United
        States
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
  **FORM
        20-F**
  o
              REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934
 or
 x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 **For
        the fiscal year ended March 31, 2005.**
  o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 **For
        the transition period from ____________ to ____________.**
  **Commission
        file number 0-28990**
  **HIGHWAY
        HOLDINGS LIMITED**
 (Exact
        name of Registrant as specified in its charter)
  **British
        Virgin Islands**
 (Jurisdiction
        of incorporation or organization)
  Suite
        810, Level 8, Landmark North
 39
        Lung
        Sum Avenue
 Sheung
        Shui
 New
        Territories, Hong Kong
 (Address
        of principal executive offices)
  **Securities
        registered or to be registered pursuant to Section 12(b) of the Act:
        None**
  **Securities
        registered or to be registered pursuant to Section 12(g) of the
        Act:**
  Title
        of each class
 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**
  **Indicate
        the number of outstanding shares of each of the issuer’s classes of capital or
        common stock as of the close of the period covered by the annual report.
        3,316,154 Common Shares were outstanding as of March 31,
        2005.**
  **Indicate
        by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x** **No
        o**
  **Indicate
        by check mark which financial statement item the registrant has elected to
        follow.**
  **Item
        17 o** **Item 18 x**
 
  **TABLE
        OF CONTENTS**
  PART
                  I
              
              
              1Item
                  1. Identity of Directors, Senior Management and Advisers
              
              
              1Item
                  2. Offer Statistics and Expected Timetable
              
              
              1Item
                  3. Key Information
              
              
              1Item
                  4. Information on the Company
              
              
              13Item
                  5. Operating and Financial Review and Prospects
              
              
              35Item
                  6. Directors, Senior Management and Employees
              
              
              45Item
                  7. Major Shareholders and Related Party Transactions
              
              
              50Item
                  8. Financial Information.
              
              
              51Item
                  9. The Listing
              
              
              53Item
                  10. Additional Information
              
              
              54Item
                  11. Quantitative and Qualitative Disclosures About Market
                  Risk.
              
              
              58Item
                  12. Description of Securities Other Than Equity Securities
              
              
              58PART
                  II
              
              
              58Item
                  13. Defaults, Dividend Arrearages and Delinquencies.
              
              
              58Item
                  14. Material Modification to the Rights of Securities Holders and
                  use of
                  Proceeds.
              
              
              59Item
                  15. Controls and Procedures.
              
              
              59Item
                  16. Not applicable.
              
              
              59Item 16A.
                  Audit Committee Financial Expert
              
              
              59Item
                  16B. Code of Ethics
              
              
              60Item
                  16C. Principal Accountant Fees and Services
              
              
              60Item
                  16D. Exemptions From the Listing Standards for Audit
                  Committees
              
              
              61Item
                  16E. Purchase of Equity Securities by the Issuer and Affiliated
                  Purchasers
              
              
              61PART
                  III
              
              
              61Item
                  17. Not applicable
              
              
              61Item
                  18. Financial statements.
              
              
              61Item
                  19. Exhibits.
              
              
              61
 
 -
            i
            -
  **FORWARD
        - LOOKING STATEMENTS**
  Except
        for any historical information contained herein, the matters discussed in
        this
        Annual Report on Form 20-F contain certain “forward-looking statements” within
        the meaning of the Private Securities Litigation Reform Act of 1995 with
        respect
        to our financial condition, results of operation and business. Forward-looking
        statements relate to analyses and other information which are based on forecasts
        of future results and estimates of amounts not yet determinable, including
        statements about our future prospects, developments and business strategies.
        These forward-looking statements are identified by their use of terms and
        phrases such as
“anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“predicts,”“will”
        and similar terms and phrases, including references to assumptions. These
        forward-looking statements involve risks and uncertainties that may cause
        our
        actual future activities and results of operations to be materially different
        from those suggested or described in this Annual Report on Form 20-F. These
        risks include: product demand; customer satisfaction and quality issues;
        labor
        disputes; competition; health and economic factors affecting China and Hong
        Kong; political relations between the United States and China; changes in
        policies by the Chinese government; currency exchange rate fluctuations;
        increased price competition; our ability to achieve and execute internal
        business plans; worldwide political instability and economic growth; and
        the
        impact of any economic downturns and inflation.
  If
        one or
        more of these risks or uncertainties materializes, or if underlying assumptions
        prove incorrect, our actual results may vary materially from those expected,
        estimated or projected. Given these uncertainties, users of the information
        included in this Annual Report on Form 20-F, including investors and prospective
        investors are cautioned not to place undue reliance on such forward-looking
        statements. We do not intend to update the forward-looking statements
        included in this Annual Report .
  CONVENTIONS
  Highway
        Holdings Limited operates through various controlled subsidiaries. Unless
        the
        context indicates otherwise, all references herein to “the Company” refer
        collectively to Highway Holdings Limited and its subsidiaries. Unless otherwise
        stated, all references to “dollars” or $ are to United States
        dollars.
  **PART
        I**
  **Item
        1.**  **Identity
        of Directors, Senior Management and Advisers**
  Not
        Applicable
  **Item
        2.**  **Offer
        Statistics and Expected Timetable** ****
  Not
        Applicable
  **Item
        3.**  **Key
        Information**
  Our
        historical Consolidated Financial Statements are prepared in accordance with
        accounting principles generally accepted in the United States (“GAAP”) and
        presented in United States dollars. The selected financial information set
        forth
        below is derived from the consolidated financial statements of the Company.
        The
        selected information is qualified in its entirety by reference to, and should
        be
        read in conjunction with, such consolidated financial statements, related
        notes
        and “Operating and Financial Review and Prospects” included as Item 5 in this
        report.
  -
            1
            -
  Selected
        Consolidated Financial Information (In thousands, except per share
        data):
  2001
              
              2002
              
              2003
              
              2004
              
              2005Income
                  Statement DataNet
                  Sales
              
              $
              17,543
              
              $
              19,432
              
              $
              20,370
              
              $
              25,356
              
              $
              27,678Gross
                  profit
              
              
              2,492
              
              
              3,384
              
              
              3,882
              
              
              5,094
              
              
              5,130Operating
                  income (loss)
              
              
              (1,029
              )
              
              (241
              )
              
              159
              
              
              875
              
              
              (269
              )Net
                  income (loss)
              
              
              (1,252
              )
              
              (231
              )
              
              485
              
              
              982
              
              
              (152
              )Dividend
                  declared and paid(1)
              
              
              0
              
              
              0
              
              
              0
              
              
              237
              
              
              323Per
                  share amountsNet
                  income (loss)-basic
              
              $
              (0.43
              )
              $
              (0.08
              )
              $
              0.17
              
              $
              0.32
              
              $
              (0.05
              )Net
                  income (loss)-diluted
              
              $
              (0.43
              )
              $
              (0.08
              )
              $
              0.17
              
              $
              0.30
              
              $
              (0.05
              )Dividend
                  declared & paid(1)
              
              
              0
              
              
              0
              
              
              0
              
              
              0.08
              
              
              0.10Weighted
                  average shares:Basic
              
              
              2,905
              
              
              2,904
              
              
              2,902
              
              
              3,030
              
              
              3,260Diluted
              
              
              2,905
              
              
              2,904
              
              
              2,902
              
              
              3,258
              
              
              3,260Balance
                  Sheet DataProperty,
                  plant and equipment, net
              
              $
              4,723
              
              $
              4,243
              
              $
              3,657
              
              $
              3,780
              
              
              3,473Working
                  capital
              
              
              6,425
              
              
              6,716
              
              
              7,753
              
              
              8,774
              
              
              9,850Total
                  assets
              
              
              15,644
              
              
              15,701
              
              
              16,494
              
              
              18,688
              
              
              20,100Long
                  Term Debt
              
              
              49
              
              
              112
              
              
              230
              
              
              385
              
              
              967Shareholders’
                  equity
              
              
              11,697
              
              
              11,466
              
              
              11,907
              
              
              12,842
              
              
              13,058
 
 (1)
              Dividends
                  declared for all periods were declared as cash
                  dividends.
 
