $14.60         6,940
May 31, 2001                     16.50         14.00         3,252
April 30, 2001                   14.50        13.125         2,111
March 31, 2001                   17.00         12.25         4,401
February 29, 2001                18.00        15.625         4,994
January 31, 2001                 17.00         14.75         5,715
</TABLE>

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


                                       32
<PAGE>   33

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 officers 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 5,597,931 common
shares were outstanding on June 30, 2001.



--------
* 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.


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<PAGE>   34

        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.

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.


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<PAGE>   35

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.

Uncommitted Banking Facilities (Exhibit 4.1)

Date: December 27, 2000 and October 27, 2000

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

Nature of Contract: Renewal of Facility Letter dated December 16, 1997 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
October 27, 2000.

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.

Consideration: The interest and commissions set forth above.

Banking Facilities (Exhibit 4.3)

Date: March 13, 2000 and May 31, 2001


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<PAGE>   36

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 (to be increased to HKD3,000,000 upon expiry/cancellation of the
standby letter of credit in favour of China Construction Bank of HKD2,000,000);
(2) Trade Finance Group 1 is HKD11,000,000; (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
HKD11,000,000; combined amounts outstanding of Trade Finance Groups 2 and 3 are
not to exceed HKD4,000,000) (5) Standby Letters of Credit is HKD4,000,000 (to be
reduced to HKD2,000,000 upon expiry/cancellation of the standby letter of credit
in favour of China Construction Bank of HKD2,000,000); (6) Factory 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 prime plus
8% per annum will apply to amounts not paid when due or in excess of agreed
facility amounts. Export bills will be discounted 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 plus 1.5% per annum for foreign currency bills.
Import bills will be financed at Bank's standard bills finance rates minus 0.25%
per annum for Hong Kong Dollar bills and at Bank's standard bills finance rates
plus 0.75% per annum 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 _% 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 HKD1,000. A handling fee in an amount to be
mutually agreed upon will be payable annually if the facilities are continuing.

Tenancy Agreement (Exhibit 4.4)

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.

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 4.5)

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.

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<PAGE>   37

Tenancy Agreement (Exhibit 4.6)

Date: May 30, 2000

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, 1998 to May 1, 2000
but extended one year commencing May 1, 2000 to May 1, 2001. Rent for the total
property is RMB30,240 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 RMB30,240 per month.

Tenancy Agreement (Exhibit 4.7)

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 5/F., Block E, Wing Village
Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area of 5/F is 1,080 square meters. The
rental period is for three years, commencing April 25, 1999 to April 25, 2002.
Rent for the total property is RMB13,500 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 RMB27,000 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 RMB13,500 per month.

Tenancy Agreement (Exhibit 4.8)

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
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.

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<PAGE>   38

Consideration: Rent of RMB8,996 per month.

Tenancy Agreement (Exhibit 4.9)

Date: October 9, 1999

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

Nature of Contract: Rental of factory located at 1/F., Factory C, Wing Village
Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area of 1/F is 1,040 square meters. The
rental period is for one year, commencing October 1, 1999 to September 30, 2000
but extended two years from October 1, 2000 to September 30, 2002. Rent for the
total property is RMB26,000 per month. A deposit of RMB68,000 is required. . The
property may only be used for industrial purpose. 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. Lessee may not sublet the factory without the approval of the Lessor.
Lessee should inform Lessor of it desire to renew the lease one month before the
expiration of the lease.

Consideration: Rent of RMB26,000 per month.

Tenancy Agreement (Exhibit 4.10)

Date: November 5, 1999

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

Nature of Contract: Rental of factory located at 2/F., Factory C, Wing Village
Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area of 1/F is 470 square meters. The
rental period is for two years, commencing December 1, 1999 to November 30,
2001. Rent for the total property is RMB7,050 per month. A deposit of RMB14,100
is required. The factory may only be used as a processing plant. Lessee may not
sublet the factory without the approval of the Lessor. Lessee should inform
Lessor of its desire to renew the lease one month before the expiration of the
lease. If Lessee is late on the payment of rent, a default charge calculated on
a daily basis based on the Bank's interest rate at the time.

Consideration: Rent of RMB7,050 per month.

Tenancy Agreement (Exhibit 4.11)

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 4.12)

                                       38
<PAGE>   39

Date: August 23, 2000

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

Nature of Contract: Lease of property located at 2/F and 3/F, Block H, Wing
Village Industrial Estate, Shekou, Shenzhen.

Terms and Conditions: The construction area is 2,060 square meters. The rental
period is one year, commencing April 10, 2000 to April 9, 2001. The total rent
for the property is RMB30,900 per month. A deposit of RMB61,800 is required. The
property may only be used for industrial purpose. 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. Lessee may not sublet the factory without the approval of the Lessor.
Lessee should inform Lessor of it desire to renew the lease one month before the
expiration of the lease.

Consideration: Rent of RMB30,900 per month.