 **RISK
        FACTORS**
  The
        Company’s business and operations involve numerous risks, some of which are
        beyond the Company’s control, that may affect future results and the market
        price of the Company’s Common Shares. The following discussion highlights some
        of the risks the Company faces.
  *Risks
        Relating to Operating in China*
  *Dependence
        on Agreements with Chinese State-Owned Enterprises* .
        All of
        the Company’s operations are currently dependent on its manufacturing operations
        conducted in China. Pursuant to its five leases (the “Premises Leases”), the
        Company utilizes approximately 450,000 square feet of space for manufacturing
        operations and dormitory facilities at the site of its principal factory
        complex
        in Long Hua, Shenzhen, China where the Company to date has conducted all
        of its
        manufacturing operations **.** The
        Company’s operations in Long Hua, Shenzhen, are conducted pursuant to agreements
        entered into between certain China companies set up by the local government
        and
        the Shenzhen City Baoan District Foreign Economic Development Head Company
        and
        its designees (collectively, the “BFDC”) (the agreements, collectively the “BFDC
        Agreements”). The Premises Leases currently expire on February 28, 2009.
        However, the Premises Leases may be terminated at any time prior to 2009
        by
        either the Company or the landlord upon six months notice to the other party.
        Should the landlord elect to terminate the Premises Leases before 2009, or
        should the Premises Lease be terminated for any other reason, the entire
        operations of the Company would have to be relocated to other facilities.
        Any
        such relocation would be costly and would disrupt the Company’s operations. Any
        unplanned termination by the landlord would have a severe adverse affect
        on the
        Company, its operations, its viability and its financial condition. While
        the
        Company believes that it could find suitable alternative facilities, the
        terms
        of such alternate facilities could be less favorable to the Company. Any
        contractual dispute under either of the BFDC Agreements or the Premises Leases
        could have a material adverse affect on the Company’s operations and financial
        condition. Although the Company currently is considering relocating its
        principal facilities from Long Hua, Shenzhen, to one or more alternative
        sites,
        the Company currently is still dependent on its principal facilities, and
        any
        disruption of its lease arrangements at its Long Hua, Shenzhen, facilities
        would
        materially, and adversely affect the Company.
  -
            2
            -
  To
        facilitate the Company’s operations in Long Hua, Shenzhen, the local government
        initially set up three separate China companies that are parties to the BFDC
        Agreements. The term of two of these agreements have been extended with the
        remaining two China companies, and these two agreements now expire in 2016
        (by
        the mutual consent of the parties, the third agreement with the local government
        agency was retired during the past year). The BFDC is owned by the local
        government of Long Hua, the town in which the factory is located. Pursuant
        to
        the BFDC Agreements, the BFDC is the party responsible for providing
        manufacturing facilities and supplying workers to the Company and the Company
        is
        responsible for paying a management fee, and certain other charges to the
        BFDC.
        As a result of structuring its operations so that they are conducted pursuant
        to
        the BFDC Agreements and the Premises Leases, the Company’s operations in Long
        Hua, Shenzhen, are not subject to certain rules and regulations that would
        be
        imposed on entities which are considered under China law to be doing business
        in
        China by utilizing other business structures such as joint ventures or wholly
        owned subsidiaries organized in China. For example, the Company has not been
        required to apply for permits or licenses in China or to register to do business
        in China. Should there be any adverse change in the Company’s dealings with the
        BFDC, or should the local or federal government change the rules under which
        the
        Company currently operates, all of the Company’s operations and assets could be
        jeopardized.
  To
        date,
        the Company and the BFDC have been dealing with each other on terms different
        in
        certain respects than those contained in the BFDC Agreements. There can be
        no
        assurance that the BFDC will not insist upon a change in the current practices
        so as to require adherence to the terms of the BFDC Agreements, which the
        Company considers less favorable to it than the practices currently in effect,
        or that the Company or BFDC may not be required to do so by the Ministry
        of
        Foreign Trade and Economic Co-operation of China and other relevant authorities.
        There can also be no assurances that the Company will be able to negotiate
        extensions and further supplements to any of the BFDC Agreements or that
        the
        Company will be able to continue its operations in China. If the Company
        were
        required to adhere to the terms of the BFDC Agreements, the Company’s business
        and results of operations could be materially and adversely affected.
  -
            3
            -
  The
        BFDC
        Agreements and the Premises Leases are dependent on the Company’s continuing
        good relationship with the designees of the local government. In the event
        of a
        dispute involving the BFDC Agreements or the Premises Leases, the current
        arrangement under which the Company conducts its business may be difficult
        to
        enforce in China. The Company’s operations and prospects will be materially and
        adversely affected by the failure of the BFDC or Land & Sun Company to honor
        or extend the current arrangement or renew the BFDC Agreements or the Premises
        Leases, respectively.
  *Internal
        Political and Other Risks* .
        As of
        the date of this Annual Report, all of the Company’s manufacturing facilities
        are located in China. As a result, the Company’s operations and assets are
        subject to significant political, economic, legal and other uncertainties
        associated with doing business in China. Changes in policies by the Chinese
        government resulting in changes in laws, regulations, or the interpretation
        thereof, confiscatory taxation, restrictions on imports and sources of supply,
        currency re-valuations or the expropriation of private enterprise could
        materially adversely affect the Company. An example of such uncertainty and
        rapid changes was China’s sudden imposition in 2000 on the metals industry of
        the Customs License Deposit, which resulted in the Company being forced to
        pay a
        20% deposit on all imported steel metals. The Customs License Deposit rules
        have
        since been modified and partially repealed.
  The
        Chinese government has been pursuing economic reform policies, including
        the
        encouragement of private economic activity and greater economic
        decentralization. There can be no assurance, however, that the Chinese
        government will continue to pursue such policies, that such policies will
        be
        successfully pursued, that such policies will not be significantly altered
        from
        time to time, or that business operations in China would not become subject
        to
        the risk of nationalization, which could result in the total loss of investments
        in that country. Economic development may be limited as well by other factors,
        such as the imposition of austerity measures intended to reduce inflation,
        the
        inadequate development of an infrastructure, and the potential unavailability
        of
        adequate transportation, adequate power, adequate water supplies, satisfactory
        roads and communications and raw materials and parts. Certain parts of China,
        including the Company’s facilities in Long Hua, Shenzhen, have in the past and
        recently experienced severe shortages of electricity and water, which could
        negatively affect the Company. During the past fiscal year, the Company has
        experienced both water and electricity shortages, which have caused the Company
        to supplement its electricity needs through its diesel electricity generators.
        If for any reason the Company were required to move its manufacturing operations
        outside of China, the Company’s favorable cost structure could be eliminated,
        its competitiveness and market position would be materially jeopardized,
        and
        there would be substantial doubt as to whether the Company could continue
        its
        operations.
  *Revaluation
        of Renminbi Yuan.* As a
        company whose operations are entirely based in China, it is exposed to
        fluctuations in the value of the renminbi yuan, or RMB, the local currency
        of
        China. The United States and certain European countries have recently been
        calling for the re-valuation of the RMB, which revaluation would result in
        the
        appreciation of the RMB. Should the Chinese government allow a significant
        RMB
        appreciation, the Company’s cost structure and pricing could change and have a
        material negative effect on its operations, sales and financial
        results.
  -
            4
            -
  *Possible
        Reoccurrence of SARS.* During
        2002/2003, Severe Acute Respiratory Syndrome (SARS) became a major world-wide
        health concern. SARS is believed to have originated in China and most SARS
        infections and deaths occurred in China. Because SARS is a highly contagious
        disease, a number of countries and health organizations, including the World
        Health Organization, strongly advised people to avoid traveling to Hong Kong
        or
        the Guangdong province in mainland China. The Company’s offices and facilities
        are located in both Hong Kong and in the Guangdong province. While SARS did
        not
        affect the Company’s workers, the disease did materially and adversely affect
        business in China. Should SARS reoccur in China in the future, the Company’s
        employees and operations could be affected. In addition, the Company’s
        international customers may reduce their contacts and business with the Company
        by shifting their manufacturing needs to manufacturers located outside of
        China
        or by purchasing products manufactured outside of China. Any such future
        shift
        of work orders or product purchases from the Company to companies based in
        countries that are not so affected by SARS would have a material affect on
        the
        Company, its operations, and on its financial condition.
  *Uncertain
        Legal System and Application of Laws* .
        The
        legal system of China is often unclear and is continually evolving, and
        currently there can be no certainty as to the application of its laws and
        regulations in particular instances. China does not have a comprehensive
        system
        of laws, and the existing regional and local laws are often in conflict and
        subject to inconsistent interpretation, implementation and enforcement. New
        laws
        and changes to existing laws occur quickly and sometimes unpredictably. As
        is
        the case with all businesses operating in China, the Company often is also
        required to comply with informal laws and trade practices imposed by local
        and
        regional administrators. Local taxes and other charges are levied depending
        on
        the local needs for tax revenues and may not be predictable or evenly applied.
        These local and regional taxes/charges and governmentally imposed business
        practices often affect the Company’s cost of doing business and require the
        Company to constantly modify its business methods to both comply with these
        local rules and to lessen the financial impact and operational interference
        of
        such policies. For example, the Company and other companies have periodically
        been taxed on foreign currency bank transfers, which taxes can be substantial.
        In addition, it is often extremely burdensome for businesses to comply with
        some
        of the local and regional laws and regulations. As a result, with the general
        knowledge and tacit approval of the local and regional agencies, most businesses
        fail to fully comply with certain of these more burdensome laws and regulations.
        Recently, however, the local and regional agencies have increasingly enforced
        rules that previously were not enforced, thereby increasing the burden on
        the
        Company and the other businesses operating in the region. While the Company
        has,
        to date, been able to operate with the newly enforced rules and within these
        changing administratively imposed business practices, no assurance can be
        given
        that it will continue to be able to do so in the future. Should the local
        or
        regional governments or administrators impose new practices or levies that
        the
        Company cannot effectively respond to, or should the administrators continue
        to
        enforce more of those rules that they have not previously enforced, the
        Company’s operations and financial condition could be materially and adversely
        impacted. The Company’s ability to appeal many of the local and regionally
        imposed law and regulations is limited, and the Company may not be able to
        seek
        adequate redress for laws that materially damage its business. The Chinese
        judiciary is relatively inexperienced in enforcing the laws that exist, leading
        to a higher than usual degree of uncertainty as to the outcome of any
        litigation. Even where adequate laws do exist in China, it may not be possible
        to obtain swift and equitable enforcement of that law.
  -
            5
            -
  *Current
        Favorable Tax Policy Could Change* .
        Under
        the BFDC Agreements, the Company is not considered by local tax authorities
        to
        be doing business in China; therefore, the Company’s activities in China have
        not been subject to local taxes on its operations. The BFDC is responsible
        for
        paying its own taxes incurred as a result of its operations under the BFDC
        Agreements. Since the Company reimburses the BFDC for its expenses related
        to
        the Company’s activities in China, the Company indirectly pays some taxes on its
        operations. There can be no assurances, however, that the Company will not
        be
        subject to direct taxation on its operations in the future. If China did
        impose
        a direct tax upon the Company, the tax could materially adversely affect
        the
        Company’s business and results of operations. See Note 3 of Consolidated
        Financial Statements for additional information on taxation.
  *Recent
        Turbulent Relations with the United States* .
        Relations between the U.S. and China have during the past few years been
        strained as a result of numerous events, including the demands by the United
        States that China permit the RMB exchange rate to fluctuate, China’s opposition
        to the U.S. war in Iraq in 2003, the strained relations between the U.S.
        and
        North Korea (a neighbor of China), the U.S. Navy reconnaissance plane that
        was
        downed on Hainan Island in China in April 2001, allegations by the U.S. that
        certain thermonuclear military technology of the U.S. has been stolen by
        China’s
        spies, the continuous support by the U.S. of Taiwan, and the continuous
        allegations by the U.S. of human rights abuses in China. In addition, the
        U.S.
        and China have recently been involved in controversies over the protection
        in
        China of intellectual property rights that threatened a trade war between
        the
        countries. These strains on U.S./China relations could affect the ability
        of
        companies operating in China, such as the Company, from engaging in business
        with, or selling to the U.S. or U.S. companies. Any disruption of the current
        trade relations with the U.S. could have a material adverse effect on the
        Company’s business. No assurance can be given that these and any other future
        controversies will not change the status quo involving peaceful trade relations
        between the U.S. and China, or that the Company’s business and operations in
        China will not be materially and adversely affected. Even if trade relations
        between the U.S. and China are not affected by political difficulties between
        the two countries, such political friction could adversely affect the prevailing
        market price for the Company’s Common Shares.
  *Labor
        Shortages* .
        One of
        the principal economic advantages of locating the Company’s operations in China
        has been the availability of low cost labor. Due to the enormous growth in
        manufacturing in China and the effects of China’s one-child policy, the Company
        has recently experienced some difficulty in filling its labor needs. In addition
        to making labor more difficult to obtain, the shortage of low-cost labor
        could
        also force the Company to increase its wages, thereby negatively affecting
        its
        cost advantage. In order to address the increase in labor costs in Long Hua,
        Shenzhen, the Company has been exploring opening one or more alternative
        locations for its manufacturing facilities in area that have lower labor
        costs.
        The new, smaller facility that the Company will begin leasing in July 2005
        in He
        Yuan, China, currently offers lower labor rates than those prevailing in
        Long
        Hua, Shenzhen. In addition to the recently developing tight labor market,
        the
        Company has also been affected by cyclical trends and other shortages in
        labor
        supply. For approximately two months each year, there are labor shortages
        in
        China as a result of the Chinese New Year during which time the Company follows
        the customary practice at its factory complex of temporarily discontinuing
        operations. In addition, the availability of labor is also restricted during
        the
        harvest periods of the year. There is also a large turnover of employees
        in
        China each year, particularly following the Chinese New Year holiday. The
        Company has experienced labor shortages in the past as a result of road and
        weather conditions and natural disasters. Any material or prolonged shortage
        of
        labor would have a material adverse effect on the Company’s results of
        operations.
  -
            6
            -
  *Risks
        Related to its Operations*
  *Significant
        Financial and Operational Costs Expected to Arise Due To The Current
        Restructuring of the Company’s Business Segments* In order
        to remain competitive and viable, the Company must continuously revise and
        improve its operations and must anticipate and react to changing market forces.
        The Company has recently identified a number of changes in the markets in
        which
        it operates and, in response thereto, is considering either modifying or
        selling
        some or all of two of its operations. The Company believes that the
        proliferation of digital cameras and the photographic capabilities of mobile
        telephones will materially and adversely affect its film-based camera
        operations. In addition, the Company believes that the market for alarm clocks
        will continue to decrease and become increasingly price competitive.
        Accordingly, the Company is re-evaluating its ability to compete with these
        highly competitive, low margin (and often unprofitable) operations, and has
        decided to exit its single-use camera operations. In addition, the Company
        continues to focus on its strengths as an OEM manufacturer and to sell or
        otherwise reduce its financial exposure associated with its “Kienzle” brandname
        product sales operations. These changes will require the Company to
        significantly restructure its operations, to reallocate its assets, and to
        transition existing facilities and personnel to new uses. The Company’s actions
        are expected to disrupt its operations and detract from its principal operations
        while it disposes of certain of its existing businesses and/or reorganizes
        its
        OEM manufacturing operations. Although the Company believes that the disposition
        and restructuring of some of its operations will, in the long-term, improve
        the
        Company’s operations, profitability and financial condition, in the short-term
        these actions could have a negative affect on its operations and financial
        condition. No assurance can be given that the Company has correctly identified
        market changes or that these changes in its business will improve the Company’s
        future profitability.
  In
        addition to the changes that the Company currently is making to its operations,
        it will, in the future, also have to react to the continuously changing
        manufacturing market. The failure to anticipate, detect or react to market
        changes can have severe adverse affects on the Company’s operations. No
        assurance can be given that the Company will be able to detect and correctly
        react to other future changes in its principal markets, or that its investments
        in anticipation of such changes will result in the anticipated return. Should
        the Company incorrectly react to market changes, its business, operations
        and
        financial condition could be adversely affected.
  *The
        Company is Increasingly Financially Dependent Upon a Few Major Customer.* Historically,
        a substantial percentage of the Company’s sales has been to small number of
        customers. The Company’s current business plan calls for reducing the number of
        smaller clients and shifting the Company’s sales and operations to a fewer,
        large customers. During the years ended March 31, 2003, 2004 and 2005, the
        Company’s sales to its three largest customers for such periods accounted for
        approximately 40.6%, 46.1% and 43.9% of net sales respectively. See
“Business — Major
        Customers.” The Company’s success will depend to a significant extent on
        maintaining its major customers and on the success achieved by its major
        customers. The Company could be materially adversely affected if it loses
        any
        major customers or if the business and operations of its major customers
        decreases. While the Company has in the past been able to replace major
        customers, no assurance can be given that the Company will be able to do
        so in
        the future. Most of the Company’s sales transactions with its customers are
        based on purchase orders received by the Company from time to time. While
        the
        Company is a party to certain longer term manufacturing agreements that contain
        fixed purchase requirements, the Company is to a large extent dependent upon
        receiving new purchase orders for future sales. In addition, orders under
        fixed
        purchase agreements are sometimes not placed with the Company as scheduled,
        and
        the Company may be unable or unwilling to enforce the terms of such fixed
        purchase requirements. As a result, most of the Company’s revenues are dependent
        upon periodic orders and the amount of sales to its customers fluctuate from
        time to time. In addition, with fewer, larger customers, the Company’s
        operations have become more dependent upon fewer customers and would be more
        significantly impacted by a delay or reduction of any anticipated purchase
        orders or by the loss of any one or more of its major customers.
  -
            7
            -
  In
        addition to its increasing dependence on generating revenues from fewer,
        larger
        customers, the Company’s risk exposure to the collection of its accounts
        receivable likewise is increasing as the size of receivables from individual
        clients increases. A substantial portion of the Company’s sales to its major
        customers are made on credit, which exposes the Company to the risk of
        significant revenue loss if a major customer is unable to honor its credit
        obligations to the Company. Any material delay in being paid by its larger
        customers, or any default by a major customer on its obligations to the Company
        would significantly and adversely affect the Company’s liquidity. During the
        fiscal years ended March 31, 2003, 2004 and 2005, accounts receivable from
        the
        five customers with the largest receivable balances at year-end represented
        49.0%, 61.5% and 67.4% of the total outstanding receivables, and one customer’s
        accounts receivable represented 30.8% of the Company’s total receivables as of
        March 31, 2005. As of March 31, 2005, the total amount of the Company’s accounts
        receivable was $5,165,000.
  *The
        Company Faces Significant Competition From Numerous Larger, Better Capitalized,
        and International Competitors* The
        Company competes against numerous manufacturers for all of its current products.
        Such competition arises from both third party manufacturers (such as the
        Company) and from the in – house
        manufacturing capabilities of existing customers. To a large extent, the
        Company
        competes in its OEM business on the basis of quality, price, service, and
        the
        ability to deliver products on a reliable basis. Due to intense price
        competition, the Company has during the past few years had to reduce its
        price
        and its operating margins in all three of its business units. This has led
        to
        lower sales in some product lines, lower gross margins, and to net losses
        in
        some product lines. During the past few years, the Company has at times refused
        certain purchase orders of manufacturing contracts because of pricing pressures,
        which has lowered the Company’s net sales and lowered its market share. Unless
        the Company can increase its gross margins, the Company will continue to
        operate
        at very narrow profit margins, which will negatively affect the Company’s
        financial position and its stock price. While the Company intends to reduce
        its
        operations in the highly competitive, low margin business lines by focusing
        its
        efforts on offering more proprietary services and increasing sales for its
        fully
        integrated and complex technical manufacturing services, no assurance can
        be
        given that the Company will, in fact, be able to compete against its numerous
        competitors.
  -
            8
            -
  Since
        locating its facilities in Shenzhen, China, in 1991, the Company has been
        able
        to compete with other manufacturers based its cost of operations in Shenzhen,
        the availability of a large labor pool, its favorable tax status, and its
        convenient access to Hong Kong’s shipping port and business/banking facilities.
        Since the Company first moved to Shenzhen as one of the first manufacturers
        in
        that locality, however, many other manufacturers have re-located or established
        new facilities in Shenzhen, and the Company’s competitive advantage has been
        significantly diminished. In addition, many of the larger, international
        companies that have established competing facilities in Shenzhen have also
        established manufacturing facilities in other low-cost manufacturing locations,
        many located sites outside of China, which have given those competitors the
        ability to shift their manufacturing to those locations whenever costs at
        those
        other locations was cheaper than in Shenzhen. Accordingly, the Company has
        indirectly been competing against both the competitors in Shenzhen as well
        as
        the other facilities outside of China. No assurance can be given that the
        Company will continue to be able to compete effectively in its principal
        businesses.
  At
        times,
        the Company competes against a number of Chinese clock manufacturers, some
        of
        whom the Company believes may be directly or indirectly subsidized by the
        state.
        These companies often have cost structures that the Company cannot compete
        against, thereby forcing the Company to withdraw from certain product markets.
        For example, the Company has experienced significant competition from Chinese
        clock manufacturers that manufacture the low quality, extremely inexpensive
        quartz clocks that are sold at prices significantly below the Company’s cost of
        raw materials for these products. These low-price clocks have recently flooded
        the clock market and reduced the demand for the more expensive and higher
        quality clocks manufactured by the Company and its principal original equipment
        manufacturer clients. These clock manufacturers, including those that that
        the
        Company believes are state-owned or supported, are causing the Company to
        re-evaluate the desirability of manufacturing clocks for its own account.
“See,
        Item 4. Information on the Company - Reorganization.”
  *Dependence
        on Single China Factory Complex* .
        All of
        the Company’s products are currently manufactured at a single factory complex
        located in Long Hua, Shenzhen in southern China. The Company currently maintains
        fire, casualty and theft insurance aggregating approximately $20,000,000
        covering various of its stock in trade goods and merchandize, furniture and
        equipment in China. The proceeds of this insurance may not be sufficient
        to
        cover material damage to, or, the loss of, all or material portions of the
        factory complex due to fire, severe weather, flood, or other act of God or
        cause, and such damage or loss would have a material adverse effect on the
        Company’s financial condition, business and prospects. Although the Company is
        currently considering relocating its main manufacturing facilities, and in
        that
        context has entered into a lease for a new smaller manufacturing facility
        in He
        Yuan, the Company will continue to be solely dependent upon the Long Hua
        in the
        near future.
  *The
        Company’s Operations May be Significantly Disrupted and Negatively Affected if
        The Company Relocates its Manufacturing Facilities.* The
        Company is currently considering relocating its facilities to a new or newer
        facility outside of Long Hua, Shenzhen. While the Company has not yet located
        and secured an alternative facility, the Company may find such a new facility
        and may move its entire manufacturing facilities to such a new facility within
        one or two years. If the Company does relocate its facilities, its entire
        operations, including its business, its manufacturing operations, and its
        relationships with clients and local government offices and landlords, could
        be
        adversely affected by while the Company disassembles, moves and reinstalls
        its
        equipment and manufacturing capabilities. Any such disruption could affect
        the
        Company’s relationship with its vendors and customers. In addition, the Company
        expects to incur significant expenses in relocating its entire facilities.
        All
        of the foregoing factors related to any relocation are expected to negatively
        impact the Company’s revenues and financial position during the fiscal year(s)
        in which the relocation occurs.
  -
            9
            -
  *Fluctuation
        in Foreign Currency Exchange Rates* Because
        the Company engages in international trade, the Company is subject to the
        risks
        of foreign currency exchange rate fluctuations. In prior years, the Company’s
        exposure to currency fluctuations was limited because most of its sales were
        denominated in either U.S. or Hong Kong dollars. However, as a result of
        its
        increasing unit sales of its clocks and cameras in Germany and increases
        in
        metal manufacturing for European customers, which sales are paid in euros,
        the
        Company has becoming exposed to the risks associated with possible foreign
        currency controls, currency exchange rate fluctuations or devaluations. Although
        the Company plans to sell or reduce its sales offices and operations in Germany,
        thereby reducing the amount of revenues its generates in currencies other
        than
        the U. S. and Hong Kong dollar, the Company will remain exposed to exchange
        rate
        fluctuations in the future.
  The
        Company’s financial results have, from time to time, been affected by currency
        fluctuations. For example, during the fiscal years ended March 31, 2003,
        2004,
        and 2005, the Company recognized net foreign currency exchange gains of
        $344,000, $278,000 and $249,000, respectively. However, foreign currency
        exchange rates can also result in material losses. For example, during the
        fourth quarter of the fiscal year ended March 31, 2005, the Company recognized
        a
        net foreign currency exchange loss for $181,000. Notwithstanding these currency
        transaction fluctuations, the Company does not attempt to hedge its currency
        exchange risks and, therefore, will continue to experience gains or losses
        due
        to changes in foreign currency exchange rates. However, even if the Company
        were
        to engage in currency hedging transactions, no assurance can be given that
        the
        Company will not suffer future losses as a result of either currency
        fluctuations or as a result of such hedging transactions.
  *Significant
        Worldwide Political, Economic, Legal And Other Risks Related To International
        Operations.* The
        Company is incorporated in the British Virgin Islands and has active
        subsidiaries incorporated in Hong Kong and Germany. The Company’s executive and
        administrative offices are located in Hong Kong. All of the Company’s products
        are manufactured in China, and almost all of its net book value of its total
        fixed assets is located in China. The Company sells its products to customers
        in
        Hong Kong, North America, Europe, and Japan. As a result, its international
        operations are subject to significant political and economic risks and legal
        uncertainties, including changes in international and domestic customs
        regulations, changes in tariffs, trade restrictions, trade agreements and
        taxation, changes in economic and political conditions and in governmental
        policies, difficulties in managing or overseeing foreign operations, and
        wars,
        civil unrest, acts of terrorism and other conflicts. The occurrence or
        consequences of any of these factors may restrict the Company’s ability to
        operate in the affected region and decrease the profitability of our operations
        in that region.
  -
            10
            -
  *Risks
        Relating to Hong Kong*
  *Political
        and Economic Developments Affecting Hong Kong* .
        The
        Company’s registered offices and sales offices and several of its principal
        customers and suppliers are located in Hong Kong. Accordingly, the Company
        may
        be materially adversely affected by factors affecting Hong Kong’s political
        situation and its economy or its international, political and economic
        relations. Pursuant to a Joint Declaration (the “Joint Declaration”) signed
        between the governments of China and Britain on December 19, 1984, China
        recovered sovereignty over Hong Kong on July 1, 1997. The Joint Declaration
        provides Hong Kong with a high degree of legislative, judicial and economic
        autonomy (except in foreign and defense affairs) and the laws currently in
        force
        in Hong Kong have remained basically unchanged (the Joint Declaration
        contemplates that the policies expressed therein will remain in effect for
        a
        period of at least fifty (50) years from July 1, 1997), there can be no
        assurance as to the continued stability of political, economic or commercial
        conditions in Hong Kong and that the Company’s financial conditions and results
        of operations will not be adversely affected as a consequence of these
        events.
  A
        substantial portion of the Company’s net sales and expenses are denominated in
        the Hong Kong monetary unit, the Hong Kong dollar. Since 1983, the exchange
        rate
        between Hong Kong dollar and the U.S. dollar has been fixed at approximately
        HK$7.78 to $1.00. However, due to the currency turmoil that has affected
        many
        countries in Southeast Asia, there has been pressure to devalue the Hong
        Kong
        dollar. All dollar amounts (“$”) set forth in this Annual Report are in U.S.
        dollars. The peg of the Hong Kong dollar to the U.S. dollar has remained
        and
        been defended by the Hong Kong Special Administrative Region Government.
        While
        the Hong Kong Government has indicated that it has no plans to break the
        peg
        with the U.S. dollars, no assurances can be given that this will remain so
        in
        the future. The Company incurs its major expenses in Hong Kong dollars and
        in
        China’s renminbi and generates its revenue’s primarily in U.S. dollars and would
        therefore benefit from depreciation of the Hong Kong dollar or renminbi.
        However, an appreciation of the renminbi or Hong Kong dollar against the
        U.S.
        dollar would increase the expenses of the Company when translated into U.S.
        dollars and could adversely affect profit margins. There can be no assurance
        that the exchange rate of the Hong Kong dollar will not fluctuate in the
        future
        and that such fluctuations will not have a materially adverse effect on the
        Company’s business and results of operations.
  *Certain
        Legal Consequences of Incorporation in the British Virgin
        Islands*
  The
        Company is incorporated under the laws of the British Virgin Islands, and
        its
        corporate affairs are governed by its Memorandum of Association and Articles
        of
        Association and by the International Business Companies Act of the British
        Virgin Islands. Principles of law relating to such matters as the validity
        of
        corporate procedures, the fiduciary duties of the Company’s management,
        directors and controlling shareholders and the rights of the Company’s
        shareholders differ from those that would apply if the Company were incorporated
        in a jurisdiction within the U.S. Further, the rights of shareholders under
        British Virgin Islands law are not as clearly established as the rights of
        shareholders under legislation or judicial precedent in existence in most
        U.S.
        jurisdictions. Thus, the public shareholders of the Company may have more
        difficulty in protecting their interests in the face of actions of the
        management, directors or controlling shareholders than they might have as
        shareholders of a corporation incorporated in a U.S. jurisdiction. In addition,
        there is doubt that the courts of the British Virgin Islands would enforce,
        either in original action or in an action for enforcement of judgments of
        U.S.
        courts, liabilities that are predicated upon the securities laws of the
        U.S.
  -
            11
            -
  Further,
        pursuant to the Company’s Memorandum and Articles of Association and pursuant to
        the laws of the British Virgin Islands, the Company Memorandum and Articles
        of
        Association may be amended by the board of directors without shareholder
        approval (provided that a majority of the Company’s independent directors do not
        vote against such amendment). Until successors are elected, the Company’s
        independent directors consist of Benson Lee, Terrence A. Noonan, Mark Majzner
        and Dirk Hermann. Amendments which may be made by the board of directors
        without
        shareholder approval include amendments increasing or reducing the authorized
        capital stock of the Company and increasing or reducing the par value of
        its
        securities.
  *Risks
        Associated With An Investment in the Company’s Securities*
  *Volatility
        Of Market Price Of the Company’s Shares.* The
        markets for equity securities have been volatile and the price of the Company’s
        Common Shares has been and could continue to be subject to material fluctuations
        in response to quarter to quarter variations in operating results, news
        announcements, trading volume, sales of Common Shares by officers, directors
        and
        principal shareholders of the Company, news issued from competing companies,
        customers, suppliers or other publicly traded companies, general market trends
        both domestically and internationally, currency movements and interest rate
        fluctuations. Certain events, such as the issuance of Common Shares upon
        the
        exercise of outstanding stock options of the Company could also adversely
        affect
        the prevailing market prices of the Company’s securities.
  *Exemptions
        Under The Exchange Act As A Foreign Private Issuer* .
        The
        Company is a foreign private issuer within the meaning of rules promulgated
        under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). As such,
        and though its Common Shares are registered under Section 12(g) of the Exchange
        Act, it is exempt from certain provisions of the Exchange Act 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 with respect to a security
        registered under the Exchange Act; the sections of the Exchange Act requiring
        insiders to file public reports of their stock ownership and trading activities
        and establishing insider liability for profits realized from any “short-swing”
        trading transaction (i.e., a purchase and sale, or sale and purchase, of
        the
        issuer’s equity securities within six months or less), and the provisions of
        Regulation FD aimed at preventing issuers from making selective disclosures
        of material information. In addition, certain provisions of the Sarbanes-Oxley
        Act of 2002 either do not apply to the Company or the implementation of the
        provisions has been deferred. Because of the exemptions under the Exchange
        Act
        and Sarbanes-Oxley Act applicable to foreign private issuers, shareholders
        of
        the Company are not afforded the same protections or information generally
        available to investors in public companies organized in the United
        States.
  *The
        Financial Costs and Administrative Burdens of Implementing The Sarbanes-Oxley
        Act of 2002 Could Materially and Adversely Affect Our Financial Results and
        Financial Condition.* To date,
        the Company has been exempted from some of the regulations under the
        Sarbanes-Oxley Act of 2002 that are applicable to U.S. public companies,
        and the
        costs of complying with the Sarbanes-Oxley Act of 2002 have, to date, not
        been
        material. Except for the provisions of Section 404 of the Sarbanes-Oxley
        Act,
        all of the provisions of that act that will apply to the Company must now
        be
        implemented. These rules require the Company to make a number of changes
        in some
        of its corporate governance, securities disclosure and compliance practices.
        In
        addition, in response to the requirements of the Sarbanes-Oxley Act, the
        Nasdaq
        Stock Market has also promulgated new rules on a variety of subjects. Compliance
        with all of these new rules imposed by the SEC and by the Nasdaq Stock Market
        and the as well as the Sarbanes-Oxley Act of 2002 will significantly increase
        the Company’s legal, financial and accounting costs, and the Company expects
        these increased costs to continue in the future. To date, as a foreign private
        issuer, the Company has not had to implement certain of the regulations and,
        accordingly, has been spared a portion of the cost associated with the
        implementation of the new rules. However, commencing this year, the Company
        expects to incur significant additional financial and administrative burdens,
        particularly in its accounting, auditing and legal fees and expenses, which
        expenses could negatively impact the Company’s operations and profitability.
  -
            12
            -
  **Item
        4.**  **Information
        on the Company**
  **History
        and Development of the Company.**
  Highway
        Holdings Limited is a holding corporation that was incorporated on July 20,
        1990
        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 in Hong
        Kong at Suite No. 810, Level 8, Landmark North, Sheung Shui, New Territories,
        Hong Kong. Highway Holdings Limited currently operates through eight active
        controlled subsidiaries.
  The
        Company began its operations in 1990 in Hong Kong as a metal stamping company.
        In 1991, the Company transferred the metal stamping operations to a factory
        in
        Long Hua, Shenzhen, China, where the metal stamping and the Company’s other
        operations have been conducted pursuant to agreements entered into between
        certain China companies set up by the local government and the Shenzhen City
        Baoan District Foreign Economic Development Head Company and its designees
        (collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”).
        As a result of the BFDC Agreements, the Company is provided with manufacturing
        facilities and labor by affiliates of local government instrumentalities,
        for
        which the Company pays management fees, based on a negotiated sum per factory
        worker, and other charges, as well as rent for the factory complex.
  Since
        its
        organization in 1990, the Company has primarily been a manufacturer of high
        quality metal parts for major Japanese and German original equipment
        manufacturers (“OEMs”). The Company’s metal stamping capabilities have, however,
        over the years been supplemented with additional manufacturing and assembly
        capabilities, such as the ability to manufacture and assemble plastic parts
        and
        electronic circuits. As a result, the Company has evolved from a company
        that
        was only engaged in manufacturing simple metal parts to a company that has
        the
        capabilities to manufacture and assemble larger complex components, subsystems,
        subassemblies and even entire products for its OEM clients. The manufacturing
        operations have, since the formation of the Company, always been the largest
        segment of the Company’s business and have generated most of the revenues for
        the Company.
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            13
            -
  After
        establishing its metal manufacturing operations, the Company in 1991 began
        its
        camera manufacturing business by acquiring the Hi-Lite Camera Company, a
        Hong
        Kong camera company, from Benson Lee, who continues to serve the Company
        as one
        of the Company’s directors. The Company’s camera operations have consisted
        primarily of manufacturing 35mm cameras and recycling single-use cameras.
        Camera
        sales during the three years ended March 31, 2005, 2004, and 2003 accounted
        for
        13.8%, 23.6% and 24.1% of net sales, respectively. The Company mainly
        manufactured cameras for distribution in Europe, the United States and Hong
        Kong. Prior to the fiscal year ended March 31, 1999, most of the Company's
        camera revenues were derived from the sale of one-time-use cameras that the
        Company recycled. In June 1999, in response to an action filed by Fuji Photo
        Film Co. with the United States International Trade Commission (ITC), the
        importation of the Company’s recycled one-time-use cameras into the United
        States was effectively barred. Because the U.S. market represented a large
        portion of the Company’s operations, the loss of the U.S. single-use camera
        sales significantly and adversely affected the Company’s sales and financial
        results. Although the Company continued to distribute its recycled single-use
        cameras in Europe and continued to sell its low-end 35mm re-usable cameras
        after
        the Fuji Photo Film Co. proceedings, the advent and massive proliferation
        during
        the past few years of digital cameras and mobile telephones with photographic
        capabilities has significantly, and negatively affected the film camera industry
        and with it the Company’s film-based camera business. Accordingly, as discussed
        below, the Company has decided to sell or close its single-use camera operations
        in the current fiscal year ending March 31, 2006. The Company also is
        considering modifying or separating itself from some of its other film-based
        camera operations.
  In
        1997,
        the Company purchased substantially all the assets of Kienzle Uhrenfabrik
        GmbH
        ( “ Kienzle
        Uhren ” ),
        a
        clock and watch manufacturer that traces its origin back to 1822 in Germany,
        that was at the time in receivership. The purchase included the trademark
        to the
“Kienzle” name and the equipment, machinery, tools, patents and furniture and
        office equipment of Kienzle Uhren. Subsequent to purchasing the equipment,
        the
        assets of Kienzle Uhren were dismantled, packed and shipped from Germany
        to the
        Company ’ s
        facilities in Hong Kong and China. Thereafter, the Company commenced
        manufacturing clocks for third parties for sale under various brand names
        (such
        as Braun, Swatch, and more recently Casio), as well as clocks for the Company’s
        own account (which clocks were sold under the Company’s own “Kienzle” brand
        name). In addition, the Company has also recently been using the manufacturing
        capabilities of the clock/watch division to manufacture electronic products
        and
        components for its non-clock OEM manufacturing business. During the fiscal
        years
        ended March 31, 2003 and 2004, the Company has also licensed the “Kienzle” mark
        for use with various other products in Europe, which products were manufactured
        by others. During the past two years, the Company also has been manufacturing
        and selling watches, both under its “Kienzle” brand name and for sale under
        other labels. Revenues from its clock/watch division, consisting of sales
        of
        clocks and watches (including revenues derived by the clock/watch division
        for
        OEM manufacturing for the Company’s other divisions), during the fiscal years
        ended March 31, 2005, 2004 and 2003 have been 21.9%, 18.1%, and 18.5%,
        respectively, of the Company’s net sales. The Company believes that the market
        for its clock products is diminishing and becoming extremely price competitive.
        As a result, the Company is considering modifying, reducing or otherwise
        separating itself from its German clock/watch marketing and distribution
        operations during the current fiscal year ending March 31,2005, and may seek
        to
        sell or license the rights to the Kienzle trademark for watches and clocks
        (in
        June 2005, the Company sold the rights to the “Kienzle” trademark for uses other
        than watches and clocks).
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            14
            -
  **Current
        Reorganization and Revised Business Strategy**
  The
        Company continuously monitors the strength and weaknesses of its own operations
        as well as market changes that affect its operations and prospects. The Company
        believes that the following are the primary factors that currently affect
        its
        business and its proposed reorganization in response to these
        changes:
  Manufacturing
        Operations .
        Since
        its organization, the Company’s principal and most profitable business segment
        has been as an OEM manufacturer. Its manufacturing capabilities have improved
        and evolved over the past few years, and it is now able to manufacture complete
        subassemblies and products for its customers. Unlike most of its smaller
        competitors in Shenzhen that can either (i) only manufacture metal parts
        or (ii)
        only manufacture plastic and electronic parts, the Company has the ability
        to
        manufacture and assemble high quality parts, components and products that
        require all of the foregoing metal, plastic and electronic manufacturing
        capabilities. The Company believes that it should further develop and leverage
        its multi-disciplinary manufacturing strengths, its cost structure, its
        logistical advantages, its reputation as a high-quality manufacturer, and
        its
        existing relationships with blue chip Japanese and European customers to
        further
        expand its manufacturing operations. The Company has always used the
        manufacturing capabilities that it developed by manufacturing its own products
        as a basis for obtaining more complex OEM manufacturing business. However,
        because of the substantial changes in the film camera and clock manufacturing
        industries, the Company has made the strategic decision to make its OEM
        manufacturing operations the principal focus its future operations.
  The
        Company’s OEM manufacturing business has historically been directed primarily at
        manufacturing and assembling metal parts used in subsystems or other products.
        As part of its business strategy to capture more of the revenues related
        to the
        manufacture of end-products, the Company has recently been attempting to
        leverage its complete manufacturing capabilities to the manufacture of the
        subsystems, subassemblies, larger components, and even completed end-products
        for its clients. In addition, the Company is attempting to diversify the
        types
        of products that it manufactures, and, in that context, now manufactures
        a wider
        variety of parts and components for its European OEM customers, including
        electrical connectors, coils for induction motors, ballasts casings, lighting
        fixtures, and friction clutch assemblies.
  As
        its
        manufacturing capabilities and the complexity and quality of products have
        improved, the Company has attracted larger, more prestigious clients. In
        order
        to maintain and increase the amount of business it conducts with these larger,
        internationally known clients, the Company has been improving its operating
        capabilities, has been improving and upgrading its manufacturing facilities,
        and
        has taken steps to improve its image as a manufacturer to such clients. In
        addition, in order to improve and enhance its systems, in 2002 the Company
        received its ISO 9001 quality management system certification, and in 2004
        it
        also received its ISO 14001 environmental management systems
        certification.
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            15
            -
  As
        part
        of restructuring its operations and its focus on its OEM operations, the
        Company
        continues to invest in, and to explore the use of, new technologies with
        long-term growth potential, and to enhance its technical expertise and
        capabilities in manufacturing finished products. The Company’s goal is to
        eventually become an OEM manufacturer of such newer and technologically advanced
        products, including more complex electronic products. For example, the Company
        has recently been developing LCD television/computer monitors for certain
        niche
        markets. The Company has manufactured a limited number of these new products
        and
        has test marketed some of these new products. While the Company has received
        positive reviews on its products, the Company is still developing its business
        model for these products and is still evaluating the feasibility and
        desirability of entering into any new markets. Accordingly, the Company has
        not
        yet committed to any such new products, and no assurance can be given that
        the
        Company will, in fact, manufacture any of the new product lines that it is
        currently evaluating.
  Clocks,
        Watches and the “Kienzle” Trademark .
        The
        Company has been manufacturing clocks, clock movements since its acquisition
        of
        Kienzle Uhren in 1997. Most recently, the Company also has been manufacturing
        watches. The Company manufactured clock and clock movements on an OEM basis
        for
        other clock companies, such as Braun and Casio, as well as for its own account
        as “Kienzle” products. In addition, the Company has maintained a Kienzle
        marketing subsidiary in Germany for the purpose of selling Kienzle branded
        clocks and watches in Europe. In order to further leverage the “Kienzle” brand
        name in Germany and other parts of Europe, the Company in 2003 entered into
        a
        supply and licensing agreement with Kienzle AG, then an unaffiliated German
        distributor. In connection with the license agreement (which agreement the
        Company terminated in 2004), the Company also invested 100,000 euros
        (approximately $131,000 based on current exchange rates) in Kienzle AG and
        became a minority owner of Kienzle AG. As discussed below, in connection
        with
        the recent sale of some “Kienzle” trademark rights to Kienzle AG, the Company’s
        100,000 euro minority interest may also be returned in full.
  During
        the past few years, the world-wide market for clocks has been shrinking and
        has
        become extremely price competitive. As a consequence, the Company’s sales and
        marketing organization in Germany has continuously operated at a loss. As
        a
        result of these factors, the Company is (i) considering selling the Company’s
        remaining rights to the “Kienzle” name for watches and clocks, and (ii)
        re-evaluating the future of its low-margin clock/watch manufacturing operations
        as well as its unprofitable marketing arm in Germany. While the Company may
        reduce or restructure certain of its clock/watch manufacturing operations,
        it
        expects to continue to manufacture clocks on an OEM basis for certain of
        its
        major OEM clock clients (such as Braun and Casio).
  The
        Company in March 2005 entered into an agreement to sell all of its rights
        to the
“Kienzle” trademark in all markets other than clocks and watches, to Kienzle AG
        and its affiliates. The purchase price for the non-clock/watch rights to
        the
“Kienzle” trademark was $1,000,000, which amount was required to be paid in full
        at the closing of the sale. The sale was initially scheduled to close in
        April
        2005. Kienzle AG did not pay the purchase price in April 2005, and the closing
        date was first extended to the middle of May 2005, and then was again extended
        to the end of June 2005. However, in June 2005, the Company did transfer
        the
        non-clock/watch rights to the Kienzle trademark in accordance with the agreement
        and did receive the $1,000,000 payment (the check has been received and
        deposited, but as of the date of this Annual Report, the U.S. funds have
        not yet
        been confirmed). Kienzle AG has also agreed to repurchase the Company’s
        investment in Kienzle AG for the 100,000 euro purchase price that the Company
        initially paid for the investment. The repurchase of the Kienzle AG investment
        currently is scheduled to occur in July 2005.
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            16
            -
  In
        addition to selling the non-watch/clock right in “Kienzle” to Kienzle AG, the
        Company is currently considering selling/licensing the rights to the “Kienzle”
        trademark for use with clocks and watches, but has not entered into any
        agreements to do so. The Company believes that the rights to the “Kienzle” brand
        name for use with clocks and watches in Europe is a valuable asset. However,
        no
        assurance can be given that the Company will be able to sell its remaining
        rights to the “Kienzle” trademark or that any sale will generate significant
        sales proceeds.
  The
        Company also is re-evaluating its German marketing operations, which operations
        have operated at a significant loss. If the Company is not able to end the
        heavy
        losses its continues to incur from its German marketing operations, the Company
        may have to restructure, sell or even close the offices in Germany later
        during
        the current fiscal year ending March 31, 2006.
  Camera
        Operations .
        The
        Company’s camera operations consist of the manufacture of (i) reusable low-end
        35mm cameras, (ii) single-use cameras, and (iii) niche camera products, such
        as
        the Company’s underwater camera and other accessories for underwater cameras.
        Many of these products are based on traditional film photography. During
        the
        past few years, however, the sale of digital cameras has increased
        significantly, thereby affecting the demand for traditional film cameras.
        However, more importantly, the sale and use of mobile telephones that have
        the
        ability to take and transmit digital pictures has exploded, thereby
        significantly affecting the demand for the Company’s film-based camera products
        and, in particular, for the Company’s single-use cameras. All of the Company’s
        single-use cameras aimed at the market for convenient, low-end photographic
        products, which market is being reduced by mobile camera telephones. The
        rise of
        digital camera alternatives to film-based cameras has reduced the market
        for
        film-based cameras and has increased the price competition between manufacturers
        of film-based cameras.
  Because
        of the dwindling future market prospects for low-end film-based cameras,
        the
        Company has decided to discontinue manufacturing its single-use camera
        operations during the current fiscal year ending March 31, 2006, a process
        that
        has already started and is expected to be completed during the current fiscal
        year. As part of exiting the single-use camera business, the Company is
        currently considering selling its inventory of single-use cameras and all
        assets
        related to its single-use camera business to one or more potential buyers.
        However, the Company has not yet entered into any agreement to sell these
        assets, and no assurance can be given that the Company will, in fact, be
        able to
        sell any of these assets. In the event that the Company is not able to sell
        the
        single-use camera inventory and operations, it will nevertheless discontinue
        these operations. The Company will continue to manufacture its underwater
        cameras and products for others on an OEM basis. The underwater camera products
        market represent a viable and profitable niche market.
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            17
            -
  New
        Manufacturing Facilities .
        The
        Company has been in its current facilities since 1991. Although the Company’s
        landlord has periodically upgraded the current facilities, the Company believes
        that the current facilities do not reflect the image that the Company believes
        it needs to retain and increase the amount of business that it conducts with
        its
        multi-national customers. In addition, because so many competitors have
        established their facilities in Shenzhen, and the area has grown so much
        recently, the costs of operating in Shenzhen have increased significantly.
        The
        Company believes that there are other manufacturing facilities available
        outside
        of Shenzhen that offer (i) newer facilities, (ii) lower operating costs
        (including lower rent, lower labor, and cheaper utilities), (iii) easy access
        by
        highway or rail to Hong Kong and the other major markets and sea ports, and
        (iv)
        greater availability of lower cost labor. As part of these efforts, the Company
        in May 2005 entered into a three-year lease for a 2,500 square meter
        manufacturing facility in He Yuan, a city about 125 kilometers from the
        Company’s current site in Long Hua, Shenzhen. These facilities will initially
        house a portion of the Company’s plastics operations. If the Company can
        successfully operate at this location, the Company will consider relocating
        all
        of its manufacturing facilities to this location. Any relocation of the
        Company’s entire facilities will depend upon the operations of the He Yuan
        facilities and would not commence until 2006, at the earliest. No assurance
        can
        be given that the Company will find the He Yuan facilities to be satisfactory
        or
        that the Company will re-locate its existing facilities.
  **Business
        Overview**
  The
        Company is primarily an integrated manufacturer of high quality parts and
        components, clocks and clock movements, and cameras for major Japanese, German
        and United States OEMs and contract manufacturers. The Company also manufactures
        clocks and watches for its own account under its own “Kienzle” brandname. In
        addition, the Company has sold watches and other products to a European
        distributor for sale in Europe under the “Kienzle” brand name. All of the
        Company’s manufacturing activities are currently conducted at a factory complex
        located in Long Hua, in Shenzhen, China, which the Company occupies pursuant
        to
        an arrangement with affiliates of the local government. The Company has leased
        a
        new, smaller facility in He Yuan, China, at which it will conduct some of
        its
        manufacturing operations.
  To
        date,
        the Company’s largest revenue source has been from its metal manufacturing
        operations. The Company manufactures and supplies a wide variety of high
        quality
        metal parts, components and products which are used by the Company’s customers
        in the manufacturing of such products as photocopiers, laser printers, compact
        disc players, laser disc players, cassette players, computer equipment,
        electronic components, electrical connectors, cameras, clocks, automobiles,
        vacuum cleaners, light fixtures and car audio and other audio equipment.
        As part
        of its manufacturing operations, the Company assists customers in the design
        and
        development of the tooling used in the metal stamping process and provides
        a
        broad array of other manufacturing services, including spray painting, screen
        printing, plastic injection molding, pad printing and electronic assembly
        services. The electronic assembly services include chip on board assembly,
        IC-bonding, and SMT automatic assembly of printed circuit boards. By providing
        these services, which complement the Company’s core metal stamping operations
        and eliminate the need to outsource these needed functions, the Company is
        better able to assure product quality, control overall manufacturing costs
        and
        provide timely product delivery, all of which management believes is essential
        to maintaining, expanding and increasing the Company’s customer base. The
        Company believes its historical success as a supplier to respected
        multi-national companies is due in large part to: (i) its international
        management structure which includes Japanese, German and Chinese  nationals;
        (ii) its low labor and operating costs resulting from locating its manufacturing
        operations in China; (iii) its ability to consistently manufacture the type
        of
        high quality products required by the Company’s targeted customers; (iv) its
        expertise in manufacturing these products in the required quality at a
        reasonable cost; (v) the unique breadth of its manufacturing capabilities,
        and
        (vi) its engineering design and development capabilities (which it uses to
        assist its customers to design their products).
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            18
            -
  In
        prior
        years, the Company has continuously tried to strategically align its
        manufacturing operations to attract new OEM clients. For example, the Company
        combined the specialized manufacturing skills and technologies it developed
        for
        its clock and camera operations with its metal manufacturing strengths. The
        combination of these capabilities led to orders for more complex products
        from
        internationally known companies such as Berger Lahr GmbH and Miele & Cie.
        KG., for whom the Company manufactures products using a combination of metal,
        electronic and plastics manufacturing.
  The
        Company believes that its ability to manufacture products using a combination
        of
        metal, electronic and plastics components has tempered the competitive pricing
        pressures that have developed during the past few years from the competing
        metal
        manufacturers in Shenzhen. During the past few years, a number of metal
        manufacturers have been established in Shenzhen that are also able to produce
        high-quality, low cost metal parts. As a result, the manufacture of many
        metal
        parts had become a commodity operation that competes primarily based on price.
        In order to distinguish itself from these other stamping operations, the
        Company
        therefore adopted a plan in which it shifted its focus from smaller, simple
        metal stamping projects for which the Company competes solely on price to
        the
        manufacture of more complex parts, components and entire products that utilize
        more of the Company’s vertically integrated technologies. Since the Company has
        the ability to design, manufacture and assemble complete components containing
        metal, plastic and electronics, and not just metal stamped parts, the Company’s
        new focus is on manufacturing more customized products for global companies.
        By
        shifting to the manufacturing of larger, customized products that utilize
        more
        of the Company’s vertically integrated and multi-disciplinary capabilities, the
        Company believes that it will be able to increase its revenues and gross
        margins
        and reduce the costs associated with setting up and manufacturing small run,
        metal stamping parts. The Company believes that its restructured strategy
        has
        led to the manufacturing agreements with (i) OSRAM, a subsidiary of Siemens
        AG,
        (ii) Berger Lahr GmbH, a subsidiary of Schneider Electric, (iii) major German
        companies such as Miele & Cie. KG., and (iv) Japanese companies such as KEM,
        an indirect supplier of functional assemblies to IBM lap top computers.
  The
        Company currently still manufactures (i) clocks and watches for its own Kienzle
        branded line of timepieces, and (ii) clocks and clock components on an OEM
        basis
        for internationally known clock companies. However, the Company expects to
        re-evaluate these operations during the current fiscal year ending March
        31,
        2006. The Company currently manufactures high-quality quartz clocks for both
        its
        own Kienzle brand name line of clocks and for other internationally known
        companies, primarily Braun of Germany, and Casio of Japan. However, the
        international market for quartz clocks has, during the past few years, strongly
        declined, and the Company anticipates that this market will not increase
        in the
        foreseeable future. As a result, sales of certain lines of clocks (primarily
        quartz clocks) previously manufactured by the Company have decreased during
        each
        of the past three years. In addition to the manufacture of quartz clocks,
        during
        the fiscal year ended March 31, 2005, the Company’s clock and watch operations
        also included the following:
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            19
            -
  ·
              The
                  Company manufactured clocks that set themselves with radio signals
                  broadcast from atomic clock stations.
  ·
              The
                  Company has supplemented sales of Kienzle clocks with clocks, wrist
                  watches and other timekeeping products that are manufactured by
                  others and
                  then marketed in Europe by the Company’s German marketing subsidiary under
                  the Kienzle brandname.
  ·
              The
                  Company manufactured and sold wrist watches under the “Kienzle” name,
                  mostly in Germany.
  The
        Company’s third existing line of operations is the manufacture of low cost
        cameras for OEMs in the United States, Japan and Europe. Until June 1999,
        the
        United States had been the Company’s largest market for single use (disposable)
        cameras. In 1999, in response by an action initiated by Fuji Film against
        a
        number of camera importers, the United States International Trade Commission
        (ITC) issued an order that effectively barred the Company’s OEMs from importing
        recycled one-time-use cameras into the United States. The Company responded
        to
        the loss of its largest camera market by increasing its sales into Europe
        and
        Asia, increasing its manufacturing and sales of low-end 35mm cameras, developing
        other new camera products (such as a new line underwater photographic products),
        and developing new camera products (such as the Company’s patented pre-loaded,
        reusable 35mm camera that was designed to compete in the single-use camera
        market). The Company delayed the introduction of the patented 35mm camera
        into
        the U.S. due to the Fuji action. However, because of the recent downturn
        in the
        low-end film based camera market, the Company does not expect that it will
        pursue the distribution of this camera in the U.S. Other than in certain
        niche
        markets (such as its underwater camera products), the Company has competed
        in
        the camera business based primarily on price. During the past few years,
        the
        pricing competition has been severe, and the market for the Company’s low-end
        film-based cameras has decreased due to the proliferation digital cameras
        and
        mobile telephones that have the ability to take and transmit photographs.
        As a
        result, the Company has decided to sell or close down it single-use camera
        operations during the current fiscal year ending March 31, 2006, and is
        considering modifying or selling some or all of its other film-based camera
        operations. See, “Current Reorganization and Revised Business Strategy,”
        above.
  **Industry
        Overview**
  Management
        believes that the third-party manufacturing industry has experienced major
        increases over the past decade as manufacturers increasingly outsource the
        manufacture of some or all of their component and/or product requirements
        to
        independent manufacturers. The benefits to OEMs of using contract manufacturers
        include: access to manufacturers in regions with low labor and overhead cost,
        reduced time to market, reduced capital investment, improved inventory
        management, improved purchasing power and improved product quality. The metal
        manufacturing business of the Company represented approximately 64.3% of
        the
        Company’s gross revenues in the fiscal year ended March 31, 2005 and has
        historically been the largest segment of the Company’s business. In addition,
        since the Company expects revenues from clock/watch and camera manufacturing
        to
        be less during the current fiscal year ending March 31, 2006 (due to market
        conditions and the Company’s actions to reduce losses from its camera and
        clock/watch manufacturing operations), the metal and OEM manufacturing business
        is expected to become the predominant operations of the Company in the
        future.
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            20
            -
  The
        Company first commenced its metal stamping operations in China in 1990. At
        that
        time, the Company gained a significant cost and logistical advantage over
        other
        manufacturers by basing its manufacturing facilities in Long Hua, Shenzhen,
        China, less than 30 miles from Hong Kong. During the past few years, however,
        many other manufacturers have located their facilities in Shenzhen and in
        other
        similar low-cost areas in China and Asia. As a result, the Company now faces
        significantly more competition as a manufacturer of OEM parts. The Company
        has
        responded to the increased competition by restructuring its operations and
        by
        trying to move from manufacturing low margin, low-cost individual parts to
        manufacturing higher margin, more expensive components, subassemblies and
        even
        complete units for its OEM customers. The Company’s metal manufacturing business
        also was primarily directed at OEMs located in Asia, primarily in China and
        Japan. As part of its new strategy, the Company has also increased its sales
        to
        European customers.
  Historically,
        the Company has manufactured high-quality metal parts, mostly for Japanese
        customers. The Company did not engage in any active marketing efforts to
        develop
        its business for its metal manufacturing operations. Recently, however, because
        of all of the competition that has developed, in Shenzhen and elsewhere,
        for low
        cost metal stamping, the Company has changed its customer focus, its
        manufacturing goals, and its marketing efforts. As part of its business strategy
        to capture more of the revenues related to the manufacture of end-products,
        the
        Company has recently been attempting to leverage its complete manufacturing
        capabilities to the manufacture of the subsystems, subassemblies, larger
        components, and even completed end-products for its clients. In addition,
        the
        Company is attempting to diversify the types of products that it manufactures.
        The Company has also increased its marketing efforts and now attends trade
        shows
        and engages in direct marketing efforts. In order to upgrade its technical
        manufacturing abilities and to suit its international customers, the Company
        has
        obtained its ISO 9001 quality management systems certification and its 14001
        environment management systems certification.
  Although
        the Company does not have any definitive data regarding worldwide clock
        manufacturing and sales, the Company believes that there is an industry-wide
        decline in sales underway, and that numerous clock manufacturers are being
        driven out of business. The Company believes that sales of the sort of clocks
        that are manufactured by the Company have been declining worldwide during
        the
        past few years for the following reasons: (i) Higher quality clocks have
        a long
        useful life and, therefore, are not replaced frequently. Consequently, unlike
        other consumer products, replacement sales are less frequent. (ii) The market
        has been flooded by inexpensive quartz clocks manufactured by companies owned
        or
        subsidized by governments or other similar means that have often been sold,
        in
        the opinion of the Company, at prices that are significantly below the raw
        materials costs of such clocks. Until recently, the Company believed that
        it
        could overcome some of these market forces developing its radio controlled
        clock
        technologies and by increasing its marketing efforts. Accordingly, while
        the
        Company believed that it could distinguish itself from its competitors by
        selling clocks and watches under the “Kienzle” brandname and by manufacturing
        clocks that set themselves by radio signals broadcast from atomic clock
        stations. During the past few years, these radio clocks were particularly
        popular in Europe and Japan and constituted a significant portion of total
        clock
        sales in Europe and Japan. Despite these efforts, it may no longer be in
        the
        Company’s best interests to try to compete in these markets. As a result,
        management of the Company is considering focusing the Company’s principal
        efforts on its OEM and related manufacturing operations and may, as a result,
        decide to modify or sell some or all of its clock manufacturing operations
        and
        to try to sell its remaining clock/watch rights to the “Kienzle” trademark. See,
“Current Reorganization and Revised Business Strategy,” above.
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            21
            -
  The
        Company’s camera operations consist of manufacturing low cost single-use and
        35mm cameras and selling the Company’s own line of niche underwater camera
        products. Sales by the Company of its single-use cameras and of its low-end
        reusable 35 mm cameras have drastically decreased, and price competition
        in
        these markets has increased. In order to counter the changes in this industry,
        the Company developed niche-market products, such as its line of underwater
        camera products. The Company, however, believes that the market for film-based
        cameras, such as the Company’s products, have been negatively impacted and will
        further decline as the market transitions from the traditional film camera
        to
        the digital cameras. The growing use and availability of digital photography
        with mobile telephones and other portable devices is expected to further
        contribute to the future decrease in demand for the Company’s cameras,
        particularly the single-use disposable cameras. Accordingly, the Company
        has
        decided to discontinue its single-use camera operations during the current
        fiscal year. See, “Current Reorganization and Revised Business Strategy,”
        above.
  **The
        Company’s Strategy**
  Management
        believes that the Company’s future growth and profitability depend on its
        ability to compete as a third party manufacturer, as well as its ability
        to
        exploit other manufacturing opportunities that are complimentary to its
        strengths.
  *Capitalize
        on its manufacturing cost structure and logistical advantages:* By
        locating the Company’s principal manufacturing facility in Long Hua, Shenzhen,
        China, less than 30 miles from Hong Kong, the Company is able to take advantage
        of the low overhead costs and inexpensive labor available in China. The close
        proximity of the factory complex to Hong Kong facilitates transportation
        of the
        Company’s products out of China to customers in Hong Kong and beyond through the
        port of Hong Kong. Management believes that there has been an increase in
        the
        number of Japanese and German OEMs establishing factories or using contract
        manufacturers in southern China and this provides the Company with a large
        customer base within close proximity to the Company’s operations in China. In
        order to further reduce its manufacturing cost structure, the Company has
        been
        considering relocating its manufacturing facilities from Long Hua, Shenzhen
        to
        other locations in southern China, such as the new facility in He Yuan, China,
        that the Company will begin leasing in July 2005. If the Company determines
        that
        it can operate at a lower cost facility that is further from Hong Kong, such
        as
        the one in He Yuan, then it may, in the future, relocate its entire operations
        to that facility.
  -
            22
            -
  *Capitalize
        on, and leverage its manufacturing strength* :
        Unlike
        many of its metal part manufacturing competitors, primarily those in Shenzhen,
        China, the Company has a vertically integrated manufacturing facility that
        can
        design, manufacture and assemble more complex components and subassemblies.
        In
        addition, unlike some of its competitors in Shenzhen that are limited to
        either
        metal stamping or to electronics and plastics manufacturing, the Company
        also
        has the ability to combine metal stamping and electronics and plastics
        manufacturing. Accordingly, the Company’s strategy is to focus on manufacturing
        more complex products that utilize the Company’s various manufacturing
        strengths. As the Company expands its manufacturing capabilities into new
        and
        varied products, the Company has commenced promoting the use of its assembly
        facilities to manufacture more of the end-product than just some parts or
        components by emphasizing the efficiencies of assembling the products by
        one
        manufacturer. Management believes that the Company’s close relationships with
        its customers can increase the number of parts and services the Company provides
        to its customers. In addition, as more German and other European companies
        seek
        to establish a manufacturing base in China, the Company will provide
        manufacturing solutions for these European companies.
  *Change
        its product line in response to market conditions* : ** The
        Company’ strategy is to respond to changes in market conditions by changing its
        product offerings. Recent examples of its ability to respond to market and
        other
        conditions include the development of a new line of underwater camera products
        and the development of a clock that sets itself based on radio signal
        broadcasts. The Company has also been exploring manufacturing other products,
        such as LCD monitors and LCD televisions, which business may require the
        Company
        to enter into a business relationship or partnership with a manufacturer
        of LCD
        monitors and related components. However, it is unclear if the Company will
        commit to large scale manufacturing of LCD monitor products or that it will
        be
        able to develop viable business connections to further the LCD monitor and
        LCD
        television business and/or to compete in this market.
  *Expansion
        by acquisition, merger and other means* :
        The
        Company believes it has the opportunity to expand its business through
        acquisitions and through the establishment of additional manufacturing
        facilities. The Company has previously been successful at purchasing supplier
        companies and transferring the manufacturing operations to its facility in
        China
        to take advantage of the low labor and operating costs associated with
        manufacturing in China. Management may seek similar opportunities in Europe,
        Japan and the United States. No assurances can be given that the Company
        will
        identify acquisition prospects or that such prospects, if identified, will
        result in an acquisition.
  In
        addition to expanding its manufacturing capabilities through acquisition,
        merger, etc., the Company may also establish additional manufacturing facilities
        in other countries that offer benefits similar to those available in China.
        The
        Company believes that there are other countries that offer low labor and
        operating costs and locations close to the Company’s customers. However, no such
        other locations have been identified, and no assurance can be given that
        the
        Company will be able to duplicate its China business in other
        countries.
  -
            23
            -
  *Maintain
        production quality* :
        Management believes that maintaining close relations with the Company’s
        customers is important to the success of the Company’s business. Understanding
        each customer’s needs and efficiently and quickly addressing its needs is vital
        to maintaining a competitive advantage. Certain Japanese and German companies
        have built the goodwill associated with their products and tradenames on
        a high
        level of perceived quality. By employing the type of high quality management
        standards, production standards and quality control standards historically
        utilized by many leading Japanese and German companies, the Company has been
        able to satisfy the stringent requirements of its customers which ordinarily
        cannot be written into a specification or contract. Management believes that
        the
        Company’s commitment to high level service, attention to detail and quality has
        the effect of providing customers with a sense of confidence and security
        that
        their product requirement will be met and their products will be delivered
        on
        time and a competitive price.
  The
        Company conducts most of its manufacturing operations in accordance with
        typical
        Japanese manufacturing standards, paying particular attention to cleanliness,
        incoming material control, in process quality control, finished goods quality
        control and final quality audit. The Company’s metal factory complex has
        received ISO 9001 quality management system certification and an ISO 14001
        environmental management systems certification. The Company’s quality system
        helps to minimize defects and customer returns and create a higher confidence
        level among customers. Management believes that these factors increase demand
        for the Company’s services and products.
  **Metal
        Manufacturing**
  The
        Company’s metal manufacturing business consists of various stages: (i) tooling
        design and production; (ii) manufacturing parts using metal stamping and
        plastic
        infection molding; (iii) mechanical and/or electric/electronic assemblies,
        and
        (iv) finishing, packaging and shipping.
  *Tooling
        design and production* :
        The
        metal manufacturing process generally begins when a customer has completed
        the
        design of a new product and contacts the Company to supply certain metal
        components to be used in the product. Generally, the Company must design
        and
        fabricate the tooling necessary to manufacture these components in its tooling
        workshop. In some instances, however, the customer already possesses the
        tooling
        necessary to manufacture the metal component and simply delivers the tools
        to
        the Company. Customer will sometimes also pay the Company to purchase and
        install the equipment necessary to manufacture the customer’s products. The
        Company uses computer-aided design and manufacturing equipment to produce
        a long
        lasting, high quality metal stamping tool designed to produce a high quality
        product in efficient manner. As many of the metal parts manufactured by the
        Company make use of progressive, multi-stage stamping techniques, tools and
        machines must be precisely fine tuned and aligned to achieve the required
        quality standard and maximum efficiency.
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            24
            -
  The
        tool
        making process form metal parts generally takes between 14 to 45 working
        days
        depending on the size and complexity of the tool. Customers typically bear
        the
        cost of producing the tools and, as is customary in the industry, the customers
        hold title to the tooling. However, the Company maintains and stores the
        tools
        at its factory for use in production and the Company usually does not make
        tooling for customers unless they permit the Company to store the tools on
        site
        and manufacture the related parts.
  The
        Company also makes some basic plastic injection molds. Other, more complicated
        molds are made for the Company by qualified suppliers.
  *Metal
        Stamping; Plastic Injection Molding* :
        Following the completion of the tooling, the materials required for the specific
        product is selected and purchased. See “Raw Material, Components Parts and
        Suppliers.” Often the customer specifies the materials to be used as well as the
        supplier. The completed tooling is fitted to the press which is selected
        for its
        size and pressing force.
  Using
        separate shifts, part stamping can be conducted 24 hours a day, seven days
        per
        week other than during normal down time periods required for maintenance
        and
        changing of tools and during the traditional Chinese New Year holidays. Due
        to
        the strict quality requirements of customers, each machine is subject to
        stringent in-process quality controls; the Company’s quality control personnel
        inspect the products produced each hour and update in-process logs at each
        pressing machine in which they record the quantity produced, defect rate
        and
        product dimensions and specifications. When defects are found during production,
        the Company’s maintenance personnel inspect the tooling and the machine to
        determine which is responsible. If the tooling is the cause of the defect,
        it
        will be immediately removed from the machine and serviced or repaired by
        a team
        of technicians from the Company’s tooling maintenance department. If the machine
        is the source of the defect, the machine is serviced immediately by the
        Company’s technicians and engineers. In a continuous effort to assure quality,
        all stages of the production process are closely monitored so that all equipment
        and tools can be well maintained. The Company’s wholly
        owned subsidiary Nissin Precision Metal Manufacturing Limited, has been
        registered for ISO 9001 quality
        management system certification and for ISO 14001 environmental management
        systems certification.
  *Electronic
        Assembly* :
        The
        Company’s electronic assembly manufacturing consists of chip on board assembly,
        IC-bonding and SMT technology.
  *Finishing,
        Packaging and Shipping* :
        After
        pressing, the metal parts are degreased, inspected for defects and checked
        with
        custom-built test gauges. Some components are then sprayed in the Company’s
        dedicated spray-paint facilities. After being painted, the parts are baked
        at
        high temperatures in drying ovens before final inspection and packaging.
        Some
        parts are also screen printed by the Company. In addition, for certain metal
        products, the Company assembles metal components and these parts are delivered
        to the assembly department for spot welding, threading, riveting other
        sub-assembly processed. Each of the parts, assemblies and products is then
        inspected, packaged to the customer’s specific requirement and delivered to the
        final quality audit department for final quality inspection which is conducted
        on a random sample basis. All parts, assemblies and products are shipped
        by
        truck directly from the factory to the customer’s factory in China or elsewhere
        through the port of Shenzhen.
  -
            25
            -
  The
        Company’s metal and related OEM manufacturing operations accounted for 57.4%,
        58.3% and 64.3% of the Company’s total sales during the years ended March 31,
        2003, 2004 and 2005, respectively.
  **Clock
        and Watch Manufacturing**
  The
        Company has been manufacturing clocks and clock components since June 1995.
        Prior to April 1997, the Company manufactured clocks for Kienzle Uhren GmbH,
        a
        clock manufacturer that traces its origin back to 1822 in Germany. In April
        1997, the Company acquired the “Kienzle” trademark and substantially all of the
        assets of the clock manufacturer. The equipment and parts that the Company
        acquired were located in Germany but were moved to, and reassembled in the
        Company’s facilities in China. Since acquiring the Kienzle assets, the Company
        has also increased its plastic-injection capacity, and its dial printing
        and
        established a new auto lathe operation for round metal parts to handle the
        Company’s additional manufacturing needs.
  The
        Company’s clock business is divided into the manufacture and sale of clock
        movements and finished alarm and wall clocks. During the past fiscal year,
        the
        Company manufactured clocks for Braun and other OEMs. Approximately 55% of
        its
        watch and clock manufacturing (measured in terms of dollars of sales) were
        watches/clocks that Company sold under its Kienzle trademark, and 45% of
        the
        watch/clock manufacturing was for its OEM clients.
  The
        “Kienzle” name is a registered trademark in approximately 50 countries
        world-wide including major markets of the United States, U.K., Germany and
        Japan. The Company believes that the “Kienzle” brand is regarded as a quality
        manufacturer of clocks and watches. The Company also believes that the
        reputation of the Kienzle name can be carried over to other high quality
        products, particularly in Germany.
  Since
        fiscal 2003, the Company has also been manufacturing wrist watches, most
        of
        which are sold under the Kienzle brandname.  Revenues
        from watch manufacturing increased from $260,000 in fiscal 2004 to $310,000
        in
        fiscal 2005. The Company has supplemented its distribution of Kienzle wrist
        watches that it manufactures with wrist watches manufactured by other
        manufacturers, which watches are branded and sold under the Kienzle name.
        During
        fiscal 2005 sales of third party manufactured watches sold under the Kienzle
        name represented $1,675,000 in sales.
  In
        addition to the clocks traditionally manufactured and sold under Kienzle
        name,
        the Company is attempting to increase the line of clock products it offers.
        For
        example, the Company recently introduced a line of clocks that are synchronized
        with radio signals broadcast from atomic clock transmitters. These radio
        synchronized clocks automatically set themselves with split second accuracy
        and
        adjust for daylight saving time and leap year. The radio synchronized clocks
        are
        very popular in Europe (where there are two atomic clock broadcast stations)
        and
        are growing in popularity in Japan, although they are not popular in the
        U.S.
        The Company has recently developed three radio-controlled clocks for Braun
        GmbH .
        The
        Company was issued a patent relating to radio controlled clocks in 2005 by
        the
        European Patent Office and has filed several patent applications for aspects
        of
        its own radio controllable clocks in Europe, Hong Kong, Germany and the U.S.
  -
            26
            -
  The
        Company has used the electrical and electronic skills and technologies that
        it
        acquired from its clock operations to enhance its OEM metal manufacturing
        capabilities.
  **Camera
        Assembly**
  The
        camera products that the Company manufactures consist of (i) reusable 35mm
        film-based cameras, (ii) lens-fitted film packages, commonly referred to
        as
        single-use cameras, and (iii) niche camera products, such as the Company’s
        underwater camera and other accessories for underwater cameras. Camera sales
        during the three years ended March 31,2005, 2004 and 2003 accounted for 13.9%,
        23.6% and 24.1% of net sales, respectively. The Company’s cameras are sold
        worldwide through various distributors.
  In
        order
        to develop potential new markets for re-usable cameras, the Company developed
        a
        new reusable lens-fitted film package, a camera that has a different design
        and
        functional mechanism from that utilized in the single-use lens-fitted film
        package cameras currently on the market. The Company’s reusable lens fitted film
        package can, however, also compete and be sold in the same market as the
        single-use lens-fitted film package. To date, since the Company has not been
        able to sell the camera in the U.S. as a result of the legal proceedings
        brought
        in the U.S. by Fuji Photo Co., and, more recently, because of the decline
        in
        sales in the film camera market, revenues from this camera have not been
        material, and the Company no longer is pursuing the market expansion of this
        product.
  In
        order
        to expand its camera product offerings, the Company has also developed a
        low
        cost, fully automatic, compact 35mm camera with flash lighting and waterproof
        housing, which allows the camera to take photographs underwater in depths
        of up
        to 60 feet. The Company also manufactures and markets (i) an underwater
        single-use camera, (ii) underwater products for digital camera use, and (iii)
        a
        variety of underwater camera accessories such as waterproof video/flash lights.
  The
        Company fabricates many of the components used in its camera internally.
        Other
        key components such as the lens, printed circuit board, integrated circuits,
        carrying cases and packaging are purchased from outside vendors in Hong Kong,
        China, Taiwan and Japan.
  **Raw
        Material, Component Parts and Suppliers**
  *Metal
        Parts* .
        The
        primary raw materials used by the Company to manufacture its metal stamped
        parts
        are various types of steel including pre-painted steel sheet, electrolytic
        zinc
        plated steel sheet, PVC laminated steel sheet and cold roll steel sheet.
        The
        Company selects suppliers based on the price they charge and the quality
        and
        availability of their materials. Often, the customer requires the Company
        to use
        specific suppliers. Most of the Company’s suppliers of steel operate through
        Hong Kong or China-based companies which deliver the materials directly to
        the
        site of the Company’s operations in China.
  During
        the past fiscal year, the price of metal and plastics raw materials has
        increased significantly, and there have been shortages for some materials.
        The
        Company estimates that the cost or some metal and plastic products increased
        during the past year by between 20% and 50% on some materials. The increase
        in
        raw materials prices has also increased the price of packaging. The increases
        in
        these prices has reduced the Company’s gross margins on some of its OEM
        manufacturing products. The Company has also required some of its customers
        who
        have low gross margin products to accept a price increase due to the material
        price increases, which has resulted in some reduction of new purchase
        orders.
  -
            27
            -
  *Finished
        Products* .
        Camera
        and clock manufacturing primarily involves the production of plastic injected
        and metal stamped components as well as integrated circuits, lenses, crystals,
        magnets and paper packaging products. While these materials are subject to
        price
        fluctuations, the Company has not been materially adversely affected by price
        increases or shortages of supply. The recycling of single-use cameras requires
        empty camera shells purchased mainly from Japanese and German agents for
        recycling in the factory complex in China. The supply of quality shells can
        be
        limited at times based on overall market use of single-use cameras; however,
        the
        supply of shells is typically only restricted by the purchase price for such
        shells.
  **Transportation**
  The
        Company transports components and finished products to customers in China
        and to
        and from Hong Kong and China by truck. Generally, the Company sells its products
        “free-on-forwarder” (“F.O.F.”) Hong Kong or “free-on-board” (F.O.B.) Hong Kong.
        To date the Company has not been materially affected by any transportation
        problems as it uses subcontract trucking services which have been readily
        available in the past. Similarly, recent improvements in the roads and highways
        in China have facilitated intra-China transportation. The Hong Kong and China
        customs departments have opened additional border crossings, extended their
        operating hours, and have been working continually to improve the flow of
        cross-border goods. In considering establishing new manufacturing facilities
        for
        the Company, the Company expects to move away from Shenzhen and Hong Kong.
        However, any new facility that the Company considers will have good
        transportation connections to Hong Kong and other key delivery sites, although
        transportation costs may increase due to the additional distance to the delivery
        sites.
  **Customers
        and Marketing**
  The
        Company’s sales are generated from sales in Hong Kong/China, Europe, the United
        States, and other Asian countries. Net sales to customers by geographic area
        are
        determined by reference to the shipping destinations specified by the Company’s
        customers (except for sales to China). For example, if the products are
        delivered to the customer in China, 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 in Europe. Payments are paid in Hong Kong dollars,
        United States dollars and European euros. Net sales as a percentage of net
        sales
        to customers by geographic area consisted of the following for the years
        ended
        March 31, 2003, 2004 and 2005:
  Year
                  Ended March 312003
              
              2004
              
              2005GEOGRAPHIC
                  AREAS:Hong
                  Kong & China
              
              
              63.7
              %
              
              66.1
              %
              
              62.4
              %Europe
              
              
              25.7
              %
              
              23.7
              %
              
              30.8
              %Other
                  Asian countries
              
              
              1.3
              %
              
              2.4
              %
              
              1.4
              %United
                  States
              
              
              7.5
              %
              
              2.4
              %
              
              4.0
              %Others
              
              
              1.8
              %
              
              5.4
              %
              
              1.4
              %
 
 -
            28
            -
 The
        Company’s customers for its metal stamping products are OEMs and contract
        manufacturers. While the Company sells its products in Hong Kong (which includes
        sales made to China which are recorded as sales in Hong Kong because the
        purchase orders are issued by the Hong Kong offices of the China factories),
        Europe (primarily Germany), the United States, and other Asian countries
        (predominantly Japan and Malaysia), the Company’s products are sold primarily to
        Japanese and German owned companies with OEM or contract manufacturers in
        China.
  Until
        recently, the Company has marketed its metal stamping products and services
        to
        existing customers primarily through direct contact with the Company’s
        management and senior purchasing officers of the customers. Historically,
        metal
        pressing sales were primarily conducted by the managing director of the metal
        stamping company, Nissin, Mr. Satoru Saito, a Japanese national, and Mr.
        Roland
        Kohl, a German national, who serves as the Chief Executive Officer, using
        existing contacts, word-of-mouth referrals and references from associated
        or
        related companies of the customers. During the past few years, the Company
        has
        gradually increased the number of German and Japanese sales person to complement
        the activities of Mr. Kohl and Saito. Due to the international nature of
        senior
        management, the Company believes that is has been able to set itself apart
        from
        its competitions and bridge the cultural, language and quality gaps that
        most
        Japanese and German companies fear when dealing in China. In connection with
        the
        recent realignment of its operations, shift in manufacturing strategy, and
        its
        increased focus on increasing overall sales of higher quality components
        for
        global customers, the Company has initiated a more direct and active marketing
        strategy, including advertising in trade publications, attending trade
        shows/exhibitions and using the internet and its websites as marketing
        tools.
  The
        Company’s customers for its non-Kienzle branded clocks include internationally
        recognized clock manufacturers such as Braun and Casio. The ultimate customers
        of the Kienzle branded clocks consist of importers, wholesalers and large
        retailers, primarily in Europe where the Kienzle brand name has strong brand
        recognition. The Company also markets it watches and clocks through its
        marketing office located in Germany. Previously, the Company also marketed
        its
        clocks and watches in Europe through Kienzle AG, a third party distributor
        under
        a licensing and supply agreement that the Company that was cancelled in January
        2004.
  Camera
        sales are conducted primarily through existing importers and distributors
        who
        market the cameras under their own brands.
  **Major
        Customers**
  For
        the
        fiscal year ended March 31, 2005, two customers each accounted for more than
        10%
        of the Company’s gross revenues (or 35.8% collectively of the Company’s net
        sales). No other customers individually accounted for more than 10% of the
        Company’s gross revenues during this recent past fiscal year. During the past
        few years, the Company has relied to a large extent on a few larger customers
        and on many smaller customers. If the Company loses any of its major customers
        who account for a material portion of total net sales, or if any of these
        customer’s order decrease substantially, the Company’s results of operations and
        financial position would be materially and adversely affected if the Company
        is
        unable to replace any of its major customers.
  -
            29
            -
  Customers
        place metal manufacturing orders with the Company in the form of purchase
        orders
        which are usually supported by a delivery schedule covering one to two months
        of
        orders. Customers usually do not provide long term contracts for their purchases
        and are able to cancel or amend their orders at any time without penalty.
        In
        addition, certain customers enter into agreements with the Company in which
        the
        parties agree upon their purchase and sale procedures, but such agreements
        do
        not contain any specific purchase orders or purchase requirements. However,
        customers often provide the Company with non-binding forecasts of their
        anticipated needs for the next year. Orders from such customers are thereafter
        received from time to time by customers based on the customers’ needs, not on
        contractually fixed amounts or time periods. Accordingly, backlog has not
        been
        meaningful to the Company’s business. Sales of metal manufactured products are
        primarily on credit terms of up to 45 to 90 days with payment in Hong Kong
        dollars while the sale of cameras and clocks is through letters of credit,
        wire
        transfer advance payment and, for older established accounts, some open accounts
        payable within 30 to 90 days of shipment in United States dollars. Management
        constantly communicates with its credit sale customers and closely monitors
        the
        status of payment in an effort to keep its default rate low. However, as
        a
        result of the concentration of sales among a few of the Company’s larger
        customers, the Company is required to bear significant credit risk with respect
        to these customers. Typically, metal part orders are spread over a three-month
        period and the Company is able to withhold delivery or slow down shipments
        in
        the event of any delinquency in payment for past shipments. Parts are generally
        shipped 30-40 days after an order has been placed unless the Company is required
        to manufacture new tools which requires approximately 14-45 days to complete
        prior to commencing manufacturing. While the Company has not experienced
        material difficulty in securing payment from its major customers, there can
        be
        no assurance that the Company’s favorable collection experience will continue.
        The Company could be adversely affected if a major customer was unable to
        pay
        for the Company’s products or services.
  **Patents,
        Licenses and Trademarks**
  In
        November 1998, the Company acquired the worldwide rights (other than in Italy)
        to the “Kienzle” trade name and trademark for use with clocks, watches and
        certain other timekeeping instruments. Thereafter, the Company also acquired
        the
        rights to the “Kienzle” trademark for use in numerous other product categories,
        other than with respect to products used in the automobile industry. In June
        2005, the Company sold the rights to use the “Kienzle” trade mark for all uses
        that it held other than for clocks and watches. The Company currently also
        intends to sell or license its remaining rights in the “Kienzle” trade mark. The
        trade name and trademark is registered in approximately 50 countries, including
        Germany, the United States, the UK and Japan.
  The
        Company has two patents, and has applied for one other patent relating to
        its
        clock business. The Company’s two patents are: (i) a U.S. patent that covers
        technology concerning the company’s “global clock,” a LCD timepiece that
        provides simultaneous analog and digital display of 24 time zones, which
        are
        divided into work, leisure and sleep categories, along with a calendar week
        scheduler; and (ii) a European patent that covers technology related to radio
        controlled clocks. The global clock is designed for use by international
        travelers. The pending patent application also relates to the Company’s Radio
        Controllable Clock.
  -
            30
            -
 