Tenancy Agreement (Exhibit 4.13)

Date: August 23, 2000

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

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

Terms and Conditions: The construction area is 1,030.00 square meters. The
rental period is one year, commencing May 20, 2000 to May 19, 2001. The total
rent for the property is RMB15,450 per month. A deposit of RMB30,900 is
required. The property may only be used for industrial purpose. 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. Lessee may not sublet the factory without the approval
of the Lessor. Lessee should inform Lessor of it desire to renew the lease one
month before the expiration of the lease.

Consideration: Rent of RMB15,450 per month.

Tenancy Agreement (Exhibit 4.14)

Date: June 3, 1999

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

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

Terms and Conditions: The construction area is 1,030 square meters. The rental
period is two year, commencing July 15, 1999 to July 14, 2001. The total rent
for the property is RMB14,420 per month. A deposit of RMB28,840 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 one month 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.

Consideration: Rent of RMB14,420 per month.

Tenancy Agreement (Exhibit 4.15)

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.

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<PAGE>   40

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 4.16)

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 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 4.17)

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 4.18)

Date: January 4, 2001

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

                                       40
<PAGE>   41

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 for use as a dormitory.

Terms and Conditions: The total construction area for all the rooms is 1,857.89
square meters. The rental period is one year, commencing January 1, 2001 to
January 1, 2002. The total rent for the property is RMB29,005.50 per month. A
deposit of RMB29,005.50 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 RMB29,005.50 per month.

Tenancy Agreement (Exhibit 4.19)

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 of Lan Wang Building (Exhibit 4.20)

Date: January 18, 2000

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 5,861.72 square meters. The
total area for the office is 2,831.34 square meters. The total area for the
dormitory is 3,518.26 square meters. The total floor area of the guardroom and
lobby is 126.60. The total aggregate floor area is 12,337.92 square meters. The
rental period is three years, commencing February 15, 2000 to February 14, 2003.
The total rent for the property is RMB 104,872.32 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 104,872.32 per month.

Tenancy Agreement (Exhibit 4.21)

Date: October 1, 1999

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

                                       41
<PAGE>   42

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, 1999
to September 30, 2001. 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.


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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).
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 United
States federal tax law other than 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 United States
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; or

     -  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 (as specifically defined
        for tax purposes);

     -  a corporation, partnership or other business entity created or organized
        in or under the laws of the U.S. or any State or political subdivision
        thereof;

     -  an estate whose income is subject to U.S. federal income tax regardless
        of its source;



                                       43
<PAGE>   44

     -  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;

     -  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. Dividends paid
with respect to our common shares will generally be treated as foreign source
"passive income" or, in the case of certain types of financial institutions,
"financial services income," for purposes of computing allowable foreign tax
credits for U.S. foreign tax credit purposes.

        Sale or Other Disposition of Our Common Shares

        Generally speaking, 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);

     -  subject to the passive foreign investment company rules described below,
        any 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;

     -  any gain or loss will generally be treated as having United States
        source for United States foreign tax credit purposes; and

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

        Passive Foreign Investment Company

        U.S. holders generally would be subject to a special, adverse tax regime
(that would differ in certain 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.

        We believe that we will not be treated as a PFIC for U.S. federal income
tax purposes for our current taxable year, or for future taxable years. However,
an actual determination of PFIC status is factual in nature and generally cannot
be made until the close of the applicable tax year. We will be a PFIC if either:

                                       44
<PAGE>   45

     -  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. We intend to use reasonable efforts to avoid PFIC status, but can give no
assurance that we will be successful. 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 were classified as a PFIC, unless you timely made 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 will 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 will be taxed as ordinary income,

     -  the amount allocated to the taxable years prior to the first taxable
        year in which we are a PFIC will 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 will 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 will 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 will 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 will 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 will be adjusted to reflect
any such income or loss amounts. Any gain realized upon disposition will be
taxed as ordinary income. If we are or become a PFIC, we believe our shares will
be treated as marketable stock for purposes of the mark-to-market election.

        If you own common shares in a PFIC, in lieu of making a mark-to-market
election, you may make a qualifying electing fund election. If we are or 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."

                                       45
<PAGE>   46

        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 a 31 percent U.S. federal backup withholding
(under the recently enacted tax law, the 31 percent rate is reduced to 30
percent for payments made after August 6, 2001 and prior to 2004, and will be
further gradually reduced to 28 percent for payments made in 2006 and
thereafter). Unless we are notified by the IRS that you are subject to backup
withholding you will not be subject to backup withholding provided that:

     -  you are a corporation or other exempt recipient, or

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

        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.

                                       46
<PAGE>   47

        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

                     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
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.



                                       47
<PAGE>   48

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 effect 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 and 2001 the Company had no open forward exchange
contracts or option contracts. For information concerning the Company's currency
hedging activities in 1999.

        Cash on hand at March 31, 2001 of $27,318,000 was held in the following
currencies:

<TABLE>
<CAPTION>
                                            Equivalent
                                            U.S. Dollar
                                             Holdings
----------------------------------------   ------------
<S>                                         <C>
United States dollars                       $14,008,000
Hong Kong dollar                              6,756,000
Euro dollar                                   5,563,000
Chinese renminbi                                991,000
</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 $22,243,000 as at March 31, 2001 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, 2001 we had no
long-term debt and $17 million outstanding on our credit facilities resulting in
minimal interest rate risk.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

        Not applicable.


                                       48
<PAGE>   49

                                     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, 2000 and March 31, 2001............  F-2

Consolidated Statements of Income for the years ended March 31, 1999,
         March 31, 2000 and March 31, 2001.....................................  F-3

Consolidated Statements of Changes in Shareholders' Equity for the years
         ended March 31, 1999, March 31, 2000 and March 31, 2001...............  F-4

Consolidated Statements of Cash Flows for the years ended March 31, 1999,
         March 31, 2000 and March 31, 2001.....................................  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.


                                       49
<PAGE>   50
                          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, 2000 and 2001, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 2001. 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, 2000 and 2001, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.





/s/ DELOITTE TOUCHE TOHMATSU

DELOITTE TOUCHE TOHMATSU
June 30, 2001

Hong Kong


                                      F-1

<PAGE>   51




                            DESWELL INDUSTRIES, INC.

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

<TABLE>
<CAPTION>

                                                                          MARCH 31,
                                                                   ---------------------
                                                                      2000          2001
                                                                   -------      --------
<S>                                                                <C>          <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                                        $27,156      $25,330
  Restricted cash (note 6)                                           2,129        1,988
  Marketable securities (note 3)                                     1,308            -
  Accounts receivable - net of allowance for doubtful
    accounts of 2000 - $87 and 2001 - nil                           10,607       15,777
  Inventories (note 4)                                              10,932       12,034
  Prepaid expenses and other current assets                          2,295        1,833
  Income taxes receivable                                              164          428
                                                                   -------      -------
        Total current assets                                        54,591       57,390
Property, plant and equipment-net (note 5)                          16,701       25,563
Goodwill - net of accumulated amortization
  of 2000 - $142 and 2001 - $177                                       549          513
                                                                   -------      -------
        Total assets                                               $71,841      $83,466
                                                                   =======      =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                 $ 5,401      $ 4,274
  Accrued payroll and employee benefits                              1,417        1,837
  Customer deposits                                                  1,745        1,850
  Other accrued liabilities                                          1,200        1,776
  Income taxes payable                                                 101          297
                                                                   -------      -------
        Total current liabilities                                    9,864       10,034
                                                                   -------      -------
Deferred income taxes (note 7)                                          15           15
                                                                   -------      -------
Commitments and contingencies (note 9)
Minority interests                                                   8,931        9,540
                                                                   -------      -------
Shareholders' equity:
  Common Shares $0.01 par value-authorized 20,000,000 shares,
    shares issued and outstanding March 31, 2000 - 5,347,931;
    March 31, 2001 - 5,597,931                                          53           56
  Additional paid-in capital                                        24,100       26,843
  Retained earnings                                                 28,878       36,978
                                                                   -------      -------
        Total shareholders' equity                                  53,031       63,877
                                                                   -------      -------
        Total liabilities and shareholders' equity                 $71,841      $83,466
                                                                   =======      =======
</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>   52

                            DESWELL INDUSTRIES, INC.

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED MARCH 31,
                                                           --------------------------------------
                                                               1999           2000           2001
                                                           --------       --------       --------
<S>                                                        <C>            <C>            <C>
Net sales                                                  $ 53,439       $ 60,958       $ 80,847
Cost of sales                                                32,179         38,262         52,596
                                                           --------       --------       --------
Gross profit                                                 21,260         22,696         28,251
Selling, general and administrative expenses                 10,364         11,970         15,414
                                                           --------       --------       --------
Operating income                                             10,896         10,726         12,837
Interest expense                                               (306)            (3)            (6)
Other income, net                                               939            898            915
                                                           --------       --------       --------
Income before income taxes and minority interests            11,529         11,621         13,746
Income taxes (note 7)                                           462            890            315
                                                           --------       --------       --------
Income before minority interests                             11,067         10,731         13,431
Minority interests                                            1,575            433            621
                                                           --------       --------       --------
Net income                                                 $  9,492       $ 10,298       $ 12,810
                                                           ========       ========       ========

Net income per share (note 2)

Basic:
  Net income per share                                     $   1.73       $   1.90       $   2.38
                                                           ========       ========       ========
  Weighted average common shares outstanding                  5,478          5,412          5,376
                                                           ========       ========       ========

Diluted:
  Net income per share                                     $   1.72       $   1.89       $   2.36
                                                           ========       ========       ========
  Weighted average common and potential common shares         5,524          5,449          5,435
                                                           ========       ========       ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   53



                            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, 1998                        5,479,131            $55        $25,374        $19,782        $45,211
Repurchase and cancellation of common stock        (3,000)             -            (19)             -            (19)
Net income                                              -              -              -          9,492          9,492
Dividends ($1.08 per share)                             -              -              -         (5,917)        (5,917)
                                                ---------            ---        -------        -------        -------
Balance at March 31, 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
                                                =========            ===        =======        =======        =======
</TABLE>


The comprehensive income of the Company for the years ended March 31, 1999, 2000
and 2001 was represented by the net income of the respective year.