 In
        connection with developing new camera technologies, the Company was issued
        a
        patent in the United States ,
        U.S.
        Patent Number 6,522,835 B2, that covers the Company’s “photographic film
        package” with a detachable cartridge. The package is integral to the Company’s
        pre-loaded camera, and the patent applies specifically to alternative
        photographic cameras that can compete in the market place with single-use
        cameras. Applications relating to this U.S. patent application are still
        pending
        in Europe, Japan, China and Hong Kong. The Company has
        applied for patents in the United States for its camera cassette assembly
        apparatus and method.
  As
        a
        manufacturer of parts, components and finished products for OEMs and contract
        manufacturers, the Company has no patents, licenses, franchises, concessions
        or
        royalty agreements which it considers material to its OEM manufacturing
        business.
  **Competition**
  The
        Company competes against numerous manufacturers in all of its product and
        business lines. The Company competes with both smaller local companies and
        large
        international companies. For example, management believes that firms which
        are
        smaller than the Company make up the largest segment of the metal manufacturing
        industry although it is not aware of any empirical data defining the metal
        manufacturing industry in China. These metal stamping companies compete with
        the
        Company for standard metal stamping work. As a vertically integrated,
        multi-disciplinary manufacturer of complex components and products, the Company
        also competes against numerous global OEM manufacturers, whether those other
        manufacturers are located in Shenzhen, China or elsewhere. Most of the
        international competitors of the Company have substantially greater
        manufacturing, financial and marketing resources than the Company. The Company
        believes that the significant competitive factors are quality, price, service,
        and the ability to deliver products on a reliable basis. The Company believes
        that it is able to compete in its segment of the OEM manufacturing market
        by
        providing good quality products at a competitive prices with reliable delivery
        and service.
  The
        camera and clock manufacturing industry traditionally has been highly
        competitive and fragmented. However, the Company believes that the market
        for
        quartz clocks is strongly declining due to the influx of alternative timekeeping
        products, including products such as mobile phones, PDAs, and even MP3 players.
        The Company also competes against a number of Chinese clock manufacturers,
        some
        of whom it believes are supported by the state or are state-owned or controlled
        companies and are able to sell their products at prices that are below the
        Company’s price of raw materials, thereby making it financially impractical for
        the Company to compete in this clock market. The Company believes that most
        major brands of clocks and watches have significantly greater marketing and
        distribution capabilities and financial resources than the Company. In the
        single-use camera market, customers generally are attracted to manufacturers
        based on the price of the product and timely delivery. As a result of the
        decreasing market for single-use cameras and the available amount of such
        cameras, margins for single-use cameras are extremely thin. The Company does
        not
        believe that it is the best use of its resources to compete against the other
        single-use camera manufacturers based primarily on price. Since the Company
        cannot distinguish its products in the single-use camera manufacturing market,
        the Company has decided to modify, sell or otherwise end its camera operations
        and to reallocate its resources to higher margin products.
  -
            31
            -
  Certain
        of the new product markets that the Company is considering entering into
        also
        are extremely competitive and are dominated by well-capitalized, international
        companies. For example, the Company is considering manufacturing LCD monitor
        and
        flat panel televisions. There are numerous large, multi-national companies
        that
        currently compete in these markets.
  **Other
        Activities**
  The
        markets in which the Company operates are continuously changing, and the
        Company
        regularly seeks both (i) new or alternate products that it can manufacture
        and
        sell, and (ii) new methods of operating that may enhance its business. Certain
        of changes in the Company’s products and operations evolve from its existing
        business. For example, the Company’s quartz clock manufacturing has evolved into
        the manufacture of radio-controlled clocks and other electronics products.
        In
        addition, the manufacture of single-use cameras and low-end 35mm cameras
        has
        spawned the Company’s underwater camera product line. Certain other actions
        deviate significantly from the Company’s existing manner of operations and are,
        as a result, subject to greater uncertainties. The following are some of
        the
        other actions that the Company has taken, and is taking:
  A.  The
        Company owns the worldwide rights (other than in Italy) to the name “Kienzle”
        for clocks, watches and certain other timekeeping instruments. The Company
        believes that the Kienzle name is associated with quality and prestige in
        Europe, particularly in Germany. Although the Kienzle name is traditionally
        associated with watches and clocks, the Company believes that the reputation
        of
        the name can also be used to market other high quality products, such as
        electronic and household products. Rather than attempt to commercially exploit
        the value of the Kienzle name, the Company recently decided to sell or license
        the rights to the Kienzle name to others. In June 2005, the Company sold
        the
        rights to use the Kienzle name for all products other than clocks and watches.
        The Company is also currently considering selling/licensing the clock/watch
        rights to the “Kienzle” trademark.
  B.  The
        Company is exploring the possible manufacture and distribution of liquid
        crystal
        display (LCD) products, such as flat panel televisions and computer monitors
        for
        use in niche markets. The Company recognizes that it is unable to compete
        against the dominant multi-national manufacturers of LCD general purpose
        LCD
        televisions and monitors and, therefore, is attempting to develop LCD based
        products for niche markets in which products are less price sensitive. The
        Company currently has the ability to manufacture the chassis, the
        television/monitor stand, and the complete electronic circuits of LCD
        televisions/monitors and to assemble complete LCD televisions/monitors. The
        Company is considering developing niche products such as wireless LCD monitors
        and LCD Monitors with built-in memory card readers for commercial application,
        as well as dust and water proof LCD TV/Monitor for outdoor usage. To date,
        sales
        of these LCD products by the Company have been limited to sales made for
        test
        marketing purposes and have been insignificant.
  -
            32
            -
  C.  In
        August
        2003, the Company acquired a 50% interest in Kayser
        Photo (Overseas) Corp., a new
        corporation established in Panama to distribute film, cameras, batteries
        and
        single-use cameras in Central and South America. Under its agreement with Kayser
        Photo (Overseas) Corp., the Company will sell certain products to that company
        and will receive one-half of the company’s profits. The products marketed by
        Kayser Photo (Overseas) Corp. are sold under the “Kayser” brandname. Sales
        to
        date from this new venture have been insignificant, and no assurance can
        be
        given that the Company will determine that these operations will be further
        developed or will eventually become a viable business.
  **Organizational
        Structure**
  Highway
        Holdings Limited is a holding company that operates through its subsidiaries.
        As
        of March 31, 2005, Highway Holdings Limited owned eleven subsidiaries, ten
        of
        which were wholly-owned by Highway Holdings Limited. However, the Company
        currently conducts is business primarily through eight of these subsidiaries,
        six of which are incorporated in Hong Kong, one that is incorporated in Germany,
        and one that is organized in Bulgaria. For details regarding the names of
        these
        subsidiaries, the principal activities of subsidiaries, the country of their
        incorporation, and the dates of their organization, see Note 1 to the
        Consolidated Financial Statements appearing in Item 18 of this Annual Report.
  The
        Company also is a 50% equity owner of a Panamanian company that it and an
        unrelated third party established in August 2003 to engage in film, battery
        and
        camera trading activities, a 50% equity owner in a dormant U.S. entity
        established to market Kienzle branded clocks in the U.S.A.
  The
        Company acquired a 20% equity stake in Kienzle AG in 2003 for 100,000 euros
        (approximately $131,000 at current exchange rates). The Company has sold
        to
        Kienzle AG all of its rights to the “Kienzle” trademark in all markets other
        than clocks and watches. In connection with the foregoing sale of the Kienzle
        rights, Kienzle AG has also agreed to repurchase the Company’s investment in
        Kienzle AG for 100,000 euros, in which event the Company’s investment in Kienzle
        AG will terminate.
  **Property,
        Plants and Equipment**
  *British
        Virgin Islands*
  The
        Registered Office of the Company is located at Craigmuir Chambers, Road Town,
        Tortola British Virgin Islands. Only corporate administrative matters are
        conducted at these offices, through the Company’s registered agent, HWR Service
        Ltd. The Company does not own or lease any property in the British Virgin
        Islands.
  *Hong
        Kong*
  The
        Company leases Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
        Shui, New Territories, Hong Kong as its executive offices. These premises
        are
        leased under a lease that expires in July 2006. The Company believes that
        suitable alternative facilities are available if the Company cannot extend
        the
        lease on satisfactory terms.
  -
            33
            -
  The
        Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong
        at a
        rental cost of $1,500 per month under an agreement that expires in January
        2006.
  *China*
  The
        Company currently leases a total of approximately 450,000 square feet of
        space
        at the site of its factory complex located at Long Hua, Shenzhen, China from
        the
        Shenzhen Land & Sun Industrial & Trade Co., Ltd. pursuant to five
        related leases. The leased space consists of 378,000 square feet of
        manufacturing space, with the balance representing dormitories for the Company’s
        employees. This space is used predominately for the Company’s metal
        manufacturing, OEM product assembly, camera and clock manufacturing, spray
        painting, screen printing, plastic injection, tooling workshop and warehouse
        operations. There are also offices for management and administration on the
        premises. The term of the leases expires on February 28, 2009. The Company
        estimates that, depending on the Company’s operations, the utilization rate of
        these facilities during the fiscal year ended March 31, 2005 fluctuated between
        an estimated 50% and 80% of its maximum capacity. Accordingly, the Company
        has
        sufficient manufacturing space for its current needs, and its current facilities
        will continue to satisfy the Company’s space needs in the near future.
  The
        Company also obtains materials and assets under its two BFDC Agreements which
        expire in 2016. The BFDC is the local government of Long Hua, the town in
        which
        the factory complex is located. Pursuant to the BFDC Agreements, the BFDC
        is the
        party responsible for providing manufacturing facilities and supplying workers
        to the Company. The Company is responsible for paying a management fee, and
        certain other charges to the BFDC.
  As
        is
        common in southern China, the factory complex has dormitory facilities to
        accommodate factory workers. The Company has leased approximately 72,000
        square
        feet of space at Long Hua, Shenzhen, China which is used as dormitories for
        approximately 1,000 factory workers.
  The
        Company has also entered into two three-year leases (from July 1, 2005 through
        June 1, 2008) for (i) an approximately 2,500 square meter manufacturing facility
        and (ii) an approximately 1,000 square meters of dormitory living quarters
        in He
        Yuan City, China. The Company has the right to terminate the leases before
        the
        end of the three year terms under certain conditions, including if it purchases
        and builds its own buildings in the He Yuan district. The new facilities
        in He
        Yuan are approximately 125 kilometers from the Company’s current principal
        facilities in Long Hua, Shenzhen, approximately 130 kilometers from the nearest
        ocean port, and are located near a major railroad station and highway. Under
        the
        lease, the Company will pay $3,300 per month as rent. The facilities will
        initially be used to house a part of the Company’s plastics manufacturing
        facilities. If the Company’s operations are successful at He Yuan, the Company
        may consider relocating all of its operations to He Yuan in the
        future.
  *Germany*
  The
        Company leases a 152 square meter marketing office and a 1,080 square meter
        warehouse in Germany, related to sales of Kienzle branded products in Germany.
        The lease for this facility expires in October 2005.
  -
            34
            -
  **Item
        5.**  **Operating
        and Financial Review and Prospects**
  **Overview**
  The
        Company’s net sales are derived primarily from (i) the manufacture and sale of
        metal components, assemblies and products for its multi-national clients,
        (ii)
        clocks and watches, and (iii) cameras. During the past fiscal year, all of
        the
        Company manufacturing operations were conducted at its principal facilities
        in
        Shenzhen, China. The Company also maintained a marketing branch in Germany.
        Until December 2003, the Company also operated a small assembly facility
        in
        Bulgaria.
  The
        metal
        manufacturing operations currently account for the largest portion of the
        Company’s net sales and, during the fiscal year ended March 31, 2005, was the
        only segment of the Company’s operations that generated operating income. The
        gross profit margin on metal stamping is generally higher than that of camera
        and clock manufacturing, but it is typically more affected by fluctuations
        in
        raw material prices, particularly prices of rolled steel. During the past
        year,
        prices for metal raw materials, a major component of the Company’s manufacturing
        costs, increased between 20% and 50%. The Company’s manufacturing costs were
        also impacted during the past fiscal year by increases in other costs, such
        as
        the price of plastics and energy prices.
  The
        location of the Company’s executive offices in Hong Kong enables the Company to
        pay low rates of income tax due to Hong Kong’s tax structure. The Company’s
        income arising from its Hong Kong operations or derived from its operations
        within Hong Kong is subject to Hong Kong income tax. The Company has
        successfully claimed a tax benefit from the Hong Kong Inland Revenue Department
        by providing support for its position that more than half of its income is
        derived from its activities outside of Hong Kong, namely in China. The statutory
        tax rate in Hong Kong currently is 17.5%, and there are no taxes on dividends
        or
        capital gains. Since most of its income is subject to Hong Kong income tax,
        the
        Company has historically benefited from favorable overall income tax rates
        (the
        Company’s income tax rate for the fiscal year ended March 31, 2004 was 9.2%).
        However, for the fiscal year ended March 31, 2005, the Company generated
        $1,067,000 income that is subject to Hong Kong taxes, but incurred a significant
        loss (particularly from its operations in Germany) from operations that are
        not
        subject to Hong Kong taxation. Since the losses in Germany do not offset
        the
        taxable income in Hong Kong for Hong Kong tax purposes, the effective tax
        rate
        applicable to the Company for the March 31, 2005 fiscal year was 132.3%.
  Unlike
        companies which have wholly-owned subsidiaries located in China or operate
        under
        joint venture agreements in China, under the BFDC Agreements pursuant to
        which
        it operates in China, the Company does not pay taxes in China because it
        is not
        considered to be doing business in China under current China law. The BFDC
        is
        responsible for paying its own taxes incurred as a result of its operations
        under the BFDC Agreements (which taxes are indirectly passed through to the
        Company). Arrangements such as the BFDC Agreements under which the Company
        operates in China are one of the most common types of arrangements in southern
        China for Hong Kong manufacturers. Management believes the Company will continue
        to benefit from a low overall effective tax rate in the future, barring
        unforeseen changes in tax laws.
  -
            35
            -
  Net
        sales
        to customers by geographic area are generally determined by the shipping
        destinations specified by the customers. In China, however, net sales are
        always
        recorded as generated in Hong Kong because the purchase orders are issued
        by
        Hong Kong-based companies. For example, if a customer directs the Company
        to
        ship a product to the U.S. (or any other overseas market), the sale is recorded
        as a sale to the U.S. (or the specified market). However, if a product is
        delivered to a customer in China, the sales will be recorded as generated
        in
        Hong Kong.
  **Results
        of Operations**
  *General*
  During
        the past three years discussed below, the Company’s revenues have been derived
        primarily from the manufacture and sale of (i) OEM manufacture of metal parts
        and components and products, (ii) clocks, clock movements and watches, and
        (iii)
        cameras and camera accessories. Revenues during these periods also include
        revenues generated by the Company from the sale of “Kienzle” branded watches and
        other products that it did not manufacture.
  The
        following table sets forth the percentages of net sales of certain income
        and
        expense items of the Company for each of the three most recent fiscal
        years.
  Year
                  Ended March 31,2003
              
              2004
              
              2005Net
                  Sales
              
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              80.9
              
              
              79.9
              
              
              81.5Gross
                  profit
              
              
              19.1
              
              
              20.1
              
              
              18.5Selling,
                  general and administrative expenses
              
              
              18.3
              
              
              16.6
              
              
              18.0Impairment
                  loss of industrial property right
              
              
              0
              
              
              0
              
              
              0.2Impairment
                  loss of property, plant & equipment
              
              
              0
              
              
              0
              
              
              1.3Operating
                  income/(loss)
              
              
              0.8
              
              
              3.5
              
              
              (1.0
              )Interest
                  expense
              
              
              (0.2
              )
              
              (0.3
              )
              
              (0.4
              )Other
                  income
              
              
              2.1
              
              
              1.5
              
              
              1.1Impairment
                  of investment in an affiliate
              
              
              0
              
              
              (0.4
              )
              
              0Income/(loss)
                  before income taxes
              
              
              2.7
              
              
              4.3
              
              
              (0.3
              )Income
                  taxes
              
              
              (0.3
              )
              
              (0.4
              )
              
              (0.3
              )Income/(loss)
                  before minority interest
              
              
              2.4
              
              
              3.9
              
              
              (0.6
              )Minority
                  interest
              
              
              0
              
              
              0
              
              
              0Net
                  income/(loss)
              
              
              2.4
              %
              
              3.9
              %
              
              (0.6
              )%
 
 *Year
        Ended March 31, 2005 Compared to Year Ended March 31, 2004*
  Net
        sales
        for the year ended March 31, 2005 (“fiscal 2005”) increased by $2,322,000, or
        9.2%, from the year ended March 31, 2004 (“fiscal 2004”). The increase in net
        sales was due to a $3,006,000 increase in sales of all of the Company’s metal
        manufacturing and OEM operations from fiscal 2005 compared to fiscal 2004.
        The
        Company’s other two business segments (clocks and cameras) decreased in sales
        compared to the prior fiscal year. As discussed in this Annual Report, the
        Company believes that the markets for both its film-based camera products
        and
        for its clocks are declining and, as a result, the Company has decided to
        sell
        or discontinue its single-use camera operations and is re-evaluating its
        other
        camera and clock operations. Accordingly, the Company anticipates that sales
        of
        clocks and cameras during the current fiscal year will be substantially below
        the already lower sales amounts for fiscal 2005.
  -
            36
            -
  Sales
        of
        metal manufactured parts and components increased during fiscal 2005 by
        $3,006,000 to $17,792,000. Sales to the Company’s European, primarily German,
        customers represented the largest increase in metal manufacturing in fiscal
        2005. Metal and OEM manufacturing sales represented 64.3% of the Company’s total
        sales in fiscal 2005 compared to 58.3% of the Company’s total sales in fiscal
        2004. The increase in metal and OEM manufacturing sales is a result of the
        Company’s focus on manufacturing more complex components and products for
        larger, European customers.
  Net
        sales
        of cameras decreased in fiscal 2005 by $2,154,000 due to the declining market
        for film-based cameras. The Company has decided that in the current fiscal
        year
        ending March 31, 2006, the Company would discontinue the manufacture and
        sales
        of single-use cameras. Net sales of cameras represented 13.9% of the Company’s
        total net sales in fiscal 2005 compared to 23.6% in fiscal 2004.
  Sales
        of
        clocks and watches for the year ended March 31, 2005 also decreased compared
        to
        fiscal 2004. The Company has also been using the clock/watch division to
        manufacture OEM electronic products for the Company’s OEM manufacturing
        divisions. During fiscal 2005, sales of clocks, watches and other, and revenues
        generated from the OEM manufacturing operations, represented 21.9%, of the
        Company’s net sales, compared to 18.1% of the Company’s net sales for the year
        ended March 31, 2004. The total amount of revenues attributed to the clock/watch
        division for non-clock/watch OEM manufacturing during fiscal 2005 was
        approximately $1,730,000. In addition to the decline in net sales of clocks
        and
        watches manufactured by the Company, net sales of “Kienzle” labeled products
        distributed by Kienzle AG, a German distribution company, also decreased
        significantly and generated only approximately $20,000 of revenues in fiscal
        2005 compared to $1,665,000 of revenues in fiscal 2004. The distribution
        agreement with Kienzle AG has been terminated, and in June 2005 the Company
        sold
        its rights to the “Kienzle” trademark to Kienzle AG, or its appointees, for
        products other than clocks and watches. The purchase price for the rights
        to use
        the “Kienzle” trademark for products other than clocks and watches was
        $1,000,000. Sales of the Company’s principal clock products, quartz clocks,
        declined in fiscal 2005 due to low priced clocks sold by competing clock
        manufacturers, some of whom the Company believes are, directly or indirectly,
        subsidized by the Chinese government and therefore are able to sell clocks
        at
        very low prices, often below the cost of raw materials. The Company currently
        is
        considering restructuring and possibly selling its loss making German marketing
        business. In order to reduce its losses in its clock/watch manufacturing
        operations, management may also consider modifying or reducing its current
        clock
        and watch manufacturing operations.
  The
        Company’s gross profits as a percentage of its net sales decreased from 20.1% in
        the year ended March 31, 2004 to 18.5% in the year ended March 31, 2005.
        Cost of
        sales as a percentage of net sales increased from 79.9% to 81.5% as a result
        of
        increases in raw materials, particularly the significant increases in the
        cost
        of raw metal and plastics. During fiscal 2005, the Company continued to write
        off some of its inventory by writing off $409,000 of its inventories (compared
        to a major $640,000 write-off of inventory for the fiscal year ended March
        31,
        2004). The
        Company periodically writes down inventory for estimated obsolete or
        unmarketable inventory equal to the difference between the costs of inventory
        and estimated market value, based upon assumptions about future demand and
        market conditions. In
        fiscal 2003, the Company wrote off only $52,000 of obsolete inventory. The
        Company attributes the large inventory written off during fiscal 2005 to
        the
        decline in the Company’s camera and clock businesses and to the decline in the
        market for these products. The low
        gross margins also are a reflection of the increasing cost of operating in
        Shenzhen, including the increasing cost of labor and other operating costs,
        such
        as the cost of water and electricity. As a result of the increasing costs,
        the
        Company has been exploring obtaining alternative manufacturing facilities
        and
        has entered into a lease for a smaller, additional facility in He Yuan. The
        Company believes that the cost of operations generally is less in He Yuan.
        The
        Company will, however, continue to conduct substantially all of its current
        operations at its existing facilities in Shenzhen, China, during the current
        fiscal year ending March 31, 2006.
  -
            37
            -
  Selling,
        general and administrative expenses for the year ended March 31, 2005 increased
        by $766,000, or 18.2%, over fiscal 2004. As a result, selling, general and
        administrative expenses represented 18.0% of total net sales, compared to
        16.6%
        in fiscal 2004. The increase in selling, general and administrative expenses
        as
        a percentage of net sales was due in part to the increase in net sales, to
        $337,000 of non-cash compensation expenses, and to $414,000 impairment losses
        for its camera, clock and watch property, plant and equipment and industrial
        property rights. The foregoing write off of certain of the Company’s camera and
        clock/watch assets during fiscal 2005 reflected the losses that the Company
        has
        sustained from these divisions in the past, and the likelihood that the Company
        will not generate increased revenues or profits from these assets and divisions
        in the future. During fiscal 2005, the Company paid certain professional
        fees by
        issuing options to purchase 50,000 shares at an exercise price of $1.00 per
        share. This option grant was reflected as a $177,000 compensation expense.
        In
        addition, under its employment agreement with Mr. Kohl, the Company’s Chief
        Executive Officer, the Company was obligated to issue 29,154 shares to Mr.
        Kohl
        in fiscal year 2005. No shares were issued to Mr. Kohl in prior years. The
        Company is obligated to issue 29,154 shares per year to Mr. Kohl in future
        years
        under the employment agreement. Selling, general and administrative expenses
        also increased due to increases in marketing activities, through trade shows,
        advertisements, and new catalogues. The Company recognized an expense of
        $160,000 for the issuance of these shares. Selling, general and administrative
        expenses are expected to increase further in the current fiscal year ending
        March 31, 2006 as the Company implements additional financial controls and
        procedures that are required under the Sarbanes-Oxley Act of 2002.
  During
        the fiscal year ended March 31, 2005, the Company realized a $249,000 gain
        due
        to currency exchange rate fluctuations. The Company realized a currency exchange
        rate gain of $278,000 in fiscal 2004. The gains were the result of the strength
        of the euro compared to the U.S. dollar, which increased the value of payments
        the Company received in euros from it sales in Europe. Since the Company
        does
        not undertake any currency hedging transactions, its financial results will
        continue to be affected by the fluctuations of currencies.
  -
            38
            -
  The
        Company’s interest expenses increased in fiscal 2005 by $33,000 over the prior
        fiscal year due to an increase in the amounts borrowed under its line of
        credit
        and to an increase in the overall rate of interest paid by the Company.
  The
        decrease in gross margins combined with the increase in selling, general
        and
        administrative expenses and the impairment loss of property, plant and equipment
        and industrial property rights, resulted in the Company’s recognizing an
        operating loss of $269,000 compared to operating income of $875,000 in fiscal
        2004. After taxes, the Company’s fiscal 2005 net loss was $152,000 compared to
        net income of $982,000 in fiscal 2004.
  