          See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>   54




                            DESWELL INDUSTRIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                  YEAR ENDED MARCH 31,
                                                          ----------------------------------
                                                              1999         2000         2001
                                                          --------     --------     --------
<S>                                                       <C>          <C>          <C>
Cash flows from operating activities
Net income                                                $  9,492     $ 10,298     $ 12,810
Adjustments to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization                              4,223        4,784        5,039
  Loss (gain) on sale of property, plant and equipment          14           35          (52)
  Minority interests                                         1,575          433          609
  Changes in operating assets and liabilities:
    Accounts receivable                                      2,283       (2,811)      (5,170)
    Marketable securities                                     (134)      (1,174)       1,308
    Inventories                                                513       (5,030)      (1,102)
    Prepaid expenses and other current assets               (2,482)       1,815          462
    Income taxes receivable                                   (179)         233         (264)
    Accounts payable                                          (890)       2,528       (1,127)
    Accrued payroll and employee benefits                      107           67          420
    Customer deposits                                          932         (420)         105
    Other accrued liabilities                                  (76)         577          576
    Income taxes payable                                       (75)         (99)         196
                                                           -------      -------     --------
Net cash provided by operating activities                   15,303       11,236       13,810
                                                           -------      -------     --------
Cash flows from investing activities
  Purchase of property, plant and equipment                 (4,282)      (6,019)     (13,926)
  Proceeds from sale of property, plant and equipment           18          176          113
  Additional interest in a subsidiary (note 2)                   -           (6)           -
  Decrease in restricted cash                                  551          247          141
                                                           -------      -------     --------
Net cash used in investing activities                       (3,713)      (5,602)     (13,672)
                                                           -------      -------     --------
Cash flows from financing activities
  Dividends paid                                            (5,917)      (4,777)      (4,710)
  Repurchase of common stock                                   (19)      (1,257)           -
  Issue of common stock                                          -            -        2,746
                                                           -------      -------     --------
Net cash used in financing activities                       (5,936)      (6,034)      (1,964)
                                                           -------      -------     --------
Net increase (decrease) in cash and cash equivalents         5,654         (400)      (1,826)
Cash and cash equivalents, beginning of year                21,902       27,556       27,156
                                                           -------      -------     --------
Cash and cash equivalents, end of year                     $27,556       27,156       25,330
                                                           =======      =======     ========

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                                                 $   306      $     3      $     6
  Income taxes                                             $   717      $   756      $   383
</TABLE>




          See accompanying notes to consolidated financial statements.



                                      F-5
<PAGE>   55




                            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 and metallic parts and of
electronic products and subassemblies. 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 adjustments made by the Company to conform the
statutory accounts of the subsidiaries to U.S. GAAP relate to the recording of
dividends only at the time of their declaration and the capitalization of
goodwill. 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, 2001, the
retained earnings available for distribution as reflected in the statutory books
of the subsidiaries were $60,297, of which $1,635 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 and expenses of all subsidiaries. Intercompany
balances and transactions 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 $24 and
$32 and $36 for the years ended March 31, 1999, 2000 and 2001, 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:

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

      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>   56





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,
whose exchange rate 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
$423, $465 and $644 for the years ended March 31, 1999, 2000 and 2001,
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, 1999, 2000 and
2001 were HK$7.74 to US$1.00, HK$7.74 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-The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") No. 25 "Accounting for Stock Issued to Employees".

      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 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):

<TABLE>
<CAPTION>
                                                                 YEAR ENDED MARCH 31,
                                                         ----------------------------------
                                                           1999          2000          2001
                                                         ------       -------       -------
<S>                                                      <C>          <C>           <C>
Net income                                               $9,492       $10,298       $12,810
                                                         ------       -------       -------
Basic net income per share                               $ 1.73       $  1.90       $  2.38
                                                         ------       -------       -------
Basic weighted average common shares outstanding          5,478         5,412         5,376
Effect of dilutive securities - Options                      46            37            59
                                                         ------       -------       -------
Diluted weighted average common and potential common
  shares outstanding                                      5,524         5,449         5,435
                                                         ------       -------       -------
Diluted net income per share                             $ 1.72       $  1.89       $  2.36
                                                         ======       =======       =======
</TABLE>



                                      F-7
<PAGE>   57





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

      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 1998, the Financial
Accounting Standards Board ("FASB") has issued a new standard Statement of
Financial Accounting Standards ("SFAS") No. 133 "Derivative Instruments and
Hedging Activities". SFAS No. 133, as amended, will be effective for fiscal
years beginning after June 15, 2000. Management has completed the analysis of
the impact and concluded that there was no significant effect on the
consolidated financial statements of the Company on adoption of SFAS No. 133 on
April 1, 2001.

      In March 2000, the FASB has issued an interpretation ("FIN") No. 44
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25". FIN No. 44 is effective on July 1, 2000
and there was no significant impact on the consolidated financial statements of
the Company on adoption of FIN No. 44.

      In June 2001, the FASB has issued two new standards SFAS No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS Nos.
141 and 142 will be effective for the Company's fiscal year ending March 31,
2003. Management has not yet completed the analysis of the impact these would
have on the financial statements of the Company.