 *Year
        Ended March 31, 2004 Compared to Year Ended March 31, 2003*
  Net
        sales
        for the year ended March 31, 2004 increased by $4,986,000, or 24.5%, from
        the
        year ended March 31, 2003 (“fiscal 2003”). The increase in net sales was due to
        an increase in sales of all of the Company’s product segments compared to the
        prior fiscal year.
  Sales
        of
        metal manufactured parts and components for the year ended March 31, 2004
        experienced the largest increase both in dollar amount and as a percentage.
        Metal manufacturing sales increased by $3,098,000, or 26.5%, as compared
        to the
        year ended March 31, 2003, and represented 58.3% of the Company’s total sales.
        Net sales from the metal stamping segment for the year ended March 31, 2003
        represented 57.4% of the Company’s net sales. The increase in sales of OEM
        manufactured products was primarily due to the increase in sales to Germany
        customers and by an increase in sales to Hong Kong/China.
  Net
        sales
        of cameras increased in fiscal 2004 in each of the Company’s principal
        geographic markets for the Company’s cameras, other than sales in the U.S.A,
        which decreased by $1,062,000. The decrease in sales to the U.S.A. was due
        to
        the loss of the Company’s principal U.S. customer. While net sales of cameras
        increased by $1,080,000, or 22%, in fiscal 2004, cameras constituted 23.6%
        of
        the Company’s net sales, compared to 24.1% in the prior year due to the
        relatively larger increase in the Company’s overall net sales.
  Sales
        of
        clocks and watches for the year ended March 31, 2004 increased by $808,000,
        or
        21.4% as compared to the year ended March 31, 2003, and represented 18.1%,
        of
        the Company’s March 31, 2004 fiscal year sales compared to 18.5% of the
        Company’s net sales for the year ended March 31, 2003. In January 2003, the
        Company entered into a license and distribution agreement with Kienzle AG,
        a
        German distribution company, to sell watches, clocks and other products
        manufactured by other makers in Europe under its own “Kienzle” trademark. Sales
        under this agreement generated approximately $521,000 of revenues in fiscal
        2003
        (the three months from January through March, 2003) and $1,665,000 of revenues
        in fiscal 2004. Since the amount of sales made in calendar 2003 by Kienzle
        AG
        under the distribution agreement did not meet the minimum established under
        the
        distribution agreement, the Company terminated the distribution agreement
        with
        Kienzle AG. Although the distribution agreement was terminated in 2004, both
        parties conducted business with each other in substantially the same manner
        as
        before (except with respect to clocks and watches) during the fiscal year.
        Sales
        of the Company’s principal clock products, quartz clocks, continued to decline
        in fiscal 2004.
  -
            39
            -
  The
        Company’s gross profits as a percentage of its net sales increased from 19.1% in
        the year ended March 31, 2003 to 20.1% in the year ended March 31, 2004.
        Cost of
        sales as a percentage of net sales decreased from 80.9% to 79.9% despite
        a
        one-time $640,000 write-off of inventory for the fiscal year ended March
        31,
        2004. The
        Company periodically writes down inventory for estimated obsolete or
        unmarketable inventory equal to the difference between the costs of inventory
        and estimated market value, based upon assumptions about future demand and
        market conditions. In
        fiscal 2003, the Company wrote off only $52,000 of obsolete inventory. The
        reasons for the 1% increase in gross margins in fiscal 2004 include the higher
        margins the Company has realized in its metal manufacturing because of the
        increasing emphasis on manufacturing subassemblies and components, and the
        on-going benefits of the Company-wide cost reduction efforts that were initiated
        during fiscal 2003. Although the Company’s gross profits as a percentage of its
        net sales increased during the past year, the percentage is still below the
        levels the Company has previously achieved. The Company attributes the lower
        gross profits to the loss of its competitive advantage that it used to have
        due
        to its operations in Shenzhen, China. Since many other manufacturers have
        now
        also established facilities in Shenzhen and elsewhere in China, competition
        has
        been increasing which has resulted in higher labor and materials costs, and
        lower prices for manufactured products.
  Selling,
        general and administrative expenses for the year ended March 31, 2004 increased
        by $496,000, or 13.3%, over fiscal 2003 but decreased as a percentage of
        total
        net sales from 18.3% to 16.6%. The decrease in selling, general and
        administrative expenses as a percentage of net sales was due to the 24.5%
        increase in net sales. The increase in selling, general and administrative
        expenses is due in part to a $142,000 bad debt expense that the Company
        recognized during fiscal 2004. Selling, general and administrative expenses
        for
        both years included expenses related to the Bulgaria that the Company closed
        in
        December 2003. Unless the Company re-opens the Bulgaria operations, the Company
        will not bear the costs of the Bulgaria facilities in the future.
  In
        connection with the licensing and distribution agreement the Company entered
        into with Kienzle AG in January 2003, the Company also agreed to acquire
        a
        minority equity interest in Kienzle AG. The amount that the Company has invested
        to date is 100,000 euros ($109,000 at the exchange rates then in effect).
        As a
        result of Kienzle AG’s failure to meet its minimum purchase commitment for the
        year ended December 31, 2003, the Company terminated the distribution agreement
        and wrote off its $109,000 investment in Kienzle AG.
  During
        the fiscal year ended March 31, 2004, the Company realized a $278,000 gain
        due
        to currency exchange rate fluctuations. The Company realized a currency exchange
        rate gain of $344,000 in fiscal 2003. The gains were the result of the strength
        of the euro compared to the U.S. dollar, which increased the value of payments
        the Company received in euros from it sales in Europe. Since the Company
        does
        not undertake any currency hedging transactions, its financial results will
        continue to be impacted by the fluctuations of currencies.
  The
        Company’s interest expenses increased slightly for the fiscal year ended March
        31, 2004 from the prior fiscal year, while the Company’s interest income for the
        most recent fiscal year decreased from the prior fiscal year ended March
        31,
        2003. The minor changes reflect the increase in the Company’s cash balances and
        the increase in the amounts borrowed under its line of credit.
  -
            40
            -
  As
        a
        result of increased sales and an improved gross profit as a percentage of
        net
        sales, the Company’s net income increased from $485,000 for the March 31, 2003
        fiscal year to net income of $982,000 in the most recently completed fiscal
        year.
  **Liquidity
        and Capital Resources**
  At
        March
        31, 2005, the Company had a working capital of $9,850,000, compared to working
        capital of $8,774,000 at March 31, 2004.
  The
        Company has historically generated sufficient funds from its operating
        activities to finance its operations and there has been little need for external
        financing other than capital leases which are used to finance equipment
        acquisitions. During the fiscal year ended March 31, 2005, the Company generated
        $625,000 of cash from its operating activities. Cash from operating activities
        was arrived at after taking into account the effect of a $550,000 increase
        in
        accounts payable, a $442,000 increase in other liabilities, a $1,402,000
        increase in accounts receivable, and a $668,000 increase in inventories.
        Net
        cash from operations, however, was reduced by the cash dividend the Company
        paid
        in 2005, by the repayment of long-term debt, and by the decrease in its
        short-term borrowings. The Company received $450,000 during fiscal 2005 from
        the
        proceeds of stock option exercises. The foregoing amounts used in investment
        activities and in financing activities exceeded the amount of net cash provided
        in operating activities, thereby reducing the Company’s net cash/cash
        equivalents by $210,000 as of March 31, 2005 to $3,948,000.
  The
        Company’s liquidity has been improved by the June 2005 sale of all of its rights
        to the “Kienzle” trademark in all markets other than clocks and watches, to
        Kienzle AG and its affiliates. The purchase price for the non-clock/watch
        rights
        to the “Kienzle” trademark was $1,000,000 in cash (the check has been received
        and deposited, but as of the date of this Annual Report, the U.S. funds have
        not
        yet been confirmed). In addition, Kienzle AG has also agreed to return the
        Company’s 100,000 euro investment in Kienzle AG (approximately $131,000 at
        current exchange rates), which payment, if received, will also improve the
        Company’s liquidity.
  Because
        of the Company’s international operations, the Company’s banking facilities
        provide the Company with credit facilities for letters of credit and import
        loans. In addition, in order to fund certain of the Company’s capital
        requirements, the Company also has borrowed funds from its banks to finance
        some
        of its machinery and equipment purchases and some of its building costs.
        The
        foregoing banking facilities are currently being provided to the Company
        through
        a credit facility with the Hong Kong and Shanghai Banking Corporation Limited
        (HSBC) and a credit facility with DBS Bank (Hong Kong) Limited.
  The
        HSBC
        credit facility is in favor of the Company’s camera and metal manufacturing
        subsidiaries and, as of the date of this Annual Report, provides for a maximum
        credit facility of $1,928,000 (subject to various sub-limits). The HSBC credit
        facility consists of an import loan facility that bears interest at 1.0%
        over
        the banks’ best lending rate as in effect in Hong Kong from time to time, and is
        secured by a charge on certain time deposits the Company maintains at the
        bank
        and cross guarantees and indemnities among certain of the Company’s
        subsidiaries.
  -
            41
            -
  The
        DBS
        facility is in favor of the Company’s metal, clock and camera subsidiaries and
        provides for a maximum letter or credit/trust receipt facility of $1,928,000
        and
        for an aggregate of $1,024,000 for capital expenditure/equipment loans. The
        interest rates under the DBS letter of credit facility is 1% over the best
        lending rate quoted by the bank from time to time for Hong Kong dollar credits,
        and the bank’s standard bills rate for U.S. dollar credits. The DBS capital
        expenditure loans are repayable in monthly installments ranging from 16 months
        to 36 months. Interest rates under the DBS capital expenditure facility vary
        from 0.25% below the prime rate quoted by the bank from time to time, to
        1.5%
        over the prime rate quoted from time to time. The DBS facility is also secured
        by a charge on various accounts maintained by the Company at that bank and
        by
        cross guarantees indemnities by Highway Holdings Limited and the various
        borrowing subsidiaries. As of March 31, 2005, the Company had borrowings
        of a
        total of $1,449,000 outstanding under its credit facilities and had a total
        of
        $2,407,000 of available credit remaining under the two credit facilities.
        The
        Company’s long-term debt was $967,000 as of March 31, 2005.
  As
        a
        result of its currently available working capital and its internal projections
        for the next year, the Company expects that its working capital requirements
        and
        capital needs for at least the next 12 months can be funded through a
        combination of internally generated funds and existing facilities. The Company’s
        additional manufacturing facility that has been leased effective July 1,
        2005
        and will be operated during the current fiscal year is not projected to have
        any
        negative effect on the Company’s liquidity as the operating savings are
        projected to offset the additional leasing and transportation
        costs.
  During
        the current fiscal year (ending March 31, 2005), the Company anticipates
        that,
        company-wide, it will spend between $200,000 and $500,000 on capital
        expenditures. A portion of the capital expenditures will purchased from the
        Company’s existing funds, some equipment purchases will be funded by borrowings
        under the Company’s existing banking facilities, and some equipment will be
        acquired under capital leases.
  The
        Company is not a party to off-balance sheet arrangements and does not engage
        in
        trading activities involving non-exchange traded contracts. In addition,
        the
        Company has no financial guarantees, debt or lease agreements or other
        arrangements that could trigger a requirement for an early payment or that
        could
        change the value of the Company’s assets.
  The
        following is a summary of the Company’s contractual obligations as of March 31,
        2005 is as follows:
  **Payment
                  due by Year Ended March 31,****Contractual
                  Obligations**
              
              **Total**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010
                  and thereafter****000’s**
              
              **000’s**
              
              **000’s**
              
              **000’s**
              
              **000’s**
              
              **000’s**Facility
                  Leases
              
              
              3,232
              
              
              875
              
              
              878
              
              
              772
              
              
              706
              
              
              1Finance
                  Leases
              
              
              967
              
              
              409
              
              
              395
              
              
              163
              
              
              --
              
              
              --Purchase
                  obligations
              
              
              2,134
              
              
              2,134
              
              
              --
              
              
              --
              
              
              --
              
              
              --Short
                  term borrowing
              
              
              1,449
              
              
              1,449
              
              
              --
              
              
              --
              
              
              --
              
              
              --Total
              
              
              7,782
              
              
              4,867
              
              
              1,273
              
              
              935
              
              
              706
              
              
              1
 
 -
            42
            -
  **Impact
        of Inflation**
  The
        Company believes that inflation has not had a material effect on its
        business.
  **Seasonality**
  The
        first
        calendar quarter (the last quarter of the Company’s March 31 fiscal year) is
        typically the Company’s lowest sales period because, as is customary in China,
        the Company’s manufacturing facilities in China are usually closed for one to
        two weeks for the Chinese New Year holidays. The Company does not experience
        any
        other significant seasonal fluctuations. The Company does not consider any
        issues with respect to seasonality to be material.
  **Exchange
        Rates**
  The
        Company transacts its business with its vendors and customers primarily in
        U.S.
        dollars, Hong Kong dollars and euros. In addition, all of the payments the
        Company is required to make under the BFDC Agreements for its manufacturing
        facilities, its factory workers, as management fees and other operating charges
        are based on the Hong Kong dollar. The exchange rate between the U.S. dollar
        and
        the Hong Kong dollar has been fixed since 1983 at approximately HK $7.78
        to US
        $1.00. Accordingly, the Company has not been subject to material currency
        fluctuations with respect to these aspects of its operations. However, since
        the
        Company’s clock and other sales in Europe are denominated in euros, the Company
        is subject to the risks of exchange rate fluctuations. During the fiscal
        year
        ended March 31, 2004 and 2005, the Company experienced net currency exchange
        gains of $278,000 and $249,000, respectively. The recent exchange rate gains
        are
        due to the improved exchange rate between the euro and the U.S. dollar and
        the
        increasing amount of sales denominated in euros. The Company does not utilize
        any form of financial hedging or option instruments to limit its exposure
        to
        exchange rate or material price fluctuations and has no current intentions
        to
        engage in such activities in the future. Accordingly, material fluctuations
        in
        the exchange rates between the U.S. dollar and other currencies, the euro
        in
        particular, could have a material impact on the Company’s future
        earnings/losses.
  **Critical
        Accounting Policies**
  The
        Company prepares its consolidated financial statements in accordance with
        accounting principles generally accepted in the United States of America.
        The
        preparation of these financial statements requires the Company to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        the disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amount of revenues and expenses during the reporting
        period. On an on-going basis, the Company evaluates its estimates and judgments,
        including those related to bad and doubtful debts, inventories, income taxes,
        impairment of assets, intangible assets and litigation. The Company bases
        its
        estimates and judgments on historical experience and on various other factors
        that the Company believes are reasonable. Actual results may differ from
        these
        estimates under different assumptions or conditions.
  The
        following critical accounting policies affect the more significant judgments
        and
        estimates used in the preparation of the Company’s consolidated financial
        statements.
  -
            43
            -
  Revenue
        recognition - The Company recognizes revenue when all of the following
        conditions are met (i) persuasive evidence of an arrangement exists; (ii)
        delivery has occurred; (iii) price to the customer is fixed or determinable;
        and
        (iv) collectibility is reasonably assured. Although the Company in March
        2005
        entered into an agreement to sell all of its rights to the “Kienzle” trademark
        in all markets other than clocks and watches for a purchase price of $1,000,000
        (and to have its 100,000 euro investment in Kienzle AG returned), because
        there
        was substantial doubt that transaction would be consummated and that the
        payment
        would be received, the sale of the non-watch/clock rights was not recognized
        as
        a sale in the fiscal year ended March 31, 2005.
  Bad
        and
        doubtful debts - The Company maintains allowances for its bad and doubtful
        accounts for estimated losses resulting from the inability of its customers
        to
        make required payments. If the financial condition of its customers changed,
        changes to these allowances may be required, which would impact the Company’s
        future operating results.
  Inventories
        - Inventories, consisting of finished goods, raw materials and packaging
        materials, are stated at the lower of cost or market with cost determined
        using
        the first-in, first-out method. The Company makes certain obsolescence and
        other
        assumptions to adjust inventory based on historical experience and current
        information. The Company writes down inventory for estimated obsolete or
        unmarketable inventory equal to the difference between the costs of inventory
        and estimated market value, based upon assumptions about future demand and
        market conditions. These assumptions, although consistently applied, can
        have a
        significant impact on current and future operating results and financial
        position.
  Income
        taxes - The Company records a valuation allowance to reduce its deferred
        tax
        assets to the amount that the Company believes is more likely than not to
        be
        realized. In the event the Company was to determine that it would be able
        to
        realize its deferred tax assets in the future in excess of its recorded amount,
        an adjustment to the deferred tax asset would increase income in the period
        such
        determination was made. Likewise, should the Company determine that it would
        not
        be able to realize all or part of its net deferred tax asset in the future,
        an
        adjustment to the deferred tax asset would be charged to income in the period
        such determination was made.
  Impairment
        of assets - The Company's long-lived assets principally include property,
        plant
        and equipment and intangible assets. In assessing the impairment of these
        assets, the Company has made assumptions regarding the estimated future cash
        flows and other factors to determine the fair value of the respective assets.
        If
        these estimates or the related assumptions change in the future, the Company
        may
        be required to record impairment charges for these assets. For the year ended
        March 31, 2005, the Company wrote off (i) its $5,000 investment in Kayser
        Photo
        Overseas Corp., and (ii) $347,000 in molds.
  Industrial
        property rights - Industrial property rights represent the patents, technology
        and the rights relating to the name “Kienzle” and are stated at cost.
        Amortization is provided on a straight-line basis over a period of 10 years
        which is the estimated useful lives of these assets. In the year ended March
        31,
        2005, the Company reassessed the assets value of these assets and recognized
        an
        impairment loss of $67,000.
  -
            44
            -
  **Item
        6.**  **Directors,
        Senior Management and Employees**
  **Directors
        and Executive Officers**
  The
        Directors and executive officers of the Company as of June 27, 2005 are listed
        below. The Directors hold office until the next annual meeting of shareholders,
        which currently is scheduled to be held on July 28, 2005.
  Name
              Age
              PositionsRoland
                  W. Kohl
              56
              Chief
                  Executive Officer, Director, Chairman of the BoardSatoru
                  Saito
              56
              Sales
                  Director, Metal Stamping Operations, DirectorFong
                  Po Shan
              39
              Chief
                  Financial Officer, SecretaryMay
                  Tsang Shu Mui
              45
              Administration
                  Manager, DirectorQuan
                  Vinh Can (Joseph)
              56
              Factory
                  Manager, Metal Stamping OperationsTiko
                  Aharonov
              58
              DirectorBenson
                  Lee(1)
                  (2)
              63
              DirectorMark
                  Majzner(1)
              39
              DirectorDirk
                  Hermann(1)
              41
              Director
 
 (1)
              Member
                  of Audit Committee.
 (2)
              Member
                  of Compensation Committee
 
 **Roland
        W. Kohl** .
        Mr.
        Kohl was the founder of the Company and has been its Chief Executive Officer
        since its inception in 1990. He has been a Director of the Company since
        March
        1, 1995. He has overall responsibility for the day-to-day operations of the
        Company and its subsidiaries. Prior to forming the Company, Mr. Kohl was
        the
        Managing Director of Dialbright Company Limited, a camera manufacturer located
        in China. Mr. Kohl received a degree in mechanical engineering and has over
        twenty year’s experience in managing factories and manufacturing operations in
        China. Mr. Kohl is a German national and resides in Hong Kong.
  **Satoru
        Saito** .
        Mr.
        Saito has been employed by the Company since its inception and has been a
        Director since September 14, 1996. Mr. Saito’s responsibilities include
        supervision of sales and marketing in the metal manufacturing division. Mr.
        Saito has extensive experience in working with Japanese companies in Japan
        and
        China. Mr. Saito is a Japanese national and resides in Hong Kong.
  **Fong
        Po Shan** .
        Ms.
        Fong was employed as a Chief Financial Officer and Secretary of the Company
        in
        January 1998. Ms. Fong’s responsibilities include planning financial development
        and setting up the internal systems. From 1995-1997, Ms. Fong worked at Philips
        Hong Kong Limited and KONE Elevator (HK) Limited as a Management Accountant
        and
        Financial Control and Supply Manager, respectively. From 1991-1994 Ms. Fong
        was
        employed as an Accounting Manager of the Company. She is a member of CPA
        Australia and Hong Kong Institute of Certified Public Accountants. She graduated
        from Simon Fraser University with a Bachelor Degree in Business Administration
        in Canada in 1990 and received a Masters in Accounting from the Charles Stuart
        University in 1994.
  -
            45
            -
  **Tiko
        Aharonov** .
        Mr.
        Aharonov has been a Director of the Company since its inception in 1990 and
        was
        a General Manager of the Company’s camera operations from 1998 to 2004. Until
        the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as
        the General Manager of the Bulgarian operations. Mr. Aharonov currently is
        a
        Director of several unaffiliated Israeli companies. He was a bank manager
        for a
        leading Israeli commercial and retail bank in the past five years has operated
        his own real estate and investment company for high net worth individuals
        desiring to invest in real estate in Israel.
  **May
        Tsang Shu Mui** .
        Ms.
        Tsang has been the Company’s Factory Manager in charge of camera manufacturing
        and a Director of the Company since 1990. In 2001, Ms. Tsang became the
        Company’s Administration Manager. Ms. Tsang is a Chinese national and resides in
        Hong Kong.
  **Quan
        Vinh Can (Joseph)** .
        Mr.
        Quan has been employed as the Company’s Factory Manager since 1994. He is
        responsible for all of the Company’s manufacturing operations. Mr. Quan joined
        the Company’s metal stamping operations in 1990 as an assistant Production
        Manager. He graduated from the national Taiwan University with a Bachelors
        Degree in Electrical Engineering in 1974.
  **Benson
        Lee** .
        Mr. Lee
        was the founder of Hi-Lite Camera Company has been a director of the Company
        since 1991. Mr. Lee has been involved in property investment and development
        in
        Hong Kong, China and the U.S. over the past five years and has more than
        30
        years of manufacturing and business experience.
  **Mark
        Majzner** .
        Mr.
        Majzner was appointed as a director of the Company in November 2004. Mr.
        Majzner
        has been the managing director of Antipodes Premium Wines AB, a Swedish importer
        of Australian wines that he founded in May 2004. From August 2002 to May
        2004,
        Mr. Majzner served in Stockholm as the business affairs director for Naxos
        Group, the world’s leading independent classical music CD-company based in Hong
        Kong. Mr. Majzner attended Stockholm University’s International Executive Master
        of Business Administration program during 2001 until his graduation in August
        2002. He also previously served as interim chief executive officer for Virionyx
        Corporation, a New Zealand- and Australia-based biotechnology company, and
        as
        chief executive officer of Milestone Ventures Australia Pty Ltd, an e-commerce
        development company, and managing director of US Capital Consultant Pty Ltd.,
        a
        business consulting firm. Majzner served as chief financial officer and
        corporate secretary of Highway Holdings Limited from October 1994 through
        May
        1997, and was responsible for managing the company’s initial public offering in
        December 1996.
  **Dirk
        Hermann.** Dr.
        Hermann was appointed to the Board of Directors in January 2003. Dr. Hermann
        currently serves as the regional marketing manager for the southwestern region
        of Germany for Allianz Versicherungs-AG. He joined Allianz, the German insurance
        firm, in 1994 as a marketing executive assistant based in Munich. Prior,
        he held
        a marketing position with MSU Management Consulting GmbH. He began his marketing
        career with Gruber, Titze and Blank GmbH, a management consulting firm based in Germany. Dr. Hermann graduated from the University
        of
        Konstanz in Germany with a bachelor’s degree in business administration. He also
        holds a master’s degree in business administration from the University of St.
        Gallen in Switzerland. He earned a Ph.D. degree in business administration
        from
        the University of Leipzig, in Germany.
  -
            46
            -
  Dr.
        Hermann is the brother-in-law of Roland Kohl. Other than the foregoing
        relationship, there is no family relationship between any of the above-named
        officers, directors or employees. To the Company’s knowledge, no arrangement or
        understanding exists between any such director and executive officer and
        any
        major shareholder, customer, supplier or other party pursuant to which any
        director or executive officer was elected as a director or executive officer
        of
        the Company.
  **Board
        Compensation**
  During
        the past fiscal year, the Company paid each non-executive director (Messrs.
        Lee,
        Hermann, Noonan, Aharonov and Majzner) an annualized director’s fee of $6,000
        (Mr. Majzner joined the Board of Directors in November and received a fee
        of
        $2,917), and reimbursed them for their reasonable expenses incurred in
        connection with their services as directors (Terrence Noonan resigned as
        a
        director on June 25, 2005). In addition, members of any Board committee are
        paid
        an additional fee of $1,000 per year for each committee on which they serve.
        In
        the past, the Company has also granted stock options to its non-executive
        director, outside directors, although the Company did not grant any options
        to
        its directors during the fiscal year ended March 31, 2005.
  **Board
        Practices**
  Directors
        of the Company are elected each year at the Company’s annual meeting of
        shareholders and serve until their successors take office, or until their
        death,
        resignation or removal. The Company generally holds its annual meeting of
        shareholders within 90 days after the filing of its Annual Report on Form
        20-F
        with the Commission. Executive officers serve at the pleasure of the Board
        of
        Directors of the Company. As of the date of this Annual Report, there are
        no
        agreements with any of the Directors that would provide the Directors with
        any
        benefits upon termination of employment.
  *Audit
        Committee* The
        members of the both the Audit Committee of the Board of Directors are Benson
        Lee, Mark Majzner and Dirk Hermann. (During the past fiscal year, until his
        resignation on June 25, 2005, Terrence A. Noonan was an independent director
        who
        served as a member of the Company’s Audit Committee and Compensation Committee.)
        The Audit Committee reviews, acts on and reports to the Board of Directors
        on
        various auditing and accounting matters, including the selection of the
        Company’s auditors, the scope of the annual audits, fees to be paid to the
        auditors, the performance of the independent auditors, any additional services
        to be provided by the auditors, and the Company’s accounting practices. Each of
        these individuals is a non-employee director and is independent as defined
        under
        the Nasdaq Stock Market’s listing standards, and each has significant knowledge
        of financial matters (two of the members have received advanced degrees in
        business administration). Mr. Majzner has been designated by the Board as
        the
“audit committee financial expert” as defined under Item 401(h) (2) of
        Regulation S-K of the Securities Exchange Act of 1934, as amended. The Audit
        Committee met once during fiscal 2005. The Audit Committee operates under
        a
        formal charter that governs its duties and conduct.
  -
            47
            -
  *Compensation
        Committee* During
        the past fiscal year, the Compensation Committee of the Board of Directors
        consisted of Benson Lee and Terrence A. Noonan. The Compensation Committee
        administers the Company’s 1996 Stock Option Plan and provides recommendations
        for the salaries and incentive compensation of the executive officers of
        the
        Company, which compensation levels are then approved by the Board of Directors.
  To
        date,
        all eight of the Company's directors (four of whom are independent directors)
        have participated in the selection of qualified director nominees. Accordingly,
        the Board of Directors has not found it necessary to have a separate Nominating
        Committee. However, the Board is currently considering establishing a Nominating
        Committee consisting of independent directors. The Board of Directors has
        not
        established any specific minimum qualifications for director candidates or
        any
        specific qualities or skills that a candidate must possess in order to be
        considered qualified to be nominated as a director. Qualifications for
        consideration as a director nominee may vary according to the particular
        areas
        of expertise being sought as a complement to the existing board composition.
        In
        making its nominations, the Board of Directors generally will consider, among
        other things, an individual’s business experience, industry experience,
        financial background, breadth of knowledge about issues affecting our company,
        time available for meetings and consultation regarding company matters and
        other
        particular skills and experience possessed by the individual.
  **Employees**
  As
        of
        March 31, 2005, the Company a total of 1,525 persons were working on a full-time
        basis for the Company. Of these, all workers in China were supplied to the
        Company by the BFDC under the BFDC Agreements. The persons working in Germany
        and in Hong Kong were employees of the Company’s subsidiaries. Of the foregoing
        workers and employees, 53 were engaged in the administration of the Company,
        1,405 were engaged in manufacturing (including research and development,
        design,
        engineering, quality control, and shipping), 25 were engaged in marketing,
        and
        the balance (42 employees) were engaged in miscellaneous other supporting
        functions. Of the foregoing workers/employees, 1,481 were employed in China,
        36
        in Hong Kong, and eight in Germany. The employees in Germany are principally
        engaged in marketing. The Company requires most of its Hong Kong staff to
        regularly visit the Company’s China facilities to oversee local management and
        provide technical assistance.
  The
        persons working at the Company’s facilities in China are employed by BFDC
        pursuant to the BFDC Agreements. The number of workers employed by the BFDC
        fluctuates largely due to the availability of workers and the time of year.
        The
        seasonality is also dependent, to a lesser extent, on orders held by the
        Company. The Company has experienced temporary shortages of labor and has
        taken
        action to attract additional workers from other provinces of China to its
        factory complex in Long Hua, Shenzhen. From time to time, labor supply has
        been
        adversely affected primarily due to transportation difficulties in bringing
        workers to Shenzhen due to flooding or other natural disasters as well as
        seasonal demands on labor such as harvesting when the mainly rural-based
        laborers are required to return to their village. Due to the nature of the
        labor
        force working at facilities such as the Company’s in Shenzhen, the Company
        experiences high turnover of employees annually.
  -
            48
            -
  The
        Company’s employees are not parties to any labor union or collective bargaining
        agreement, and the Company has, to date, not experienced any material labor
        stoppages. The Company believes that its relations with employees are good.
  **Options
        of Directors and Senior Management**
  The
        following table sets forth the number of Common Shares that each current
        Director and executive officer of the Company could purchase as of June 27,
        2005, together with the exercise price of such options and the expiration
        date
        of the options.
  Name
                  of Beneficial Owner Or Identity of Group
              Number
                  of Common Shares
              Expiration
                  Date
              Exercise
                  PriceRoland
                  W. Kohl
              100,000
              June
                  2, 2008
              $1.55Tiko
                  Aharonov
              3,000
              June
                  2, 2008
              $1.476,000
              October
                  27, 2008
              $3.17May
                  Tsang Shu Mui
              3,000
              June
                  2, 2008
              $1.476,000
              October
                  27, 2008
              $3.17Benson
                  Lee
              6,000
              October
                  27, 2008
              $3.17Satoru
                  Saito
              6,000
              October
                  27, 2008
              $3.17Dirk
                  Hermann
              2,000
              June
                  2, 2008
              $1.474,000
              October
                  27, 2008
              $3.17Quan
                  Vinh Can (Joseph)
              3,000
              June
                  2, 2008
              $1.476,000
              October
                  27, 2008
              $3.17
 
 For
        additional information regarding the share ownership in the Company by the
        Company’s directors, executive officers, and principal shareholders is set forth
        in Item 7, “Major Shareholders and Related Party Transactions,”
        below.
  The
        Company has adopted the 1996 Stock Option Plan (the “Option Plan”) that
        currently covers 600,000 shares of the Common Shares. The Option Plan provides
        for the grant of options to purchase Common Shares to employees, officers,
        directors and consultants of the Company. The Option Plan is administered
        by the
        Compensation Committee appointed by the Board, which determines the terms
        of the
        options granted, including the exercise price (provided, however, that the
        option price shall not be less than the fair market value or less than the
        par
        value per share on the date the options granted), the number of Common Shares
        subject to the option and the option’s exercisability. As of March 31, 2005,
        options granted under the Option Plan to purchase a total of 142,150 Common
        Shares were still outstanding. The maximum term of options granted under
        the
        Option Plan is five years. The average weighted exercise price of all options
        outstanding on March 31, 2005 was $1.94 per share.
  -
            49
            -
  In
        addition to the options that can be granted under the Option Plan, the Company
        also granted Common Share purchase rights to certain of the directors and
        key
        employees prior to its December 1996 initial public offering, of which rights
        to
        purchase a total of 100,000 of Common Shares were still outstanding as of
        June
        20, 2005 (the rights for the purchase of 100,000 Common Shares that were
        granted
        to Mr. Kohl in June 2003 to replace 100,000 share purchase rights that were
        granted to him in 1996, and which rights expired in January 2003). The average
        weighted exercise price of the Common Share purchase rights outstanding on
        March
        31, 2005 was $1.55 per share.
  As
        of
        June 20, 2005 the Company had outstanding stock options and Common Share
        purchase rights for an aggregate total of 242,150 Common Shares.
  As
        part
        of the compensation that the Company has agreed to issue to Mr. Kohl, the
        Company’s Chief Executive Officer, commencing on April 1, 2004 and continuing
        annually thereafter, 29,154 Common Shares. The 29,154 shares issuable for
        the
        fiscal year ended March 31, 2005 were physically issued in June
        2005.
  **Item
        7.**  **Major
        Shareholders and Related Party Transactions**
  Major
        Shareholders .
        The
        Company is not directly or indirectly owned or controlled by any other
        corporation or any foreign government. The following table sets forth, as
        of
        June 27, 2005, certain information with respect to the beneficial ownership
        of
        the Company’s Common Shares by each person (i) who is an executive officer or
        director of the Company, or (ii) known by the Company to own beneficially
        more
        than 5% of the outstanding Common Shares outstanding as of such date.
  Name
                  of Beneficial Owner or Identity of Group(1)
              
              Number
                  of Common Shares Beneficially Owned
              
              Percent
                  Beneficially Owned(**)Roland
                  W. Kohl
              
              
              443,951
              (2)
              
              13.23
              %Mark
                  Majzner
              
              
              5,666
              
              
              *Benson
                  Lee
              
              
              339,830
              (4)
              
              10.60
              %Tiko
                  Aharonov
              
              
              268,900
              (5)
              
              8.28
              %Dirk
                  Hermann
              
              
              6,000
              (3)
              
              *Satoru
                  Saito
              
              
              355,980
              (4)
              
              10.61
              %May
                  Tsang Shu Mui
              
              
              69,171
              (5)
              
              2.06
              %Cartwright
                  Investments Limited
              
              
              346,830
              
              
              10.34
              %Fong
                  Po Shan
              
              
              1,283
              
              
              *Quan
                  Vinh Can
              
              
              37,665
              (5)
              
              *Seth
                  W. Hamot
              
              
              165,309
              (6)
              
              4.93
              %
 
 *
              Less
                  than 1%.
 **
              Under
                  the rules of the Securities and Exchange Commission, shares of
                  Common
                  Shares that an individual or group has a right to acquire within
                  60 days
                  pursuant to the exercise of options or warrants are deemed to be
                  outstanding for the purpose of computing the percentage ownership
                  of such
                  individual or group, but are not deemed to be outstanding for the
                  purpose
                  of computing the percentage ownership of any other person shown
                  in the
                  table.
 
 -
            50
            -
  (1)
              The
                  address of each of the named holders is c/o Highway Holdings Limited,
                  Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
                  Shui New
                  Territories Hong Kong.
 (2)
              Includes
                  stock options to purchase 100,000 Common Shares which are currently
                  exercisable.
 (3)
              Represents
                  currently exercisable stock options to purchase Common
                  Shares.
 (4)
              Includes
                  stock options to purchase 6,000 Common Shares which are currently
                  exercisable.
 (5)
              Includes
                  stock options to purchase 9,000 Common Shares which are currently
                  exercisable.
 (6)
              According
                  to a Schedule 13G filed on February 4, 2005, Mr. Seth W. Hamot
                  is the
                  President of Roark, Rearden & Hamot LLC, which is the general partner
                  of Costa Brava Parnerhip L.P., the owner of the 165,309
                  shares.
 