3.  MARKETABLE SECURITIES

      The Company acquired equity securities listed in United States of America.

<TABLE>
<CAPTION>

                                                                             MARCH 31,
                                                                       --------------------
                                                                         2000          2001
                                                                       ------       -------
<S>                                                                    <C>          <C>
Cost                                                                   $1,072       $     -
Unrealized gain                                                           236             -
                                                                       ------       -------
Market value                                                           $1,308       $     -
                                                                       ======       =======
</TABLE>

      Net proceeds from sale of marketable securities for the year ended March
31, 2000 and 2001 were $133 and $1,419, and realized (loss) and gain from sale
of marketable securities for the year ended March 31, 2000 and 2001 were $(1)
and $111, 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,
                                                                      ---------------------
                                                                         2000          2001
                                                                      -------       -------
<S>                                                                   <C>          <C>
Raw materials                                                         $ 6,924       $ 6,130
Work in progress                                                        1,553         2,946
Finished goods                                                          2,455         2,958
                                                                      -------       -------
                                                                      $10,932       $12,034
                                                                      =======       =======
</TABLE>

5.  PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>

                                                                             MARCH 31,
                                                                      ---------------------
                                                                         2000          2001
                                                                      -------       -------
<S>                                                                    <C>          <C>
At cost:
Leasehold land and buildings                                          $ 3,475       $ 4,940
Plant and machinery                                                    17,533        21,571
Furniture, fixtures and equipment                                       7,697         9,722
Motor vehicles                                                          1,227         2,355
Leasehold improvements                                                  2,035         3,187
                                                                      -------       -------
Total                                                                  31,967        41,775
Less: accumulated depreciation and amortization                       (15,266)      (18,952)
Construction in progress                                                    -         2,740
                                                                      -------       -------
Net book value                                                        $16,701       $25,563
                                                                      =======       =======
</TABLE>


                                      F-8
<PAGE>   58



6.  CREDIT FACILITIES AND PLEDGED ASSETS

      The Company has credit lines with various banks representing trade
acceptances, loans and overdrafts. At March 31, 2000 and 2001 these facilities
totalled $15,439, and $17,097, respectively, and none of these amounts were
utilized at these dates. 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, 2000 and 2001, cash of $1,951, and $1,826,
respectively, and leasehold land and buildings of $1,409, and $1,378,
respectively, have been pledged as collateral for the above facilities.

      The restricted cash at March 31, 2000 and 2001 also included $178 and $162
deposited into a bank account designated by the China customs department as a
guarantee for the payment of customs duties.


7.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                 YEAR ENDED MARCH 31,
                                                        -----------------------------------
                                                          1999          2000          2001
                                                        -------       -------       -------
<S>                                                     <C>           <C>           <C>
Hong Kong                                               $ 3,352       $ 2,395       $ 1,462
China and others                                          8,177         9,226        12,284
                                                        -------       -------       -------
                                                        $11,529       $11,621       $13,746
                                                        =======       =======       =======
</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") expired on December 31, 1995 but further extended
from 1999 to 2001. The Company's other Chinese subsidiaries were either loss
making or exempt from income tax in the years ended March 31, 1999, 2000 and
2001.

      However, 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.

      The Company successfully obtained tax refunds in 1999 and 2000 relating to
tax paid by Jetcrown Shenzhen in the 1998 and 1999 calendar years following the
capitalization by Jetcrown Shenzhen of $1,486 and $1,421 of its retained
earnings, respectively. Jetcrown Shenzhen's retained earnings of $5,935 was
capitalised in the year ended March 31, 2001 but the corresponding tax refund of
$428 has not yet been received and is included in current assets.

      Had these tax holidays and concessions not been available, the tax charge
would have been higher by $165, $487 and $866 and the basic net income per share
would have been lower by $0.03, $0.09 and $0.16 for the years ended March 31,
1999, 2000 and 2001, respectively, and diluted net income per share for the
years ended March 31, 1999, 2000 and 2001 would have been lower by $0.03, $0.09
and $0.16, respectively.


                                       F-9
<PAGE>   59





7.  INCOME TAXES - CONTINUED

      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,
                                                           --------------------------------
                                                           1999          2000          2001
                                                           ----          ----          ----
<S>                                                        <C>           <C>           <C>
Hong Kong                                                  $328          $403          $387
China                                                       134           487           (72)
                                                           ----          ----          ----
                                                           $462          $890          $315
                                                           ====          ====          ====
</TABLE>

        Included in income taxes for China for the year ended March 31, 2001 was
a credit of $325 in respect of the tax refund arising from the capitalization of
1998 and 1999 retained earnings of Jetcrown Shenzhen.

        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,
                                                           ---------------------------------
                                                           1999          2000          2001
                                                           ----         -----          -----

<S>                                                        <C>           <C>            <C>
Statutory tax rate in Hong Kong                            16.0%         16.0%          16.0%
Tax holidays and concessions                               (3.5)         (1.0)          (6.3)
Income not subject to taxation                             (8.3)         (8.4)          (9.3)
Increase in valuation allowances                            1.3           0.7            1.1
(Over)underprovision of income tax in previous year        (1.3)          0.6            0.3
Others                                                     (0.2)         (0.2)           0.5
                                                           ----         -----          -----
Effective rate                                              4.0%          7.7%           2.3%
                                                           ====         =====          =====
</TABLE>

        The components of deferred income tax are as follows:

<TABLE>
<CAPTION>
                                                                              MARCH 31,
                                                                         ------------------
                                                                         2000          2001
                                                                         ----          ----
<S>                                                                      <C>           <C>
Deferred tax asset:
  Net operating loss carryforwards                                       $303          $399
  Less: Valuation allowances                                             (170)         (310)
                                                                         ----          ----
                                                                          133            89

Deferred tax liability:
  Property, plant and equipment                                          (148)         (104)
                                                                        -----         -----
Net deferred tax liability                                              $ (15)        $ (15)
                                                                        =====         =====
</TABLE>

      The net operating loss carryforwards principally relate to Kwanta
Precision Metal Products Co., Limited ("Kwanta") and can be carried forward
indefinitely and applied to reduce Kwanta's future taxable income.


8.  RELATED PARTY TRANSACTIONS

      The Company rents employee accommodations in China from Mr. S.K. Lee and
Mr. M.C. Tam, executive officers of the Company and minority shareholders of
Kwanasia. The charges for these premises approximate the amount negotiable, in
management's opinion, on an arms length basis. Rentals charged by them to the
Company are $15, $12 and $12, for the years ended March 31, 1999, 2000 and 2001,
respectively.

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


                                      F-10
<PAGE>   60





9.  COMMITMENTS AND CONTINGENCIES

      The Company leases premises under various operating leases which do not
contain any renewal. Rental expense under operating leases included in the
statement of income was $1,647, $1,833 and $2,262 for the years ended March 31,
1999, 2000 and 2001, respectively.

      At March 31, 2001, the Company was obligated under operating leases
requiring minimum rentals as follows:

<TABLE>
<S>                                                                                  <C>
Years ending March 31
2002                                                                                 $2,308
2003                                                                                  1,789
2004                                                                                  1,045
2005                                                                                    914
2006                                                                                    921
2007 and after                                                                        2,344
                                                                                     ------
Total minimum lease payments                                                         $9,321
                                                                                     ======
</TABLE>

      At March 31, 2001, the Company had capital commitments for plant and
machinery totalling $375 which are expected to be disbursed during the year
ending March 31, 2002.

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 $75, $83 and
$142 for the years ended March 31, 1999, 2000 and 2001, 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 was 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 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 years ended March 31, 1999 and 2000 and that related to the plan and
MPF in the year ended March 31, 2001 amounted to $24, $26 and $30, 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. Options granted under the
stock option plan will be exercisable for a period of up to 10 years, 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
                                                                              -------------------------------------
                                                                               1999              2000          2001
                                                                              -------           -------    --------

<S>                                                                    <C>                <C>              <C>
Outstanding at beginning of the year ($12.59 for 1999, 2000 and 2001)         440,000           440,000     440,000
Granted during the year ($15.80 for 2001)                                           -                 -      10,000
Exercised during the year ($10.98 for 2001)                                         -                 -    (250,000)
                                                                              -------           -------    --------
Outstanding and exercisable at end of the year
  ($12.59 for 1999 and 2000 and $14.75 for 2001)                              440,000           440,000     200,000
                                                                              =======           =======     =======
Range of exercise price per share                                       $10 to $14.75     $10 to $14.75     $ 14.75
</TABLE>


The weighted average remaining contractual life of the share options outstanding
at March 31, 2001 was 6.81 years. At March 31, 2000 and March 31, 2001, there
were 44,000 and 34,000 options available for future grant under the plan.


                                      F-11
<PAGE>   61





11.  STOCK OPTION PLAN - CONTINUED

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,
"Accounting for Stock-Based Compensation" requires the disclosure of pro forma
net income and net income per share had the Company adopted the fair value
method as follows:

<TABLE>
<CAPTION>
                                                          1999          2000          2001
                                                          -----       ------        -------
<S>                                                      <C>          <C>           <C>
Net income:
  As reported                                            $9,492       $10,298       $12,810
  Pro forma                                               9,492        10,298        12,766

Basic net income per share:
  As reported                                             $1.73         $1.90         $2.38
  Pro forma                                                1.73          1.90          2.37

Diluted net income per share:
  As reported                                             $1.72         $1.89         $2.36
  Pro forma                                                1.72          1.89          2.35
</TABLE>

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

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


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, 1999, 2000 and 2001 are as
follows:

<TABLE>
<CAPTION>
                                                               PERCENTAGE OF NET SALES
                                                                 YEAR ENDED MARCH 31,
                                                          ---------------------------------
                                                          1999          2000          2001
                                                          ----          ----          -----
<S>                                                       <C>           <C>           <C>
Inter-Tel Incorporated                                    23.5%         25.3%         20.0%
Kyocera Mita Industrial Co. (H.K.) Limited                24.9%         24.0%         18.7%
Vtech Communications Limited                              12.4%         22.1%         17.6%
Epson Precision (H.K.) Limited                                *             *         13.0%
Behringer Holdings (Pte) Ltd.                             16.0%             *             *
Namtai Electronics (Shenzhen) Company Limited             11.2%             *             *