 There
        are
        no arrangements known to the Company, the operation of which may at a subsequent
        date result in a change in control of the Company. All holders of the Common
        Shares have the same voting rights, and the Company’s major shareholders do not
        have different voting rights.
  Related
        Party Transactions .
  The
        Company did not engage in any related party transactions during the fiscal
        year
        ended March 31, 2005.
  **Item
        8.**  **Financial
        Information.**
  The
        Company’s consolidated financial statements for the three-year period ended
        March 31, 2005 are set forth under Item 18 “Financial Statements.” The
        Company’s unaudited quarterly financial information for the year ended March 31,
        2005 and 2004 are set out below:
  **1****st******
                **Quarter**
              
              **2****nd******
                **Quarter**
              
              **3****rd******
                **Quarter**
              
              **4****th******
                **Quarter**2005Net
                  Sales
              
              $
              6,148
              
              $
              6,404
              
              $
              7,309
              
              $
              7,817Gross
                  profit
              
              
              1,476
              
              
              1,107
              
              
              1,198
              
              
              1,349Operating
                  income (loss)
              
              
              342
              
              
              (26
              )
              
              (169
              )
              
              (416
              )Net
                  income (loss)
              
              
              346
              
              
              28
              
              
              116
              
              
              (642
              )Earnings
                  (loss) per share - basic
              
              
              0.11
              
              
              0.01
              
              
              0.04
              
              
              (0.21
              )Earnings
                  (loss) per share - diluted
              
              
              0.10
              
              
              0.01
              
              
              0.03
              
              
              (0.21
              )2004Net
                  Sales
              
              $
              5,953
              
              $
              6,234
              
              $
              6,457
              
              $
              6,712Gross
                  profit
              
              
              1,139
              
              
              1,128
              
              
              1,198
              
              
              1,629Operating
                  income
              
              
              78
              
              
              209
              
              
              76
              
              
              511Net
                  income
              
              
              159
              
              
              201
              
              
              214
              
              
              408Earnings
                  per share - basic
              
              
              0.05
              
              
              0.07
              
              
              0.07
              
              
              0.13Earnings
                  per share - diluted
              
              
              0.05
              
              
              0.06
              
              
              0.07
              
              
              0.12
 
 Dividend
        Policy .
        The
        Company paid a cash dividend of $0.10 per share in August 2004 to all holders
        of
        its common shares and a cash dividend of $0.08 per share in August 2003.
        Prior
        to the 2003 dividend, the Company had not paid a dividend since the fiscal
        year
        ended March 31, 2000 due to its operating losses. Since the Company has now
        returned to profitability, the Company is considering reinstating its policy
        of
        paying cash dividends annually. However, any future dividend will be paid
        at the
        discretion of the Board of Directors and will depend upon, among other things,
        the Company’s net profit after taxes, the anticipated future earnings of the
        Company, the success of the Company’s business activities, the Company’s capital
        requirements, and the general financial conditions of the Company. Although
        it
        is the Company’s intention to pay dividends during profitable fiscal years, no
        assurance can be given that the Company will pay, in fact, pay any dividends
        in
        the future even if its has a profitable year or is otherwise capable of doing
        so.
  -
            51
            -
  Legal
        Proceedings .
  In
        the
        Matter of Certain Lens-Fitted Film Packages ,
        Inv.
        No. 337-TA-406 Consolidated Enforcement and Advisory Opinion Proceeding.
        The
        International Trade Commission (“ITC”) issued a “Notice Of Institution Of Formal
        Enforcement And Advisory Opinion Proceedings” on July 31, 2001. The proceedings
        are directed to Lens-Fitted Film Packages which are inexpensive, single use
        cameras. The Notice named a number of parties to the Formal Enforcement
        proceedings and a number of parties to the Advisory Opinion proceedings.
        The
        Company was originally named as an Advisory Opinion respondent. The ITC referred
        the case to an Administrative Law Judge (“ALJ”) to conduct a hearing and address
        other issues pertaining to the proceedings. Subsequent to the initial filing,
        a
        motion was filed with the ALJ to add the Company as an Enforcement respondent.
        This motion was granted by the ALJ.
  On
        February 11-16, 2002, a hearing was conducted. On May, 2, 2002 the ALJ made
        an
        Initial Determination regarding the merits of the case. At issue for the
        Company
        were certain claims in four US Patents assigned to Fuji Photo Film Co., Ltd.:
        US
        Patent No. 4,884,087 (“the ‘087Patent”), US Patent No. 5,381,200 (“the ‘200
        Patent”), US Patent No. Re 34,168 (“the ‘168 Patent”), and US Patent No.
        4,972,649 (the ‘649 Patent”) and whether the Company’s HL-1 model camera
        violated one or more of those patents. During the proceedings preparatory
        to the
        hearing, the Company sought to introduce its HL-2 camera into the proceedings.
        The HL-2 camera was designed to be outside the scope of all patents at issue
        in
        the proceeding, and in particular the ‘200 Patent and the ‘649 Patent.
        Introduction of the HL-2 camera into the ITC proceeding was denied by the
        ALJ.
  In
        the
        Initial Determination regarding the Company, the ALJ found that the HL-1
        camera
        did not infringe the ‘087 Patent and the ‘168 Patent. The ALJ also found that
        the HL-1 camera infringed the ‘200 Patent and the ‘649 Patent. The ALJ did not
        assess any enforcement sanctions against the Company.
  On
        August
        7, 2002, the ITC decided not to review any of the ALJ's findings concerning
        these five patent claims. Nonetheless, due to further disputes between Fuji
        and
        other parties, additional hearings to which the Company was not a party,
        were
        required. The ALJ made his determinations and the ITC adopted the ALJ's views
        and issued a final order on May 15, 2003. In its order, the ITC also adopted
        the
        ALJ's recommendations concerning relief. As a result, the Company is subject
        only to a general exclusion order which is applicable to all companies importing
        products into the United States prohibiting them from importing items that
        infringe the patents at issue in the ITC proceeding. The ITC rejected Fuji's
        request to issue a cease and desist order against the Company or to impose
        civil
        penalties upon it.
  -
            52
            -
  On
        October 7, 2002, while further proceedings between Fuji and other parties
        were
        taking place before the ALJ, Fuji filed a notice of appeal of the decision
        by
        the ITC on the Company’s issues. The appeal identified the International Trade
        Commission as the respondent and was filed with the U.S. Court of Appeals
        for
        the Federal Circuit. On November 26, 2002, the Court of Appeals granted the
        Company's motion to intervene in the appeal. The Court of Appeals subsequently
        stayed and suspended its review to allow the ITC to reach a final
        decision.
  On
        October 7, 2004, the Court of Appeals affirmed the ITC's conclusion that
        the
        Company's H-1 camera did not infringe the asserted claims of 2 of the patents
        (the '087 and '495 patents). The Court did, however, vacate its decision
        on the
        ('649 patent) remanded it for a new determination on infringement.
  The
        Company is not involved in any other material legal proceedings.
  **Item
        9.**  **The
        Listing**
  The
        Company’s Common Shares are currently traded on The Nasdaq SmallCap Market under
        the symbol “HIHO” and are not listed for trading in any trading market outside
        the United States. On June 20, 2005, the last reported sale price of our
        common
        shares on The Nasdaq SmallCap Market was $3.75 per share. As of June 20,
        2005,
        there were 52 holders of record of the Company’s Common Shares. However, the
        Company believes that are a significantly greater number of “street name”
        shareholders of the Common Shares.
  The
        following table sets forth the high and low closing sale prices as reported
        by
        The Nasdaq Stock Market for years for each of the last five years ended March
        31, 2005:
  Year
                  Ended
              
              High
              
              LowMarch
                  31, 2005
              
              $
              5.80
              
              $
              3.09March
                  31, 2004
              
              $
              7.39
              
              $
              1.40March
                  31, 2003
              
              $
              2.00
              
              $
              0.47March
                  31, 2002
              
              $
              1.33
              
              $
              0.60March
                  31, 2001
              
              $
              1.625
              
              $
              0.625
 
 The
        following table sets forth the high and low closing sale prices of the Common
        Shares as reported by Nasdaq during each quarter of the two most recent fiscal
        years.
  Quarter
                  Ended
              
              High
              
              LowMarch
                  31, 2005
              
              $
              4.75
              
              $
              4.15December
                  31, 2004
              
              $
              4.75
              
              $
              3.09September
                  30, 2004
              
              $
              5.80
              
              $
              4.18June
                  30, 2004
              
              $
              5.60
              
              $
              4.00March
                  31, 2004
              
              $
              7.39
              
              $
              4.72December
                  31, 2003
              
              $
              3.91
              
              $
              2.65September
                  30, 2003
              
              $
              4.60
              
              $
              1.99June
                  30, 2003
              
              $
              2.10
              
              $
              1.40
 
 -
            53
            -
  The
        following table sets forth the high and low closing sale prices of the Company’s
        Common Shares as reported by The Nasdaq Stock Market during each of the most
        recent six months.
  Month
                  Ended
              
              High
              
              LowMay
                  31, 2005
              
              $
              3.82
              
              $
              3.50April
                  30, 2005
              
              $
              4.80
              
              $
              4.02March
                  31, 2005
              
              $
              4.70
              
              $
              4.42February
                  28, 2005
              
              $
              4.72
              
              $
              4.15January
                  31, 2005
              
              $
              4.75
              
              $
              4.15December
                  31, 2004
              
              $
              4.69
              
              $
              4.17
 
 **Item
        10.**  **Additional
        Information**
  **Share
        Capital**
  The
        Company’s authorized capital consists of 20,000,000 Common Shares, $0.01 par
        value per share. As of March 31, 2005 and June 20, 2005, there were 3,316,154
        and 3,355,598 Common Shares, respectively, outstanding, net of 37,800 treasury
        shares, all of which was fully paid.
  The
        number of shares outstanding could increase by the shares issued upon the
        exercise of currently issued and outstanding options (see, “Item 6, Share
        Ownership,” above) and by an option to purchase 50,000 shares of Common Shares
        that the Company issued as payment for certain legal services it received
        in
        connection with proceedings initiated by Fuji Photo Film Co., Ltd. before
        the
        International Trade Commission. These proceedings have now been terminated.
        The
        foregoing options are exercisable at a price of $1.00 per share and expire
        on
        December 29, 2005.
  As
        of
        March 31, 2005, the Company no longer had any warrants to purchase Common
        Shares
        outstanding.
  **Memorandum
        And Articles Of Association**
  Highway
        Holdings Limited is registered at Craigmuir Chambers, P.O. Box 71, Road Town,
        Tortola, British Virgin Islands and has been assigned company number 32576.
        The
        objectives or purposes of the Company are to engage in any act or activity
        that
        is not prohibited under British Virgin Islands law as set forth in Clause
        4 of
        the Memorandum of Association. The Company does not believe that there are
        any
        restrictions in its charter or under British Virgin Island law that materially
        limit the Company’s current or proposed operations.
  Regulation
        60 of the Company’s Articles of Association (the “Articles”) provides that a
        favorable vote of a majority of the Company’s independent directors is required
        as to any related party transaction between the Company and any 5% or more
        members of the Company and/or officer or director of the Company. It also
        provides that the Company shall use its best efforts to at all times maintain
        at
        least 2 independent directors. However, a director may vote or consent with
        respect to any contract or arrangement in which the director is materially
        interested, if the material facts of the interest of each director in the
        agreement or transaction and his 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. Regulation 88 of the Articles allows the directors to vote
        compensation to themselves in respect of services rendered to the
        Company.
  -
            54
            -
  There
        is
        no provision in the Articles for the mandatory retirement of directors.
        Directors are not required to own shares of the Company in order to serve
        as
        directors.
  The
        authorized share capital of the Company is $200,000 divided into 20,000,000
        Common Shares with par value of $0.01 each. Holders of our Common Shares
        are
        entitled to one vote for each whole share on all matters to be voted upon
        by
        members, 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 surplus in accordance with
        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.
  Regulation
        17 provides that the Company may purchase, redeem or otherwise acquire and
        hold
        its own shares out of surplus or in exchange for newly issued shares of equal
        value. However, no purchase, redemption or other acquisition shall be made
        unless, immediately after the purchase, redemption or other acquisition the
        Company will be able to satisfy its liabilities as they become due in the
        ordinary course of its business, and the Company will not be insolvent.
  Regulation
        10 of the Articles provide that without prejudice to any special rights
        previously conferred on the holders of any existing shares, the unissued
        shares
        in the Company are at the disposal of the directors who may offer, allot,
        grant
        options over or otherwise dispose of shares to such persons, at such times
        and
        upon such terms and conditions as the Company may by resolution of the directors
        determine.
  Clause
        10
        of the Memorandum of Association provides that if at any time the authorized
        share capital is divided into different classes or series of shares, the
        rights
        attached to any class or series may be varied with the consent in writing
        of the
        holders of not less than three fourths of the issued shares of that class
        or
        series and of the holders of not less than three fourths of any other class
        or
        series of shares which may be affected by such variation.
  Clause
        15
        of the Memorandum of Association (which is subject to the provisions of
        regulation 60 of the Articles) provide that the Memorandum and Articles of
        Association of the Company may be amended by a resolution of members or a
        resolution of directors. Regulation 60 of the Articles provides that any
        proposed change in the Memorandum and Articles of Association not otherwise
        approved by the majority vote of the shares held by the Company’s non-management
        members shall be approved by a majority of the Company’s directors and not
        disapproved by a majority of the Company’s independent directors. Subject to the
        preceding sentence, our Board of Directors without shareholder approval may
        amend our Memorandum and Articles of Association. This includes amendments
        to
        increase or reduce our authorized capital stock. The Company’s ability to amend
        its Memorandum and Articles of Association without shareholder approval could
        have the effect of delaying, deterring or preventing a change in control
        of the
        Company, including a tender offer to purchase our Common Shares at a premium
        over the then current market price.
  -
            55
            -
  Provisions
        in respect of the holding of general meetings and extraordinary general meetings
        are set out in Regulations 38 to 58 of the Articles and under the International
        Business Companies Act. The directors may convene meetings of the members
        of the
        Company at such times and in such manner and places as the directors consider
        necessary or desirable, and they shall convene such a meeting upon the written
        request of members holding 10 percent or more of the outstanding voting shares
        in the Company. An annual meeting of members is held for the election of
        directors of the Company and in the manner provided in the Articles of
        Association. Any other proper business may be transacted at the annual meeting.
        If the annual meeting for election of directors is not held on the date
        designated therefore, the directors shall cause the meeting to be held as
        soon
        thereafter as convenient. If the Company fails to hold the annual meeting
        for a
        period of 30 days after the date designated for the annual meeting, or if
        no
        date has been designated for a period of 13 months after the Company’s last
        annual meeting, a court of competent jurisdiction of the British Virgin Islands
        may summarily order a meeting to be held upon the application of any member
        or
        director.
  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
        or
        vote such securities of the Company.
  There
        are
        no provisions in the Memorandum of Association or Articles of Association
        governing the ownership threshold above which shareholder ownership must
        be
        disclosed.
  The
        full
        text of the Articles and Memorandum of the Company are attached to this Annual
        Report on Form 20-F as Exhibit 1.1.
  **Material
        Contracts**
  The
        following is a summary of each material contract, other than contracts entered
        into in the ordinary course of business, to which the Company or any member
        of
        the group is a party, for the two years immediately preceding the filing
        of this
        Annual Report:
  Effective
        October 1, 2003, Nissin Precision Metal MFG, Ltd., the Company’s metal stamping
        subsidiary, entered into that certain Purchase and Sales Agreement (worldwide
        FRAME) with OSRAM Gesellshaft mit beschraenkter Haftung (”OSRAM”), with OSRAM
        acting on its own behalf and on behalf of certain of its subsidiaries. The
        agreement establishes the procedures under which OSRAM or its listed
        subsidiaries can order and purchase electronic ballast casings from the Company.
        Under the agreement, the Company has agreed to manufacture, package and ship
        these products for OSRAM and its subsidiaries under the terms and conditions,
        and at the fixed specified prices listed in the agreement. Although OSRAM
        agreed
        to purchase at least 60% of it annual needs from the Company, there is no
        minimum number that OSRAM must purchase from the Company. The Purchase and
        Sales
        Agreement shall remain in effect until September 30, 2005, but may be extended
        by the parties for successive one-year periods by agreeing on a new price
        list
        for the following year.
  -
            56
            -
  Effective
        October 15, 2003, Nissin Precision Metal MFG, Ltd. entered into that certain
        Long Term Sales and Purchase Agreement with OSRAM. Under the agreement, the
        Company agreed to manufacture various lighting products for OSRAM at fixed
        specified prices. The Company has agreed to manufacture an amount of such
        lighting products as OSRAM may, from time to time order. The agreement was
        extended through September 2005.
  On
        April
        29, 2004, Kayser Technik Ltd., the Company’s metal manufacturing subsidiary,
        entered into that certain General Business Agreement with Berger Lahr GmbH
&
        Co. KG for the manufacture by Kayser Technik Ltd. of motor coils and such
        other
        products as the parties may subsequently agree upon. The term of the agreement
        expires in December 2010.
  The
        Company is also a party to (i) the BFDC Agreements and related agreements
        described in Item 4 “Information on our Company” and filed as exhibits to the
        Company’s Securities and Exchange Commission filings, (ii) the leases, and
        extensions thereof, described in the Property, Plant and Equipment section
        of
        Item 4 “Information on our Company” and filed as exhibits to the Company’s
        Securities and Exchange Commission filings, and (iii) the bank lines of credit
        described in the Liquidity and Capital Resources section under Item 5 “Operating
        and Financial Review and Prospects”.
  **Exchange
        Controls**
  There
        are
        no exchange control restrictions on payment 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 officers 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. Taxation
        and
        repatriation of income regarding the Company’s China operations are regulated by
        Chinese laws and regulations. To date, these controls have not had and are
        not
        expected to have a material impact on the Company’s financial results. There are
        no material British Virgin Islands laws which impose foreign exchange controls
        on the Company or that affect the payment of dividends, interest or other
        payments to nonresident holders of the Company’s securities.
  **Taxation**
  No
        reciprocal tax treaty regarding withholding tax exists between the U.S. and
        the
        British Virgin Islands. Under current British Virgin Islands law, dividends,
        interest or royalties paid by the Company to individuals and gains realized
        on
        the sale or disposition of shares are not subject to tax as long as the
        recipient is not a resident of the British Virgin Islands. The Company is
        not
        obligated to withhold any tax for payments of dividends and shareholders
        receive
        gross dividends irrespective of their residential or national
        status.
  **Documents
        On Display**
  The
        documents concerning the Company which are referred to in this Annual Report
        may
        be inspected by shareholders of this Company at the offices of this Company
        in
        Hong Kong.
  -
            57
            -
  **Item
        11.**  **Quantitative
        and Qualitative Disclosures About Market Risk.**
  The
        Company pays its labor costs and overhead expenses in renminbi, the currency
        of
        China (the basic unit of which is the yuan). However, the Company sells most
        of
        our products in Hong Kong dollars, U.S. dollars, and in euros. The exchange
        rate
        between the U.S. dollar and Hong Kong dollar has remained stable, as has
        the
        exchange rate between the yuan and the U.S. dollar. However, the exchange
        rate
        between the euro and the U.S. and Hong Kong dollars has fluctuated, resulting
        in
        currency exchange gains and losses. Since the Company engages in transactions
        in
        Europe that are denominated in euros, the Company is subject to fluctuations
        in
        the rates of exchange between the dollar and the euro, which fluctuations
        will
        affect the Company’s results of operations. An increase in the value of a
        particular currency (such as the euro) relative to the dollar will increase
        the
        dollar reporting value for transactions in that particular currency, and
        a
        decrease in the value of that currency relative to the dollar will decrease
        the
        dollar reporting value for those transactions. This effect on the dollar
        reporting value for transactions is generally only partially offset by the
        impact that currency fluctuations may have on costs. The United States and
        certain European countries have recently been calling for the re-valuation
        of
        the renminbi, which revaluation would result in the appreciation of the
        renminbi. Should the Chinese government allow a significant renminbi
        appreciation, the Company’s cost structure and pricing could change and have a
        material negative effect on its operations, sales and financial
        results.
  The
        Company has not engaged in currency hedging transactions to offset the risks
        associated with variations in currency exchange rates. Consequently, significant
        foreign currency fluctuations and other foreign exchange risks may have a
        material adverse effect on the Company’s business, financial condition and
        results of operations. The Company does not currently own any market risk
        sensitive instruments. However, the Company may in the future undertake hedging
        or other transactions or invest in market risk sensitive instruments if it
        determines that such instruments can offset these risks is a sound and
        cost-efficient manner.
  The
        Company is also exposed to interest rate fluctuations as a result of the
        short-term investments that it makes and the borrowings it incurs. The Company
        maintains its excess cash in short-term borrowings that are subject to interest
        rate fluctuations. The Company had $1,449,000 of short-term borrowings that
        are
        subject to interest rate changes and $967,000 of long-term borrowings
        outstanding as of March 31, 2005. However, taking into consideration that
        the
        Company had cash and cash equivalents of $3,948,000 available as of March
        31,
        2005, the Company believes that its interest rate risk on these borrowing
        was
        acceptable.
  **Item
        12.**  **Description
        of Securities Other Than Equity Securities**
  Not
        applicable.
  **PART
        II**
  **Item
        13.**  **Defaults,
        Dividend Arrearages and Delinquencies.**
  Not
        applicable.
  -
            58
            -
  **Item
        14.**  **Material
        Modification to the Rights of Securities Holders and Use of
        Proceeds.**
  Not
        applicable.
  **Item
        15.**  **Controls
        and Procedures.**
  As
        required by Rule 13a-14 under the Securities Exchange Act of 1934,
        as of
        March 31, 2005, the Company carried out an evaluation of the effectiveness
        of
        the design and operation of the Company’s disclosure controls and procedures (as
        defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange
        Act
        of 1934. This evaluation was carried out under the supervision and with the
        participation of the Company’s Chief Executive Officer and Chief Financial
        Officer. The Company’s controls and procedures are designed and provided
        reasonable assurance of preventing errors and irregularities, and to ensure
        that
        information required to be disclosed in the Company’s reports filed or submitted
        under the Securities Exchange Act of 1934 recorded, processed, summarized
        and
        reported within the time periods specified in the Securities and Exchange
        Commission’s rules and forms. Disclosure controls and procedures include
        controls and procedures designed to ensure that information required to be
        disclosed in Company reports filed under the Exchange Act is accumulated
        and
        communicated to management, including the Company’s Chief Executive Officer and
        Chief Financial Officer as appropriate, to allow timely decisions regarding
        disclosures.
  There
        were no significant changes in the Company’s internal controls or in other
        factors that could significantly affect these controls subsequent to the
        date
        our Chief Executive Officer and our Chief Financial Officer completed their
        evaluation, nor were there any significant deficiencies or material weaknesses
        in the Company’s internal controls requiring corrective actions.
  **Item
        16.**  **Not applicable.**
  Item 16
        A. Audit
        Committee Financial Expert
 
 The
        Company’s Board of Directors has determined that Mr. Mark Majzner of the Audit
        Committee qualifies as an “audit committee financial expert” as defined by Item
        401(h) of Regulation S-K, adopted pursuant to the Securities Exchange Act
        of
        1934. Mr. Majzner has studied accounting in Australia and most recently
        g raduated
        with distinction from Stockholm University’s International Executive Master of
        Business Administration program. Until May 1997, Mr. Majzner was the past
        Chief
        Financial Officer of the Company. In addition, Mr. Majzner has held a number
        of
        positions as Chief Executive Officer and as a financial consultant to company’s
        seeking to be listed on the U.S. stock markets, that have provided Mr. Majzner
        with relevant experience in financial, accounting and auditing issues. Although
        not designated as t he
        Company’s Audit Committee “audit committee financial expert,” the Board of
        Directors believes that Dr. Hermann, also could have been designated as an
        “audit committee financial expert,” except for his lack of experience with U.S.
        accounting procedures. Dr.
        Hermann received bachelor’s degree in business administration from the
        University of Konstanz in Germany, a master’s degree in business administration
        from the University of St. Gallen in Switzerland, and a Ph.D. degree in business
        administration from the University of Leipzig, in Germany. In addition, each
        of
        the other members of the audit committee have extensive financial and business
        experience as presidents, chief operating officers, and directors of various
        public and private enterprises.
  -
            59
            -
  All
        of
        the members of the audit committee are independent non-executive directors.
        One
        of the directors and members of the audit committee, Dr. Hermann, has no
        affiliation with the Company or business relationship with the Company that
        would disqualify him as an independent director. However, Dr. Hermann is
        the
        brother-in-law of Roland Kohl, the Chief Executive Officer of the
        Company.
  Item 16
        B. Code
        of Ethics
 
 The
        Company has adopted a Code of Ethics for the Chief Executive Officer and
        Chief
        Financial Officer, which applies to the Company’s principal executive officer
        and to its principal financial and accounting officers. A copy of the Code
        of
        Ethics is attached as Exhibit 14.1. Shareholders can also obtain a
        copy of
        the Code of Ethics from:
  Highway
        Holdings Limited
 Suite
        810, Level 8, Landmark North
 39
        Lung
        Sum Avenue
 Sheung
        Shui
 New
        Territories, Hong Kong
  Attn:
        Chief Financial Officer
  Item 16
        C. Principal
        Accountant Fees and Services
 
 The
        Company’s independent public accountant for each of the fiscal years in the
        three-year period ended March 31, 2005 has been Deloitte Touche Tohmatsu.
        The
        auditor is selected annually by the Company’s Board of Directors and ratified by
        the shareholders at the Annual General Meeting. The Audit Committee has selected
        Deloitte Touche Tohmatsu as the auditor for the fiscal year ended March 31,
        2005
        and will propose to the Annual General Meeting convening on July 28, 2005
        that
        Deloitte Touche Tohmatsu be ratified as the auditor for that fiscal year.
  The
        following table sets forth the aggregate fees for professional services and
        other services rendered by Deloitte Touche Tohmatsu to the Company during
        the
        fiscal years ended March 31, 2004 and March 31, 2005.
  **2004**
              
              **2005**Audit
                  Fees (1)
              
              $
              105,000
              
              $
              149,000Audit-Related
                  Fees (2)
              
              
              -
              
              $
              6,000Tax
                  Fees (3)
              
              $
              19,000
              
              $
              67,000All
                  Other Fees
              
              
              -
              
              
              -Total
              
              $
              124,000
              
              $
              222,000
 -
              60
              -
 (1)
        Audit
        fees represent fees for professional services provided in connection with
        the
        audit of the Company’s consolidated financial statements and review of the
        Annual Report on Form 20-F, and audit services provided in connection with
        other
        statutory or regulatory filings.
  (2)
        Audit-related fees consist of assurance and related services reasonably related
        to the audit or a review of the Company’s financial statements.
  (3)
        Tax
        Fees include fees for the preparation of tax returns.
  As
        part
        of is policies and procedures, all audit related services, tax services and
        other services rendered by were Deloitte Touche Tohmatsu pre-approved by
        the
        Audit Committee.
  Item 16
        D. Exemptions
        From the Listing Standards for Audit Committees
 
 Not
        applicable
  Item
        16
        E. Purchases
        of Equity Securities by the Issuer and Affiliated Purchasers
 
 Not
        applicable
  **PART
        III**
  **Item
        17.**  **Not
        applicable**
  **Item
        18.**  **Financial
        statements.**
  See
        the
        Index to Consolidated Financial Statements accompanying this report beginning
        page F-1.
  **Item
        19.**  **Exhibits.**
  The
        following exhibits are filed as part of this annual report:
  1.1  Memorandum
        and Articles of Association, as amended, of Highway Holdings Limited,
        (incorporated by reference to Exhibit 1.1 of registrant's Form 20-F for the
        year
        ended March 31, 2001.)
 
 1.2  Amendment
        to Memorandum and Articles of Association, as filed on January 20, 2003
        (incorporated by reference to Exhibit 1.2 of registrant’s Form 20-F for the year
        ended March 31, 2002.)
 
 4.1  1996
        Stock Option Plan (incorporated by reference to Exhibit 10.32 of the
        registrant’s Registration Statement on Form F-1, Reg. No. 333-05980, filed with
        the SEC on November 8, 1996.)
 
 4.2  Form
        of
        Stock Option Agreement, dated October 16, 1999, between the Company and Roland
        W. Kohl (incorporated by reference to the registrant’s Annual Report on Form
        20-F for the fiscal year ended March 31, 2002).
  -
            61
            -
 
 4.3  License
        and Supply Agreement, dated as of January 30, 2003, is entered into by and
        between Highway Holdings Limited and Kienzle AG (incorporated by reference
        to
        Exhibit 4.3 of registrant's Form 20-F for the year ended March 31, 2003).
 
 4.4  Form
        of
        Longcheng Industrial Area Common Property Tenancy Contract No. WJ-003, dated
        October 10, 2003, between the Company and Shenzhen Land & Sun Industrial
& Trade Co., Ltd. (incorporated by reference to the registrant’s Annual
        Report on Form 20-F for the fiscal year ended March 31, 2004).
 
 4.5  Form
        of
        Longcheng Industrial Area Common Property Tenancy Contract No. WJ-004, dated
        November 28, 2003, between the Company and Shenzhen Land & Sun Industrial
& Trade Co., Ltd. (incorporated by reference to the registrant’s Annual
        Report on Form 20-F for the fiscal year ended March 31, 2004).
 
 4.6  Form
        of
        Longcheng Industrial Area Common Property Tenancy Contract No. WJ-005, dated
        December 11, 2003, between the Company and Shenzhen Land & Sun Industrial
& Trade Co., Ltd. (incorporated by reference to the registrant’s Annual
        Report on Form 20-F for the fiscal year ended March 31, 2004).
 
 4.7  Form
        of
        Longcheng Industrial Area Common Property Tenancy Contract No. HTHT-006,
        dated
        December 12, 2003, between the Company and Shenzhen Land & Sun Industrial
& Trade Co., Ltd. (incorporated by reference to the registrant’s Annual
        Report on Form 20-F for the fiscal year ended March 31, 2004).
 
 4.8  Form
        of
        Longcheng Industrial Area Common Property Tenancy Contract, dated December
        29,
        2003, between the Company and Shenzhen Land & Sun Industrial & Trade
        Co., Ltd. (incorporated by reference to the registrant’s Annual Report on Form
        20-F for the fiscal year ended March 31, 2004).
 