*   Less than 10%
</TABLE>

      Sales to Inter-Tel Incorporated, Kyocera Mita Industrial Co. (H.K.)
Limited, Vtech Communications Limited and Epson Precision (H.K.) Limited 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, 2000 and 2001, respectively, are as
follows:

<TABLE>
<CAPTION>
                                                                            PERCENTAGE OF
                                                                              ACCOUNTS
                                                                             RECEIVABLE
                                                                        -------------------
                                                                              MARCH 31,
                                                                        -------------------
                                                                         2000          2001
                                                                        ----          -----
<S>                                                                     <C>           <C>
Largest receivable balances                                             69.9%         80.5%
</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,
1999, 2000 and 2001.


                                      F-12
<PAGE>   62


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 Statement 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 and accounts payable are reasonable
estimates of their fair value. All the financial instruments are for trade
purposes.


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,
1999, 2000 and 2001 are as follows:

<TABLE>
<CAPTION>

                                                                 YEAR ENDED MARCH 31,
                            --------------------------------------------------------------------------------------------------
                                           1999                           2000                              2001
                            ------------------------------   -----------------------------    --------------------------------
                                       INTERSEGMENT                  INTERSEGMENT                     INTERSEGMENT
                            NET SALES    SALES     PROFIT    NET SALES   SALES     PROFIT     NET SALES    SALES       PROFIT
                            ---------  ---------  --------   ---------  -------   --------    ---------   -------     --------
<S>                          <C>        <C>       <C>         <C>       <C>        <C>         <C>        <C>         <C>
SEGMENT:
Injection molded
  plastic parts              $30,080    $   203   $ 8,232     $39,272   $     -    $10,571     $ 50,531   $   270     $ 12,360
Electronic products           21,861        118     3,534      21,140       123      2,145       28,647        25        3,003
Metallic parts                 3,362      1,543      (213)      3,968     3,299     (1,063)       5,906     3,942       (1,581)
                             -------    -------   -------     -------   -------    -------     --------   -------     --------
SEGMENT TOTAL                $55,303    $ 1,864   $11,553     $64,380   $ 3,422    $11,653     $ 85,084   $ 4,237     $ 13,782


RECONCILIATION TO
  CONSOLIDATED TOTALS:
Sales eliminations           (1,864)     (1,864)        -      (3,422)   (3,422)         -       (4,237)   (4,237)           -
Goodwill amortization
  not allocated to
  segment                         -           -       (24)          -         -        (32)           -                    (36)
                            -------     -------               -------   -------                 -------   -------
CONSOLIDATED TOTALS:
  NET SALES                 $53,439     $     -               $60,958   $     -                 $80,847   $     -
                            =======     =======               =======   =======                 =======   =======
  INCOME BEFORE
    INCOME TAXES
    AND MINORITY
    INTERESTS                                      $11,529                          $11,621                             $13,746
                                                   =======                          =======                             =======
</TABLE>

<TABLE>
<CAPTION>

                                                                YEAR ENDED MARCH 31,
                            -------------------------------------------------------------------------------------------
                                                1999                                          2000
                            -------------------------------------------     -------------------------------------------
                                                           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                       $ 44,513       $  1,468        $  2,207         $ 50,112      $  5,119          $2,535
Electronic products             19,871          2,663           1,328           23,431           600           1,361
Metallic parts                   3,462            151             664            5,037           300             856
                              --------       --------        --------         --------      --------          ------
SEGMENT TOTALS                $ 67,846       $  4,282        $  4,199         $ 78,580      $  6,019          $4,752
RECONCILIATION TO
  CONSOLIDATED TOTALS:
Elimination of receivables
  from intersegments            (3,930)             -               -           (7,288)            -               -
Goodwill not allocated to
  segments                         357              -              24              549             -              32
                              --------       --------        --------         --------      --------          ------
CONSOLIDATED TOTALS           $ 64,273       $  4,282        $  4,223         $ 71,841      $  6,019          $4,784
                              ========       ========        ========         ========      ========          ======
</TABLE>














<TABLE>
<CAPTION>
                                          YEAR ENDED MARCH 31,
                              ------------------------------------------
                                                  2001
                              ------------------------------------------
                                                            DEPRECIATION
                              IDENTIFIABLE     CAPITAL           AND
                                 ASSETS      EXPENDITURE    AMORTIZATION
                              ------------   -----------    ------------
<S>                             <C>            <C>             <C>
SEGMENT:
Injection molded plastic
  parts                         $60,704        $11,817         $2,625
Electronic products              26,821          1,589          1,437
Metallic parts                    6,149            520            941
                                -------        -------         ------
SEGMENT TOTALS                  $93,674        $13,926         $5,003
RECONCILIATION TO
  CONSOLIDATED TOTALS:
Elimination of receivables
  from intersegments            (10,721)             -              -
Goodwill not allocated to
  segments                          513              -             36
                                -------        -------         ------
CONSOLIDATED TOTALS             $83,466        $13,926         $5,039
                                =======        =======         ======
</TABLE>

                                      F-13
<PAGE>   63

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,
                                                        -----------------------------------
                                                           1999          2000          2001
                                                        -----------------------------------
<S>                                                     <C>           <C>           <C>
Net sales
  Hong Kong                                             $13,857       $14,704       $15,557
  Export sales
    China                                                17,292        25,958        44,078
    U.S.A.                                               13,072        16,488        18,282
    Europe                                                8,531         3,056         1,763
    Other                                                   687           752         1,167
                                                        -------       -------       -------
Total net sales                                         $53,439       $60,958       $80,847
                                                        =======       =======       =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                     MARCH 31,
                                                        ------------------------------------
                                                           1999          2000          2001
                                                        -------       -------       -------
<S>                                                     <C>           <C>           <C>
Hong Kong                                               $47,116       $46,982       $47,520
China                                                    16,800        24,310        35,433
Goodwill                                                    357           549           513
                                                        -------       -------       -------
Total identifiable assets                               $64,273       $71,841       $83,466
                                                        =======       =======       =======
</TABLE>

                                      F-14



<PAGE>   64

ITEM 19.  EXHIBITS

         The following documents are filed as exhibits herewith:


<TABLE>
<CAPTION>
EXHIBIT
  NO.                                   DESCRIPTION
-------                                 -----------
<S>         <C>
1.1         Certificate of Incorporation, 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.

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(a)      Facility letter dated December 27, 2000 between The Sanwa Bank
            Limited and Jetcrown Industrial Limited.

4.1(b)      Facility letter dated October 27, 2000 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.

4.3         Facility letter dated May 31, 2001 between Standard Chartered Bank
            and Kwanasia Electronics Company Limited.

4.4         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.

4.5         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.

4.6         Tenancy Agreement dated May 30, 2000 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.

4.7         Tenancy Agreement dated October 13, 1999 between Shekou NanShui
            Enterprises Shareholding Co. Ltd. and Jetcrown Industrial (Shenzhen)
            Limited for the 5th Floor, Block E, Wing Village Industrial Estate,
            Shekou, Shenzhen.

4.8         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.

4.9         Tenancy Agreement dated October 9, 1999 between Shekou NanShui
            Enterprises Shareholding Co. Ltd. and Jetcrown Industrial (Shenzhen)
            Limited for the 1st Floor, Factory C, Wing Village Industrial
            Estate, Shekou, Shenzhen.

4.10        Tenancy Agreement dated November 5, 1999 between Shekou NanShui
            Enterprises Shareholding Co. Ltd. and Jetcrown Industrial (Shenzhen)
            Limited for the 2nd Floor, Factory C, Wing Village Industrial
            Estate, Shekou, Shenzhen.

4.11        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.

4.12        Tenancy Agreement dated August 23, 2000 between Shekou East Empire
            Industrial Company Limited and Jetcrown Industrial (Shenzhen)
            Limited for the 2nd and 3rd Floor, Block H, Wing Village Industrial
            Estate, Shekou, Shenzhen.

4.13        Tenancy Agreement dated August 23, 2000 between Shekou East Empire
            Industrial Company Limited and Jetcrown Industrial (Shenzhen)
            Limited for the 5th Floor, Block H, Wing Village Industrial Estate,
            Shekou, Shenzhen.

4.14        Tenancy Agreement dated June 3, 1999 between Shekou East Empire
            Industrial Company Limited and Jetcrown Industrial (Shenzhen)
            Limited for the 4th Floor, Block H, Wing Village Industrial Estate,
            Shekou, Shenzhen.
</TABLE>


                                       50
<PAGE>   65

<TABLE>
<CAPTION>
<S>         <C>
4.15        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.

4.16        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.

4.17        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, Shenzhen.

4.18        Tenancy Agreement dated January 4, 2001 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.

4.19        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.

4.20        Tenancy Agreement dated January 18, 2000 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 (incorporated by reference
            to Exhibit 2.35 of Deswell's Form 20-F for the year ended March 31,
            2000 filed with the SEC on July 7, 2000).

4.21        Tenancy Agreement dated October 1, 1999 between Lee Shu Kwan and
            Kwanasia Electronics Co. Ltd. for Room 402, Block A, To Fa Court,
            Nanshan District, Shenzhen (incorporated by reference to Exhibit
            2.37 of Deswell's Form 20-F for the year ended March 31, 2000 filed
            with the SEC on July 7, 2000).

4.22        Tenancy Agreement dated April 1, 2000 between Tam Man Chi and
            Kwanasia Electronic Co. Ltd. for Flat A, 11th, Ho Wah House, Sun Ho
            City, Shenzhen (incorporated by reference to Exhibit 2.38 of
            Deswell's Form 20-F for the year ended March 31, 2000 filed with the
            SEC on July 7, 2000).

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.

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 and F-3.
</TABLE>


                                       51
<PAGE>   66

                                   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, 2001                    By:  /s/ RICHARD LAU
                                         -----------------------------
                                               Richard Lau
                                               Chairman of the Board and
                                               Chief Executive Officer