 4.9  Tenancy
        Agreement, dated October 30, 2003, between Nissin Precision Metal Manufacturing
        Limited and SHK Sheung Shui Landmark Investment Limited, as amended February
        23,
        2004 (incorporated by reference to the registrant’s Annual Report on Form 20-F
        for the fiscal year ended March 31, 2004).
 
 4.10  Form
        of
        Extension Agreement, dated January 26, 2005, between Shenzhen Long Cheng
        Nissin
        Precision Metal Plastic Factory and Nissin Precision Metal Manufacturing
        Limited.
 
 4.11  Form
        of
        Extension Agreement, dated January 26, 2005, between Bao An District Long
        Cheng
        Hi-Lite Electronic Factory and Hilite Camera Company Limited,
 
 4.12  City
        Gao
        Xin District Factory Lease Contract, dated May 23, 2005, between He Yuan
        City
        Advanced Technological Development District Co. Ltd. and Hi-Lite Camera Co.
        Ltd.
 
 4.13  City
        Gao
        Xin District Dormitory Facilities Lease Contract, dated May 23, 2005, between
        He
        Yuan City Advanced Technological Development District Co. Ltd. and Hi-Lite
        Camera Co. Ltd.
  -
            62
            -
 
 8.1  List
        of
        all of registrant’s subsidiaries, their jurisdictions of incorporation, and the
        names under which they do business.
 
 11.1  Code
        of
        Ethics.
 
 12.1  Certifications
        pursuant to Section 1350, as adopted pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002
 
 23.1 Consent
        Of Independent Registered Public Accounting Firm
 
 99.1  Certifications
        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002
 
 -
            63
            -
  **SIGNATURES**
  The
        registrant hereby 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.
  HIGHWAY
                HOLDINGS LIMITEDBy:
              /s/
                PO S. FONGPo
                S. Fong*Chief
                  Financial Officer and**Secretary*Date:
                  June 28, 2005
  -
            64
            -
  HIGHWAY HOLDINGS LIMITED
                  
                  Consolidated
                    Financial Statements
                  For
                    each of the three years in the period ended March 31, 2005
                  and
                    Report of Independent Registered Public Accounting
                    Firm
  
  HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
 
 INDEX
 
  CONSOLIDATED
                  FINANCIAL STATEMENTS
                PageReport
                    of Independent Registered Public Accounting Firm
                F
                    -
                    2Consolidated
                    Statements of Operations for each of the three years in the
                    periodended
                      March 31, 2005
                F
                    -
                    3Consolidated
                    Balance Sheets as of March 31, 2004 and 2005
                F
                    -
                    4Consolidated
                    Statements of Shareholders' Equity and ComprehensiveIncome
                    (loss) for each of the three years in the period ended March
                    31,
                    2005
                F
                    -
                    5Consolidated
                    Statements of Cash Flows for each of the three years in the
                    periodended
                    March 31, 2005
                F
                    -
                    6Notes
                    to Consolidated Financial Statements
                F
                    -
                    8
 
 F-1
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
          the
          Shareholders and Board of Directors of
 Highway
          Holdings Limited:
 
 We
          have
          audited the accompanying consolidated balance sheets of Highway Holdings
          Limited
          and its subsidiaries (the "Company") as of March 31, 2004 and 2005, and
          the
          related consolidated statements of operations, shareholders' equity and
          comprehensive income (loss) and cash flows for each of the three years
          in the
          period ended March 31, 2005. 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 the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. The Company is not required
          to
          have, nor were we engaged to perform, an audit of its internal control
          over
          financial reporting. Our audit included consideration of internal control
          over
          financial reporting as a basis for designing audit procedures that are
          appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company's internal control over financial
          reporting. Accordingly, we express no such opinion. An audit also includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements, 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 referred to above present
          fairly, in all material respects, the financial position of Highway Holdings
          Limited and its subsidiaries as of March 31, 2004 and 2005, and the results
          of
          their operations and their cash flows for each of the three years in the
          period
          ended March 31, 2005, in conformity with accounting principles generally
          accepted in the United States of America.
 
 
 **/s/
          Deloitte Touche Tohmatsu**
 Certified
          Public Accountants
 Hong
          Kong
 May
          31,
          2005
 
 F-2
  HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF OPERATIONS
 (Dollars
          in thousands except per share data)
  Year
                    ended March 31,2003
                
                2004
                
                2005Net
                    sales:Third
                    parties
                
                $
                20,370
                
                $
                23,691
                
                $
                27,633Affiliate
                
                
                -
                
                
                1,665
                
                
                45$
                20,370
                
                $
                25,356
                
                $
                27,678Cost
                    of sales
                
                
                16,488
                
                
                20,262
                
                
                22,548Gross
                    profit
                
                
                3,882
                
                
                5,094
                
                
                5,130Selling,
                    general and administrative expenses
                
                
                3,723
                
                
                4,219
                
                
                4,985Impairment
                    of industrial property rights (note 2)
                
                
                -
                
                
                -
                
                
                67Impairment
                    of property, plant and equipment (note 2)
                
                
                -
                
                
                -
                
                
                347Operating
                    income (loss)
                
                
                159
                
                
                875
                
                
                (269
                )Non-operating
                    income (expense):Exchange
                    gain, net
                
                
                344
                
                
                278
                
                
                249Interest
                    expense
                
                
                (64
                )
                
                (77
                )
                
                (110
                )Interest
                    income
                
                
                20
                
                
                9
                
                
                14Other
                    income
                
                
                81
                
                
                105
                
                
                56Total
                    non-operating income
                
                
                381
                
                
                315
                
                
                209Affiliates:Impairment
                    of investment in an affiliate
                
                
                -
                
                
                (109
                )
                
                (5
                )Equity
                    in (loss) income of an affiliate
                
                
                (5
                )
                
                2
                
                
                -(5
                )
                
                (107
                )
                
                (5
                )Income
                    (loss) before income taxes and minority interests
                
                
                535
                
                
                1,083
                
                
                (65
                )Income
                    taxes (note 3)
                
                
                (50
                )
                
                (100
                )
                
                (86
                )Income
                    (loss) before minority interests
                
                
                485
                
                
                983
                
                
                (151
                )Minority
                    interests
                
                
                -
                
                
                (1
                )
                
                (1
                )Net
                    income (loss)
                
                $
                485
                
                $
                982
                
                $
                (152
                )Income
                    (loss) per share - basic
                
                $
                0.17
                
                $
                0.32
                
                $
                (0.05
                )Income
                    (loss) per share - diluted
                
                $
                0.17
                
                $
                0.30
                
                $
                (0.05
                )Weighted
                    average number of shares outstanding (in thousands)-
                    basic
                
                
                2,902
                
                
                3,030
                
                
                3,260Weighted
                    average number of shares outstanding (in thousands)-
                    diluted
                
                
                2,902
                
                
                3,258
                
                
                3,260
  See
            accompanying notes to consolidated financial statements.
  
 F-3
 
  HIGHWAY
            HOLDINGS LIMITED AND
            SUBSIDIARIES
  CONSOLIDATED
          BALANCE SHEETS
 (Dollars
          in thousands except share data)
  ASSETSMarch
                    31,2004
                
                2005Current
                    assets:Cash
                    and cash equivalents
                
                $
                4,158
                
                $
                3,948Restricted
                    cash (note 7)
                
                
                965
                
                
                965Accounts
                    receivable, net of allowances fordoubtful
                    accounts of $111 in 2004 and $99 in 2005
                
                
                3,763
                
                
                5,165Inventories
                    (note 4)
                
                
                4,394
                
                
                5,062Investment
                    securities (note 5)
                
                
                309
                
                
                296Prepaid
                    expenses and other current assets
                
                
                639
                
                
                721Total
                    current assets
                
                
                14,228
                
                
                16,157Property,
                    plant and equipment, net (note 6)
                
                
                3,780
                
                
                3,473Industrial
                    property rights, at cost less accumulated amortization of$633
                    in 2004 and $704 in 2005
                
                
                673
                
                
                468Investments
                    in and advance to affiliates
                
                
                7
                
                
                2Total
                    assets
                
                $
                18,688
                
                $
                20,100LIABILITIES
                    AND SHAREHOLDERS' EQUITYCurrent
                    liabilities:Accounts
                    payable
                
                $
                2,296
                
                $
                2,846Short-term
                    borrowings (note 7)
                
                
                1,933
                
                
                1,449Obligations
                    under capital leases - current portion (note 8)
                
                
                173
                
                
                409Accrued
                    mold charges
                
                
                233
                
                
                208Accrued
                    payroll and employee benefits
                
                
                321
                
                
                331Income
                    taxes payable
                
                
                78
                
                
                119Other
                    liabilities and accrued expenses
                
                
                420
                
                
                945Total
                    current liabilities
                
                
                5,454
                
                
                6,307Obligations
                    under capital leases - net of current portion (note 8)
                
                
                212
                
                
                558Deferred
                    income taxes (note 3)
                
                
                178
                
                
                174Minority
                    interest
                
                
                2
                
                
                3Commitments
                    and contingencies (note 9)Shareholders'
                    equity:Common
                    shares $0.01 par value (Authorized: 20,000,000 shares)
                
                
                31
                
                
                33Additional
                    paid-in capital
                
                
                9,035
                
                
                9,820Retained
                    earnings
                
                
                3,955
                
                
                3,480Accumulated
                    other comprehensive loss
                
                
                (126
                )
                
                (222
                )Treasury
                    shares, at cost - 37,800 shares
                
                
                (53
                )
                
                (53
                )Total
                    shareholders' equity
                
                
                12,842
                
                
                13,058Total
                    liabilities and shareholders' equity
                
                $
                18,688
                
                $
                20,100
  See
            accompanying notes to consolidated financial statements.
  F-4
 
  HIGHWAY
            HOLDINGS LIMITED AND
            SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
 AND
          COMPREHENSIVE INCOME (LOSS)
 (In
          thousands except per share data)
  Common
                      shares,
                      issued
                        and
                        outstanding
                  
                  
                  Additional
                      paid-in
                  
                  
                  Retained
                  
                  
                  Accumulated
                      other
                        comprehensive
                  
                  
                  Treasury
                      shares
                  
                  
                  Total
                      shareholders'
                  
                  
                  Compre-
                      hensive
                        incomeShares
                  
                  
                  Amount
                  
                  
                  capital
                  
                  
                  earnings
                  
                  
                  loss
                  
                  
                  at
                      cost
                  
                  
                  equity
                  
                  
                  (loss)Balance
                      at April 1, 2002
                  
                  
                  2,936
                  
                  $
                  30
                  
                  $
                  8,793
                  
                  $
                  2,725
                  
                  $
                  (33
                  )
                  $
                  (49
                  )
                  $
                  11,466Repurchase
                      of treasury shares
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (4
                  )
                  
                  (4
                  )Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  485
                  
                  
                  -
                  
                  
                  -
                  
                  
                  485
                  
                  $
                  485Translation
                      adjustments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (40
                  )
                  
                  -
                  
                  
                  (40
                  )
                  
                  (40
                  )Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  445Balance
                      at March 31, 2003
                  
                  
                  2,936
                  
                  
                  30
                  
                  
                  8,793
                  
                  
                  3,210
                  
                  
                  (73
                  )
                  
                  (53
                  )
                  
                  11,907Issued
                      during the year
                  
                  
                  138
                  
                  
                  1
                  
                  
                  242
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  243Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  982
                  
                  
                  -
                  
                  
                  -
                  
                  
                  982
                  
                  $
                  982Unrealised
                        holding loss on investment securities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (13
                  )
                  
                  -
                  
                  
                  (13
                  )
                  
                  (13
                  )Translation
                      adjustments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (40
                  )
                  
                  -
                  
                  
                  (40
                  )
                  
                  (40
                  )Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  929Cash
                      dividends ($0.08 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (237
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (237
                  )Balance
                      at March 31, 2004
                  
                  
                  3,074
                  
                  
                  31
                  
                  
                  9,035
                  
                  
                  3,955
                  
                  
                  (126
                  )
                  
                  (53
                  )
                  
                  12,842Issued
                      during the year
                  
                  
                  242
                  
                  
                  2
                  
                  
                  448
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  450Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (152
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (152
                  )
                  $
                  (152
                  )Legal
                      advisors' options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  177
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  177Director's
                      stock compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  160
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  160Unrealised
                        holding loss on investment securities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (13
                  )
                  
                  -
                  
                  
                  (13
                  )
                  
                  (13
                  )Translation
                      adjustments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (83
                  )
                  
                  -
                  
                  
                  (83
                  )
                  
                  (83
                  )Comprehensive
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  $
                  (248
                  )Cash
                      dividends ($0.1 per share)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (323
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (323
                  )Balance
                      at March 31, 2005
                  
                  
                  3,316
                  
                  $
                  33
                  
                  $
                  9,820
                  
                  $
                  3,480
                  
                  $
                  (222
                  )
                  $
                  (53
                  )
                  $
                  13,058
  See
            accompanying notes to consolidated financial statements.
 F-5
 
  HIGHWAY
            HOLDINGS LIMITED AND
            SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 (Dollars
          in thousands)
 
 
 Year
                    ended March 31,2003
                
                2004
                
                2005Cash
                    flows from operating activities:Net
                    income (loss)
                
                $
                485
                
                $
                982
                
                $
                (152
                )Adjustments
                    to reconcile net income to netcash
                    provided by operating activities:Impairment
                    of industrial property rights
                
                
                -
                
                
                -
                
                
                67Impairment
                    of investment in an affiliate
                
                
                -
                
                
                109
                
                
                5Loss
                    (gain) on disposal of properly, plant andequipment
                
                
                2
                
                
                (24
                )
                
                (49
                )Loss
                    on disposal of industrial property rights
                
                
                -
                
                
                -
                
                
                59Impairment
                    of property, plant and equipment
                
                
                -
                
                
                -
                
                
                347Depreciation
                    and amortization
                
                
                1,130
                
                
                1,112
                
                
                1,148Minority
                    interests
                
                
                -
                
                
                1
                
                
                1Directors'
                    stock compensation expense
                
                
                -
                
                
                -
                
                
                160Equity
                    in loss (income) of an affiliate
                
                
                5
                
                
                (2
                )
                
                -Deferred
                    income taxes
                
                
                -
                
                
                (53
                )
                
                (4
                )Stock
                    options granted to legal advisors
                
                
                -
                
                
                -
                
                
                177Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (39
                )
                
                (891
                )
                
                (1,402
                )Inventories
                
                
                (379
                )
                
                178
                
                
                (668
                )Prepaid
                    expenses and other current assets
                
                
                43
                
                
                (385
                )
                
                (82
                )Accounts
                    payable
                
                
                334
                
                
                379
                
                
                550Accrued
                    mold charges
                
                
                (274
                )
                
                86
                
                
                (25
                )Accrued
                    payroll and employee benefits
                
                
                45
                
                
                (28
                )
                
                10Income
                    taxes payable
                
                
                -
                
                
                78
                
                
                41Other
                    liabilities and accrued expenses
                
                
                (31
                )
                
                (67
                )
                
                442Net
                    cash provided by operating activities
                
                
                1,321
                
                
                1,475
                
                
                625Cash
                    flows from investing activities:Purchase
                    of property, plant and equipment
                
                
                (190
                )
                
                (853
                )
                
                (178
                )Acquisition
                    of investment securities
                
                
                -
                
                
                (322
                )
                
                -Repayment
                    of payable to an affiliate
                
                
                -
                
                
                (109
                )
                
                -Purchase
                    of industrial property rights
                
                
                (56
                )
                
                (75
                )
                
                (47
                )Acquisition
                    of an affiliate
                
                
                -
                
                
                (5
                )
                
                -Proceeds
                    from disposal of property, plant andequipment
                
                
                -
                
                
                58
                
                
                55Decrease
                    in restricted cash
                
                
                -
                
                
                192
                
                
                -Advance
                    to an affiliate
                
                
                (3
                )
                
                -
                
                
                -Net
                    cash used in investing activities
                
                
                (249
                )
                
                (1,114
                )
                
                (170
                )
  See
            accompanying notes to consolidated financial statements.
 F-6
 
  HIGHWAY
            HOLDINGS LIMITED AND
            SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS - continued
 (Dollars
          in thousands)
  Year
                    ended March 31,2003
                
                2004
                
                2005Cash
                    flows from financing activities:Cash
                    dividends paid
                
                $
                -
                
                $
                (237
                )
                $
                (323
                )Repayment
                    of long-term debt
                
                
                (119
                )
                
                (134
                )
                
                (308
                )Increase
                    (decrease) in short-term borrowings - net
                
                
                10
                
                
                777
                
                
                (484
                )Common
                    shares repurchased
                
                
                (4
                )
                
                -
                
                
                -Proceeds
                    from shares issued on exercise of options
                
                
                -
                
                
                243
                
                
                450Net
                    cash (used in) from financing activities
                
                
                (113
                )
                
                649
                
                
                (665
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                959
                
                
                1,010
                
                
                (210
                )Cash
                    and cash equivalents, beginning of year
                
                
                2,189
                
                
                3,148
                
                
                4,158Cash
                    and cash equivalents, end of year
                
                $
                3,148
                
                $
                4,158
                
                $
                3,948Supplemental
                    cash flow information:Cash
                    paid during the year forInterest
                
                $
                64
                
                $
                77
                
                $
                110Income
                    taxes
                
                
                51
                
                
                75
                
                
                61
 
 Non-cash
          transactions:
 
 Additions
          to property, plant and equipment of $289 and $890 during the year ended
          March
          31, 2004 and 2005, respectively, were acquired under arrangements qualified
          as
          capital leases.
 
 Investment
          in an affiliate of $109 was financed by a payable to an affiliate during
          the
          year ended March 31, 2003.
 
 
 See
            accompanying notes to consolidated financial statements.
 
 F-7
  HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
          in thousands except per share data)
  1.
                ORGANIZATION
                    AND BASIS OF FINANCIAL STATEMENTS
 
 Highway
                    Holdings Limited (the "Company") was incorporated in the British
                    Virgin
                    Islands on July 20, 1990. It operates through its subsidiaries
                    operating
                    in the Hong Kong Special Administrative Region ("Hong Kong")
                    of the
                    People's Republic of China ("China"), in Shenzhen, China, in
                    Germany and
                    in the Republic of Bulgaria
                    ("Bulgaria").
 
 The
                    Company and its subsidiaries operate in three principal business
                    segments
                    - metal stamping, (including tooling design and manufacturing),
                    the
                    manufacture and trading of cameras, and clocks, watches and others.
                    The
                    Company sells its products to customers under its customers'
                    brand names
                    and a portion of its sale of clocks and watches under the name
                    "Kienzle".
                    The manufacturing activities and certain administrative activities
                    are all
                    conducted in Shenzhen and selling activities are principally
                    performed in
                    Hong Kong, Shenzhen and Germany.
 
 The
                    financial statements of the Company and its subsidiaries have
                    been
                    prepared in accordance with accounting principles generally accepted
                    in
                    the United States of America ("U.S. GAAP"). There are no material
                    differences between the U.S. GAAP amounts and the amounts used
                    in the
                    statutory accounts of the
                    subsidiaries.
 
 On
                    March 28, 2003, the Company acquired a 20% equity interest in
                    Kienzle AG,
                    a German stock corporation which is engaged in the marketing,
                    sale and
                    distribution of products under the brand name of "Kienzle", for
                    $109.
                    Kienzle AG is accounted for in the consolidated financial statements
                    as an
                    affiliate using the equity method.
 
 On
                    January 30, 2003, the Company entered into a license agreement
                    with
                    Kienzle AG. Under the license agreement, the Company granted
                    to Kienzle AG
                    a five-year exclusive, royalty-free license to use and display
                    the
                    trademark of "Kienzle" solely in conjunction with the promotion,
                    marketing, sale, and distribution by Kienzle AG of products under
                    the
                    brand name of "Kienzle" in Austria, Benelux, Denmark, Germany,
                    Spain,
                    Switzerland, Norway, Sweden, Denmark, Finland, Portugal, France,
                    and the
                    United Kingdom. Under the license agreement, Kienzle AG was required
                    to
                    purchase all products under the brand name of "Kienzle" from
                    the Company.
                    Under the license agreement, Kienzle AG was required to purchase
                    $3,000 of
                    products from the Company during the year ended December 31,
                    2003; and in
                    subsequent years, the amount of required purchases is required
                    to increase
                    to no less than $6,000 in the year ending December 31, 2004,
                    $14,000 in
                    the year ending December 31, 2005, and $28,000 in the year ending
                    December
                    31, 2006. The Company would have the right to terminate the license
                    agreement if Kienzle AG fails to meet these minimum
                    requirements.
 
 Kienzle
                    AG did not meet the minimum purchase requirement for the year
                    ended
                    December 31, 2003 and the Company, in order to protect its own
                    interest,
                    terminated the license agreement on January 16, 2004. In addition,
                    the
                    Company reassessed its investment in Kienzle AG in 2004 and 2005
                    and
                    determined that the investment had been impaired as Kienzle AG
                    did not
                    meet the minimum purchase requirement and had dissatisfactory
                    operating
                    results. An impairment loss of $109 in respect of the investment
                    in
                    Kienzle AG has thus been recognized during the year ended March
                    31,
                    2004.
 
 F-8
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  1.
                ORGANIZATION
                    AND BASIS OF FINANCIAL STATEMENTS -
                    continued
 
 On
                    August 5, 2003, the Company acquired a 50% equity interest in
                    Kayser Photo
                    (Overseas) Corp. (K.P.C.) ("Kayser Photo"), a company incorporated
                    in the
                    Republic of Panama, at a cash consideration of $5. Kayser Photo
                    is engaged
                    in the trading of camera batteries, films and disposable cameras.
                    It is
                    accounted for in the consolidated financial statements as an
                    affiliate
                    using the equity method. The Company reassessed its investment
                    in Kayser
                    Photo in 2005 and an impairment loss of $5 in respect of the
                    investment in
                    Kayser Photo (Overseas) Corp. has been recognized during the
                    year ended
                    March 31, 2005.
 
 On
                    March 14, 2005, the Company entered into an agreement to sell
                    its 20%
                    equity interest in Kienzle AG to one of Kienzle AG's shareholders
                    for
                    $131. However, the Kienzle AG's shareholders did not pay the
                    consideration
                    in accordance with the payment terms of the agreement. As such,
                    the
                    Company did not recognize a gain on disposal of investment in
                    Kienzle AG
                    during the year ended March 31, 2005 as the shares had not been
                    transferred to the respective party as of March 31, 2005 and
                    thecollectibilityof
                    the sales proceeds cannot be reasonably
                    assured.
 
 On
                    March 14, 2005, the Company entered into a Trademark Purchase
                    Agreement
                    ("the Agreement") with Kienzle AG, which the Company agreed to
                    sell to
                    Kienzle AG all "KIENZLE" trademarks not relating to the clock
                    business
                    ("Non-Clock Trademarks") for $1,000. However, Kienzle AG did
                    not pay the
                    consideration in accordance with the payment terms of the agreement.
                    As
                    such, the Company did not recognize a gain on disposal of industrial
                    property rights during the year ended March 31, 2005 as the title
                    of the
                    Non-Clock Trademarks had not been transferred to Kienzle AG as
                    of March
                    31, 2005 and the collectibilityof
                    the sales proceeds cannot be reasonably
                    assured.
 
 At
                    March 31, 2005, details of the Company's subsidiary companies
                    are as
                    follows:
 
 Place
                    ofincorporation
                Name
                    of entity
                Date
                    of incorporation
                Principal
                    activitiesHong
                    Kong
                Antemat
                    Limited
                May
                    5, 1989
                DormantHong
                    Kong
                Nissin
                    Mechatronic Limited
                May
                    25, 1990
                Dormant(formerly
                    named as BadexInvestments
                    Limited)Hong
                    Kong
                Cavour
                    Industrial Limited
                May
                    9, 1989
                Providing
                    tooling, handling andrepairing
                    services in China andmanagement
                    services tofellow
                    subsidiariesHong
                    Kong
                Hi-Lite
                    Camera Company
                November
                    10, 1978
                Manufacturing
                    and trading ofLimited
                    ("Hi-Lite")
                
                cameraHong
                    Kong
                Kayser
                    Technik Limited
                June
                    23, 1994
                Sales
                    of metal parts and rental ofmachinery
                    and equipment to fellowsubsidiariesBulgaria
                Kienzle
                    Balkan Limited
                November
                    27, 2001
                Sales
                    of cameras, clocks, watches("Kienzle
                    Balkan")
                
                and
                    othersBulgaria
                Kienzle
                    Bulgaria Limited
                January
                    23, 2001
                Dormant("Kienzle
                    Bulgaria")Hong
                    Kong
                Kienzle
                    Time (H.K.) Limited
                August
                    24, 1997
                Manufacturing
                    and trading of clocks,("Kienzle
                    HK")
                
                watches
                    and others
 
 F-9
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
 1.
                ORGANIZATION
                    AND BASIS OF FINANCIAL STATEMENTS -
                    continued
 
 Place
                    ofincorporation
                Name
                    of entity
                Date
                    of incorporation
                Principal
                    activitiesGermany
                Kienzle
                    Uhrenfabriken G.m.b.h.
                April
                    1, 1999
                Sales
                    of clocks, watches and others("Kienzle
                    Germany")Hong
                    Kong
                Nissin
                    Precision Metal
                November
                    21, 1980
                Metal
                    stamping and tooling designManufacturing
                    Limited
                
                and
                    manufacturing("Nissin")Hong
                    Kong
                Saiwan
                    Industries Limited
                August
                    10, 1990
                Manufacturing
                    of plastic injectionparts
                    to fellow subsidiaries
 
 All
                    of the subsidiaries are wholly-owned except for Kienzle Balkan,
                    which is
                    51% owned by the Company.
 
 On
                    January 25, 2000, the Company and an unrelated party established
                    Kienzle
                    USA Ltd. ("Kienzle USA"), a company incorporated in the United
                    States of
                    America ("USA") which sells clocks, with each party owning 50%
                    of its
                    common shares. It is accounted for in the consolidated financial
                    statements as an affiliate. Kienzle USA has been inactive since
                    September
                    2002.
 
 
 2.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES
 
 **Principles
          of consolidation** -
          The
          consolidated financial statements include the assets, liabilities, revenues
          and
          expenses of the Company and all its subsidiaries. All significant intercompany
          transactions and balances have been eliminated on consolidation. Affiliated
          companies (20% to 50% owned companies) in which the Company has significant
          influence but does not have a controlling interest are accounted for using
          the
          equity method.
  **Revenue
          recognition** - The
          Company recognizes revenue when all of the following conditions are
          met:
 
 ·
                Persuasive
                    evidence of an arrangement exists;
 ·
                Delivery
                    has occurred;
 ·
                Price
                    to the customer is fixed or determinable;
                    and
 ·
                Collectibility
                    is reasonably assured.
 
 **Cash
                    and cash equivalents**-
                    Cash and cash equivalents include cash on hand, cash accounts,
                    interest
                    bearing savings accounts, and certificates of time deposit with
                    a maturity
                    of three months or less at the time of
                    purchase.
 
 F-10
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
 
 2. SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 **Inventories**-
                    Inventories are stated at the lower of cost determined by the
                    first in
                    first out method, or market value. Work-in-progress and finished
                    goods
                    consist of raw materials, direct labor and overhead associated
                    with the
                    manufacturing process.
 
 **Property,
                      plant and equipment**-
                      Property, plant and equipment are stated at cost. Depreciation
                      and
                      amortization are provided using the straight-line method based
                      on the
                      estimated useful lives of 10 years for machinery and equipment
                      and
                      generally 5 to 7 years for other property, plant and equipment.
                      Assets
                      held under capital leases are depreciated over the shorter
                      of their lease
                      period or estimated useful lives on the same basis as owned
                      assets.
 
 **Industrial
                    property rights**-
                    Industrial property rights represent the patents, technology
                    and the
                    rights relating to the name "Kienzle" and are stated at cost.
                    Amortization
                    is provided on a straight-line basis over a period of 10 years
                    which is
                    the estimated useful lives of these assets. Amortization expense
                    charged
                    to operating income for the year ended March 31, 2003, 2004 and
                    2005 was
                    $119, $127 and $125 respectively.
 
 Amortization
                    expense on industrial property rights for each of the next five
                    years is
                    as follows:
 
 Year
                    ending March 31,-
                    2006
                
                $
                122-
                    2007
                
                
                76-
                    2008
                
                
                75-
                    2009
                
                
                73-
                    2010
                
                
                13Total
                
                $
                359
 
 **Investment
                    securities**-
                    Investment securities, which consist primarily of capital guaranteed
                    investment fund, have been categorized as available for sale
                    and, as a
                    result, are stated at fair value based generally on quoted market
                    prices.
                    Unrealized holding gains and losses are included as a component
                    of
                    accumulated other comprehensive
                    income.
 
 **Impairment
                    of long-lived assets**-
                    The Company reviews its long-lived assets for impairment whenever
                    events
                    or changes in circumstances indicate that the carrying amount
                    of an asset
                    may no longer be recoverable. When these events occur, the Company
                    measures impairment by comparing the carrying value of the long-lived
                    assets to the estimated undiscounted future cash flows expected
                    to result
                    from the use of the assets and their eventual disposition. If
                    the sum of
                    the expected undiscounted cash flow is less than the carrying
                    amount of
                    the assets, the Company would recognize an impairment loss based
                    on the
                    fair value of the assets.
 
 Due
                    to the poor financial performance of the manufacturing of cameras,
                    clocks,
                    watches and others, the Company reassessed its property, plant
                    and
                    equipment and industrial property rights for impairment and an
                    impairment
                    loss of $347 and $67 respectively had been recognized during
                    the year
                    ended March 31, 2005.
 
 F-11
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  2.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING POLICIES -
                    continued
 
 **Foreign
          currency translation** - The
          Company uses the United States dollar as its reporting currency. Assets
          and
          liabilities of non-United States dollar functional currency financial statements
          of subsidiaries are translated at year-end exchange rates, while revenues
          and
          expenses are translated at average currency exchange rates during the year.
          Adjustments resulting from translating non-United States dollar functional
          currency financial statements are reflected as accumulated other comprehensive
          loss. Gains or losses from foreign currency transactions are included in
          net
          income.
  **Income
          taxes** -
          Deferred income taxes are provided using the asset and liability method.
          Under
          this method, deferred income taxes are recognized for all significant temporary
          differences and classified as current or non-current based upon the
          classification of the related asset or liability in the financial statements.
          A
          valuation allowance is provided to reduce the amount of deferred tax assets
          if
          it is considered more likely than not that some portion of, or all, the
          deferred
          tax asset will not be realized.
  **Use
          of estimates** - The
          preparation of financial statements in conformity with generally accepted
          accounting principles in the United States of America 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.
  **Stock
          options** - The
          Company does not recognize compensation expense for employee stock-based
          compensation if the strike-price is equal to or greater than the market
          price of
          the stock at the date of grant. The Company's policy is to generally grant
          stock-based compensation to employees with a stock price equal to the market
          price of the stock on the date of grant. The Company continues to account
          for
          stock-based compensation arrangements under Accounting Principles Board
          ("APB")
          Opinion No. 25, *"Accounting
          for Stock Issued to Employees"* and
          provides additional financial statement disclosure in accordance with Statement
          of Financial Accounting Standard ("SFAS") No. 123, *"Accounting
          for Stock-Based Compensation "* .
          The
          Company recognizes compensation expense for all stock-based compensation
          granted
          to non-employees by estimating the fair value of the stock-based compensation
          utilizing the Black-Scholes option-pricing model. See note 13.
  The
          Company has stock option plan and stock purchase rights, as more fully
          described
          in note 13. Stock-based employee compensation costs are not reflected in
          net
          income when options granted under the plan had an exercise price equal
          to the
          market value of the underlying common stock on the date of grant.
  F-12
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
 
 2. SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 The
          following table illustrates the effect on net income (loss) and earnings
          (loss)
          per share as if the Company had applied the fair value recognition.
 
 2003
                
                
                2004
                
                
                2005Net
                    income (loss), as reported
                
                $
                485
                
                $
                982
                
                $
                (152
                )Less:
                    Stock based compensation costs under fairvalue
                    based method for all awards
                
                
                -
                
                
                (212
                )
                
                (152
                )Net
                    income (loss), pro forma
                
                
                485
                
                
                770
                
                
                (304
                )Income
                    (loss) per share - basic  As
                    reported
                
                $
                0.17
                
                $
                0.32
                
                $
                (0.05
                )Pro
                      forma
                
                
                0.17
                
                
                0.25
                
                
                (0.09
                )Income
                    (loss) per share -
                    diluted          As
                    reported
                
                $
                0.17
                
                $
                0.30
                
                $
                (0.05
                )Pro
                    forma
                
                
                0.17
                
                
                0.24
                
                
                (0.09
                )
 
 In
                      December 2004, the Financial Accounting Standards Board ("FASB")
                      issued
                      SFAS No. 123R, "Share-Based Payment". This statement is a revision
                      to SFAS
                      123 and supersedes APB Opinion No.
                      25.
 
 **Income per share**-
                    Basic income per share is computed by dividing net income attributable
                    to
                    common shareholders by the weighted average of common shares
                    outstanding
                    for the period. Diluted earnings per share gives effect to all
                    dilutive
                    potential common shares outstanding during the year. 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 each of the three
                    years ended
                    March 31, 2005, the Company had 326,128, nil and 242,150 respectively,
                    of
                    outstanding employee stock options and stock purchase rights
                    which could
                    potentially dilute basic earnings per share ("EPS") in the future,
                    but
                    were excluded in the computation of diluted EPS in such periods,
                    as the
                    effect would have been
                    antidilutive.
  **Comprehensive
                    income**-
                    Comprehensive income is defined to include all changes in equity
                    except
                    those resulting from investments by owners and distributions
                    to owners.
                    Comprehensive income for the years, which comprises foreign currency
                    translation adjustments, unrealized holding loss on investment
                    securities
                    and net income, has been disclosed within the consolidated statements
                    of
                    shareholders' equity and comprehensive income
                    (loss).
 
 In
                    November 2004, the FASB issued SFAS No. 151, "Inventory Costs
                    - an
                    amendment of ARB No. 43, Chapter 4"*.*SFAS No. 151 clarifies the accounting that requires abnormal
                    amounts of
                    idle facility expenses, freight, handling costs, and spoilage
                    costs to be
                    recognized as current-period charges. It also requires that allocation
                    of
                    fixed production overheads to the costs of conversion be based
                    on the
                    normal capacity of the production facilities. SFAS No. 151 will
                    be
                    effective for inventory costs incurred on or after July 1, 2005.
                    The
                    Company is currently evaluating the impact of this standard on
                    its
                    consolidated financial statements.
  F-13
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  2. SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 In
                    December 2004, the FASB issued SFAS No. 123R. This statement
                    is a revision
                    to SFAS No. 123 and supercedes APB Opinion No. 25. This statement
                    establishes standards for the accounting for transactions in
                    which an
                    entity exchanges its equity instruments for goods or services,
                    primarily
                    focusing on the accounting for transactions in which an entity
                    obtains
                    employee services in share-based payment transactions. Entities
                    will be
                    required to measure the cost of employee services received in
                    exchange for
                    an award of equity instruments based on the grant-date fair value
                    of the
                    award (with limited exceptions). That cost will be recognized
                    over the
                    period during which an employee is required to provide service
                    within the
                    requisite service period (usually the vesting period) in exchange
                    for the
                    award. The grant-date fair value of employee share options and
                    similar
                    instruments will be estimated using option-pricing models. If
                    any equity
                    award is modified after the grant date, incremental compensation
                    cost will
                    be recognized in an amount equal to the excess of the fair value
                    of the
                    modified award over the fair value of the original award immediately
                    before the modification. This statement will be effective to
                    the Company
                    for the fiscal year beginning April 1,
                    2006.
 
 Upon
                    adoption, the Company has two application methods to choose from:
                    the
                    modified-prospective transition approach or the modified-retrospective
                    transition approach. Under the modified-prospective transition
                    method, the
                    Company would be required to recognize compensation cost for
                    share-based
                    awards to employees based on their grant-date fair value from
                    the
                    beginning of the fiscal period in which the recognition provisions
                    are
                    first applied as well as compensation cost for awards that were
                    granted
                    prior to, but not vested as of the date of adoption. Prior periods
                    remain
                    unchanged and pro forma disclosures previously required by SFAS
                    No. 123
                    continue to be required. Under the modified-restrospective transition
                    method, the Company would restate prior periods by recognizing
                    compensation cost in the amounts previously reported in the pro
                    forma
                    footnote disclosure under SFAS No. 123. Under this method, the
                    Company is
                    permitted to apply this presentation to all periods presented
                    or to the
                    start of the fiscal year in which SFAS No. 123R is adopted. The
                    Company
                    would follow the same guidelines as in the modified-prospective
                    transition
                    method for awards granted subsequent to adoption and those that
                    were
                    granted and not yet vested. The Company has not yet determined
                    which
                    methodology it will adopt but believes that the impact that the
                    adoption
                    of SFAS No. 123R will have on its financial position or results
                    of
                    operations will approximate the magnitude of the stock-based
                    employee
                    compensation cost disclosed in Note 2 pursuant to the disclosure
                    requirements of SFAS No. 148.
 
 The
                    Emerging Issues Task Force ("EITF") reached a consensus in EITF
                    03-1, "The
                    Meaning of Other-Than-Temporary Impairment and Its Application
                    to Certain
                    Investments". The consensus was that certain quantitative and
                    qualitative
                    disclosures should be required for debt and marketable equity
                    securities
                    classified as available-for-sale or held-to-maturity under SFAS
                    Nos. 115
                    and 124, that are impaired at the balance sheet date but for
                    which an
                    other-than-temporary impairment has not been recognized. This
                    EITF
                    consensus is effective for fiscal years ending after December
                    15, 2003.
                    Adoption of the EITF consensus did not result in an impact on
                    the
                    consolidated statement of financial position or results of
                    operations.
 
 The
                    Company holds investment securities of capital guaranteed investment
                    fund,
                    which have been categorized as available for sales and, as a
                    result, are
                    stated at fair value based generally on quoted market prices.
                    Fair value
                    of the investment securities are stated lower than the cost and
                    unrealized
                    holding losses are included as a component of accumulated other
                    comprehensive income.
  F-14
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  3.
                INCOME
                    TAXES
 
 Income
                    is subject to taxation in the various countries in which the
                    Company and
                    its subsidiaries operate.
 
 The
                    components of income (loss) before income taxes and minority
                    interest are
                    as follows:
 
 Year
                    ended March 31,2003
                
                2004
                
                2005Hong
                    Kong
                
                $
                823
                
                $
                1,663
                
                $
                1,211Europe
                
                
                (283
                )
                
                (580
                )
                
                (1,276
                )USA
                
                
                (5
                )
                
                -
                
                
                -$
                535
                
                
                1,083
                
                $
                (65
                )
  The
          Company is not taxed in the British Virgin Islands where the holding company
          is
          incorporated.
  The
          Company's subsidiaries, other than Kienzle Germany, Kienzle Balkan and
          Kienzle
          Bulgaria, are all incorporated in Hong Kong and are subject to Hong Kong
          taxation on their activities conducted in Hong Kong.
  The
          Company's manufacturing operations are currently conducted solely in China.
          These manufacturing operations are conducted pursuant to agreements entered
          into
          between certain China companies set up by the local government and the
          Shenzhen
          City Baoan District Foreign Economic Development Head Company and its designees
          (collectively, the "BFDC") (the agreements, collectively the "BFDC
          Agreements").
 
 Under
                    the BFDC Agreements, the Company is not considered by local tax
                    authorities to be doing business in China; accordingly, the Company's
                    activities in China have not been subjected to local taxes. The
                    BFDC is
                    responsible for paying taxes it incurs as a result of its operations
                    under
                    the BFDC Agreements. There can be no assurances, however, that
                    the Company
                    will not be subject to such taxes in the future. If China did
                    impose a tax
                    upon the Company, the tax could materially adversely affect the
                    Company's
                    business and results of operations.
 
 As
          the
          Company's subsidiaries' manufacturing operations are carried out in China
          under
          those BFDC Agreements, in accordance with the Hong Kong Inland Revenue
          Departmental Interpretation and Practice Note No. 21, 50% of the income
          for the
          year arising in Hong Kong has been determined as not subject to Hong Kong
          profits tax. The calculation of Hong Kong profits tax has been based on
          such tax
          relief.
  F-15
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  3. INCOME
          TAXES - continued
 
 The
          provision for income taxes consists of the following:
  March
                    31,2003
                
                2004
                
                2005Hong
                    KongCurrent
                
                $
                50
                
                $
                153
                
                $
                90Deferred
                
                
                -
                
                
                (53
                )
                
                (4
                )$
                50
                
                $
                100
                
                $
                86
 
 A
                    reconciliation between the provision for income taxes computed
                    by applying
                    the Hong Kong profits tax rate to income (loss) before income
                    taxes and
                    minority interests and the actual provision for income taxes
                    is as
                    follows:
 Year
                      ended March 31,2003
                  
                  2004
                  
                  2005Profits
                      tax rate in Hong Kong
                  
                  
                  16.0
                  %
                  
                  17.5
                  %
                  
                  (17.5
                  %)Non-deductible
                      items/non-taxable income
                  
                  
                  (16.6
                  %)
                  
                  (10.9
                  %)
                  
                  153.1
                  %Changes
                      in valuation allowances
                  
                  
                  9.9
                  %
                  
                  15.2
                  %
                  
                  36.9
                  %International
                      rate difference
                  
                  
                  10.3
                  %
                  
                  (3.5
                  %)
                  
                  (31.5
                  %)Increase
                      in opening deferred income taxesresulting
                      from an increase in profitstax
                      rate in Hong Kong
                  
                  
                  -
                  
                  
                  2.0
                  %
                  
                  -Other
                  
                  
                  (10.3
                  %)
                  
                  (11.1
                  %)
                  
                  (8.7
                  %)Effective
                      tax rate
                  
                  
                  9.3
                  %
                  
                  9.2
                  %
                  
                  132.3
                  %
 
 Deferred
                    income tax (assets) liabilities are as
                    follows:
 March
                      31,2004
                  
                  2005Deferred
                      tax liability:Property,
                      plant and equipment
                  
                  $
                  390
                  
                  $
                  352Deferred
                      tax asset:Operating
                      loss carryforwards
                  
                  
                  (1,188
                  )
                  
                  (1,178
                  )Valuation
                      allowance
                  
                  
                  976
                  
                  
                  1,000Total
                      net deferred tax asset
                  
                  
                  (212
                  )
                  
                  (178
                  )Net
                      deferred tax liability
                  
                  $
                  178
                  
                  $
                  174
 
 At
                    March 31, 2004 and 2005, subsidiaries of the Company had tax
                    loss
                    carryforwards for Hong Kong profit tax purposes, subject to the
                    agreement
                    of the Hong Kong Inland Revenue Department, amounting to approximately
                    $3,174 and $2,942, respectively, which have no expiration
                    date.
  F-16
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  3. INCOME
          TAXES - continued
 
 At
          March
          31, 2005, the tax loss carryforwards in Bulgaria and Germany and their
          future
          expiration dates are as follows:
  Bulgaria
                
                Germany
                
                TotalYear
                    ending March 31,-
                    2006
                
                $
                -
                
                $
                -
                
                $
                --
                    2007
                
                
                66
                
                
                -
                
                
                66-
                    2008
                
                
                -
                
                
                -
                
                
                --
                    2009
                
                
                104
                
                
                -
                
                
                104-
                    2010
                
                
                2
                
                
                -
                
                
                2-
                    Indefinite
                
                
                -
                
                
                2,331
                
                
                2,331$
                172
                
                $
                2,331
                
                $
                2,503
 
 The
                    tax loss carryforwards can only be utilized by the subsidiaries
                    generating
                    the losses.
   4.
                INVENTORIES
 
 Inventories
          by major categories are summarized as follows:
  March
                    31,2004
                
                2005Raw
                    materials
                
                $
                2,292
                
                $
                2,841Work
                    in progress
                
                
                855
                
                
                725Finished
                    goods
                
                
                1,247
                
                
                1,496$
                4,394
                
                $
                5,062
 
 Inventories
                    amounting to $52, $640 and $409, were written off in 2003, 2004
                    and 2005,
                    respectively.
 
 
 5.
                INVESTMENT
                    SECURITIES
 March
                      31,2004
                  
                  2005Cost
                  
                  $
                  322
                  
                  $
                  322Gross
                      unrealized holding loss
                  
                  
                  (13
                  )
                  
                  (26
                  )Fair
                      value
                  
                  $
                  309
                  
                  $
                  296
  F-17
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  6.
                PROPERTY,
                    PLANT AND EQUIPMENT, NET
  Property,
          plant and equipment consist of the following:
  March
                    31,2004
                
                2005At
                    cost:Machinery
                    and equipment
                
                $
                10,377
                
                $
                10,422Furniture
                    and fixtures
                
                
                671
                
                
                770Leasehold
                    improvements
                
                
                527
                
                
                538Total
                
                
                11,575
                
                
                11,730Less:
                    Accumulated depreciation and amortization
                
                
                (7,795
                )
                
                (8,257
                )Net
                    book value
                
                $
                3,780
                
                $
                3,473
 
 Depreciation
                    expense charged to operating income for the year ended March
                    31, 2003,
                    2004 and 2005 was $1,011, $985 and $1,023,
                    respectively.
 
 Included
                    in property, plant and equipment are assets held under capital
                    leases with
                    the following net book values:
 March
                      31,2004
                  
                  2005Machinery
                      and equipment, at cost
                  
                  $
                  796
                  
                  $
                  1,825Less:
                      Accumulated depreciation and amortization
                  
                  
                  (98
                  )
                  
                  (283
                  )$
                  698
                  
                  $
                  1,542
 
 Depreciation
                    and amortization of machinery and equipment held under capital
                    leases,
                    which is included in depreciation and amortization expense in
                    the
                    accompanying consolidated statements of operations, was $37,
                    $45 and $185
                    for the year ended March 31, 2003, 2004 and 2005,
                    respectively.
  F-18
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  7.
                SHORT-TERM
                    BORROWINGS
 
 Short-term
                    borrowings include import loans obtained from
                    banks.
 March
                      31,2004
                  
                  2005Credit
                      facilities granted
                  
                  $
                  2,828
                  
                  $
                  3,856Weighted
                      average interest rate on borrowings atend
                      of year
                  
                  
                  4.2
                  %
                  
                  5.2
                  %
 
 At
          March
          31, 2004 and 2005, the Company pledged bank deposits of $965 and $965,
          and
          investment securities of $309 and $296, respectively, to banks to secure
          banking
          facilities granted. There are no restrictive financial covenants associated
          with
          these bank facilities.
  Interest
          rates are generally based on the banks' best lending rate in Hong Kong
          plus 1%
          to 2% per annum, subject to fluctuations at the banks' discretion. The
          credit
          facilities are subject to annual review by the banks.
  8.
                OBLIGATIONS
                    UNDER CAPITAL LEASES
 
 Long-term
          debt consists of obligations under capital leases on certain property,
          plant and
          equipment for the Company's operations with lease terms expiring in the
          next 3
          years.
 
 Future
                    minimum lease payments as at March 31, 2005 are as
                    follows:
 
 Year
                    ending March 312006
                
                $
                4092007
                
                
                3952008
                
                
                163$
                967
 
 The
                    capital lease commitment amounts above exclude implicit interest
                    of $38,
                    $18 and $3 payable in the years ending March 31, 2005, 2006 and
                    2007,
                    respectively.
  F-19
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  9.
                COMMITMENTS
                    AND CONTINGENCIES
 
 (a)
                The
                    Company leases premises under various operating leases which
                    do not
                    contain any renewal or escalation clauses. Rental expense under
                    operating
                    leases was $691 and $725 and $817 in 2003, 2004 and 2005,
                    respectively.
 
 At
                    March 31, 2005, the Company and its subsidiaries were committed
                    under
                    operating leases requiring minimum lease payments as
                    follows:
 
 Year
                    ending March 31,-
                    2006
                
                $
                875-
                    2007
                
                
                878-
                    2008
                
                
                772-
                    2009
                
                
                706-
                    2010
                
                
                1$
                3,232
 
 (b)
                The
                    Company is committed to invest approximately $200 in Kienzle
                    USA pursuant
                    to an agreement entered into with a joint venture partner of
                    Kienzle USA.
                    The Company had invested $31 in Kienzle USA as of March 31, 2005.
                    Kienzle
                    USA has been inactive since September
                    2002.
 
 (c)
                The
                    Company had a total capital commitment of $271 for the purchase
                    of
                    property, plant and equipment as of March 31,
                    2004.
 
 (d)
                The
                    BFDC Agreements (see Note 3) originally expiring on March 31,
                    2006 was
                    renewed and extended to March 31, 2016 with the BFDC. Pursuant
                    to the BFDC
                    Agreements, the Company is not subject to certain rules and regulations
                    that would be imposed on entities which are considered under
                    China law to
                    be doing business in China by utilizing other business structures
                    such as
                    joint ventures or wholly owned subsidiaries organized in China.
                    Should
                    there be any adverse change in the Company's dealings with the
                    BFDC, or
                    should the local or federal government change the rules under
                    which the
                    Company currently operates, all of the Company's operations and
                    assets
                    could be jeopardized.
 
 In
                    addition, transactions between the Company and the BFDC are on
                    terms
                    different in certain respects from those contained in the BFDC
                    Agreements.
                    There can be no assurance that the BFDC will not insist upon
                    a change in
                    the current practices so as to require adherence to the terms
                    of the BFDC
                    Agreements, which the Company considers less favorable to it
                    than the
                    practices currently in effect, or that the Company or BFDC may
                    not be
                    required to do so by the Ministry of Foreign Trade and Economic
                    Co-operation of China and other relevant authorities. There can
                    also be no
                    assurances that the Company will be able to negotiate extensions
                    and
                    further supplements to any of the BFDC Agreements or that the
                    Company will
                    be able to continue its operations in China. If the Company were
                    required
                    to adhere to the terms of the BFDC Agreements, the Company's
                    business and
                    results of operations could be materially and adversely
                    affected.
  F-20
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  9. COMMITMENTS
          AND CONTINGENCIES - continued
 
 (e)
                The
                    United States International Trade Commission ("ITC"),an
                    independent, nonpartisan, quasi-judicial federal agency of the
                    Government
                    of the USA that: (i) provides trade expertise to both the legislative
                    and
                    executive branches of the United States of America, (ii) determines
                    the
                    impact of imports on U.S. industries, and (iii) directs actions
                    against
                    certain unfair trade practices, such as patent, trademark, and
                    copyright
                    infringement,initiated
                    an investigation in 1998 concerning certain lens-fitted film
                    packages
                    ("proceedings"). The ITC referred the investigation to an Administrative
                    Law Judge ("ALJ") to conduct a hearing and address other issues
                    pertaining
                    to the proceedings. The ITC, based on an initial determination
                    made by the
                    ALJ, had issued an order "1998 Order" banning the importation
                    of products
                    fitting the description lens-fitted film
                    packages.
 
 The
                    Company, as a result of the 1998 Order issued by the ITC in connection
                    with the proceedings, had obtained a ruling from the United States
                    Customs
                    Services ("USCS") stating that its product (HL-1 camera) does
                    not meet the
                    description of lens-fitted film package under the 1998 Order.
                    Fuji Photo
                    Co. Ltd. ("Fuji") believed that the USCS had wrongly interpreted
                    the 1998
                    Order in respect to the HL-1 camera and had requested an Advisory
                    Opinion
                    from the ITC whereby it asked the ITC to redefine lens-fitted
                    film
                    packages in order to invalidate the ruling of the USCS in respect
                    to the
                    HL-1 camera. Also, Fuji claimed, in its request for Advisory
                    Opinion, that
                    the HL-1 camera of the Company infringed four of its US Patents.
                    The ALJ
                    has made an initial determination on May 2, 2002 that the HL-1
                    camera did
                    not infringe US Patent No. 4,884,087 and the US Patent No. Re
                    34,168; both
                    held by Fuji and (ii) did infringe the US Patent No. 5,381,200
                    and the US
                    Patent No. 4,972,649; both held by Fuji. Notwithstanding the
                    infringement
                    on two of Fuji's US Patents, the ALJ did not assess any enforcement
                    sanctions (including penalties) against the Company.****The
                    initial determination by the ALJ finding HL-1 camera to have
                    infringed on
                    two of Fuji's US Patents had the effect of invalidating the ruling
                    issued
                    by the USCS.
 
 The
                    ITC, on August 7, 2002, accepted the findings of the ALJ concerning
                    the
                    four Fuji patents as they applied to HL-1 camera.Fuji
                    appealed the findings accepted by the ITC related to theUS
                    Patent No. 4,884,087 and the US Patent No. Re 34,168with
                    the United States Federal Circuit Court of Appeals for the Federal
                    Circuit
                    ("FCCA") on October 7, 2002. The FCCA also granted on November
                    26, 2002 a
                    motion of the Company to intervene in the appeal. The FCCA subsequently
                    suspended its review to allow the ITC to reach a final decision
                    on other
                    matters related to the proceedings. The ITC,on
                    May 15, 2003, adopted the initial determination of the ALJ (including
                    the
                    recommendation not to take any enforcement sanctions against
                    the Company)
                    regarding the four Fuji patents through the issuance of a final
                    order
                    ("Fuji Patent Final Order").
 
 On
                    October 7, 2004, the Court affirmed the ITC's conclusion that
                    the
                    Company's H-1 camera did not infringe the asserted claims of
                    two of the
                    patents (the US Patent No. 4,884,087 and US Patent No. Re 34,168).
                    The ITC
                    decision on US Patent No. 5,381,200 was not appealed to the Court
                    and thus
                    the ITC decision stands. The Court did, however, vacate its decision
                    on
                    the US Patent No. 4,972,649 which remanded it for a new determination
                    on
                    infringement. Management and its legal counsel cannot predict
                    the outcome
                    of the remand on the US Patent No. 4,972,649 before the ITC.
                    The Company
                    had not made any interim importations with respect to the H-1
                    Camera nor
                    does it intend to make any future importations, there are no
                    contingent
                    liabilities related to the importation of the H-1 camera in relation
                    to
                    the pending ITC matter.
  F-21
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  9. COMMITMENTS
          AND CONTINGENCIES - continued
  (f)
                  The
                      Company had entered into a fee arrangement
                      with a law firm in connection with legal services provided
                      to the Company
                      and had subsequently entered into a settlement agreement and
                      mutual
                      release (the "Agreement") with the law firm on December 30,
                      2004. The
                      Company would settle all expenses incurred by the legal advisors
                      relating
                      to ITC matter case discussed in (e) above, through the following
                      arrangement:
 
 - A check in the sum of US$2
                    and
 
 - A one-year option to purchase 50,000 common
                    shares of
                    the Company at an exercise price of $1.00 per
                    share.
 
 The option was granted on December 30, 2004,
                    and the
                    Company had recorded an expense of $177 in the consolidated statements
                    of
                    operations for the year ended March 31, 2005 as discussed in
                    note
                    13.
  10.
                CAPITAL
                    STOCK
 
 In
                    August 1998, the Board of Directors authorised the Company to
                    repurchase
                    shares up to the value of $400 with a maximum repurchase price
                    of $3.50
                    per share. During the year ended March 31, 2003, the Company
                    purchased
                    6,000 shares for a total cash consideration of $4 at prices per
                    share
                    ranging from $0.60 to $1.41. At March 31, 2004 and 2005, these
                    shares were
                    held in treasury and are not eligible to vote or receive
                    dividends.
 
 
 11.
                CONCENTRATIONS
                    OF CREDIT RISK AND MAJOR CUSTOMERS
 
 A
          substantial percentage of the Company's sales are made to two customers
          and are
          typically on an open account basis. Details of the customers accounting
          for 10%
          or more of total net sales in any of the years ended March 31, 2003, 2004
          and
          2005 are as follows:
 
 Year
                    ended March 31,2003
                
                2004
                
                2005Company
                    A
                
                
                18.9
                %
                
                17.1
                %
                
                18.1
                %Company
                    B
                
                
                14.6
                %
                
                22.4
                %
                
                17.7
                %
 
  F-22
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  11. CONCENTRATIONS
          OF CREDIT RISK AND MAJOR CUSTOMERS - continued
 
 Details
          of the accounts receivable from the two customers with the largest receivable
          balances at March 31, 2004 and 2005 are as follows:
  Percentage
                    of accounts receivableMarch
                    31,2004
                
                2005Company
                    A
                
                
                11.2
                %
                
                15.8
                %Company
                    B
                
                
                36.5
                %
                
                30.8
                %Two
                    largest receivable balances
                
                
                47.7
                %
                
                46.6
                %
 
 Details
          of the movements of the allowance for doubtful account for the years ended
          March
          31, 2003, 2004 and 2005 are as follows:
  2003
                
                2004
                
                2005At
                    beginning of year
                
                $
                30
                
                $
                63
                
                $
                111Bad
                    debt expense
                
                
                41
                
                
                142
                
                
                57Amount
                    written off
                
                
                (8
                )
                
                (94
                )
                
                (69
                )At
                    end of year
                
                $
                63
                
                $
                111
                
                $
                99
 
 
 12.
                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
                    amounts that
                    the Company could realize in a current market
                    exchange.
 
 The
                    carrying amounts of cash and cash equivalents, restricted cash,
                    investment
                    securities, accounts receivable, accounts payable, accrued liabilities,
                    short-term borrowings and long-term debt are reasonable estimates
                    of their
                    fair value. The interest rates on the Company's long-term debt
                    approximate
                    those which would have been available at March 31, 2005 for debt
                    of
                    similar remaining maturities and credit
                    rating.
  F-23
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  13.
                STOCK
                    OPTIONS AND STOCK PURCHASE RIGHTS
 
 The
                    Company has adopted the 1996 Stock Option Plan (the "Option Plan").
                    The
                    Option Plan provides for the grant of options to purchase Common
                    Shares to
                    employees, officers, directors and consultants of the Company.
                    The Option
                    Plan is administered by the Compensation Committee appointed
                    by the Board
                    of Directors, which determines the terms of the options granted,
                    including
                    the exercise price (provided, however, that the option price
                    shall not be
                    less than fair market value or less than the par value per share
                    on the
                    date the options granted), the number of Common Shares subject
                    to the
                    option and the option's exercisability. The maximum exercisable
                    period of
                    options granted under the Option Plan is five years. In addition
                    to the
                    options that can be granted under the Option Plan, the Company
                    also
                    granted stock purchase rights to purchase 262,076 Common Shares
                    to certain
                    of the directors and key employees prior to its December 1996
                    initial
                    public offering and granted stock purchase rights to purchase
                    100,000
                    Common Shares to a director during the year ended March 31,
                    2004.
 
 In
                    May 2004, the Board of Directors proposed to increase the number
                    of stock
                    options under the Option Plan from 400,000 to 600,000 to provide
                    incentives to those persons performing services to the Company.
                    The
                    increase of stock options were approved by the shareholders during
                    AGM in
                    August 2004.
 
 On
                    December 30, 2004, the Board of Directors approved and granted
                    stock
                    options of 50,000 to legal advisors in accordance with the settlement
                    agreement and mutual release. The options were immediately vested
                    with the
                    expiration of twelve months. The Company recorded an expense
                    of $177 for
                    the options based on the Black-Scholes option-pricing
                    model.
 
 No
                    options were granted in 2003.
 
 The
                    fair value of options granted to employees and directors in 2004
                    and legal
                    advisors in 2005, was $1.2130 and $3.531 respectively, using
                    the
                    Black-Scholes option-pricing model based on the following
                    assumptions:
 
 2004
                
                2005Risk-free
                    interest rate
                
                
                4.75%
                
                
                2.67%Expected
                    life
                
                
                1
                    year
                
                
                1
                    yearExpected
                    volatility
                
                
                101.73%
                
                
                74%Expected
                    dividend yield
                
                
                2.5%
                
                
                1.90%
 
 The
                    options vest in accordance with the terms of the agreements entered
                    into
                    by the Company and the grantee of the
                    options.
  F-24
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
 13. STOCK
          OPTIONS AND STOCK PURCHASE RIGHTS - continued
 
 The
                    following summarizes the stock purchase rights and options
                    outstanding:
 
 Stockpurchase
                    rights
                
                Stock
                    optionsAverage
                
                
                
                Averageexercise
                
                Number
                
                exercise
                
                Numberprice
                
                of
                    shares
                
                price
                
                of
                    sharesApril
                    1, 2003
                
                $
                1.8065
                
                
                85,628
                
                $
                1.9093
                
                
                240,500Stock
                    purchase rights granted
                
                
                1.5500
                
                
                100,000
                
                
                -
                
                
                -Stock
                    options granted
                
                
                -
                
                
                -
                
                
                2.1986
                
                
                168,000Stock
                    purchase rights exercised
                
                
                1.5500
                
                
                (52,847
                )
                
                -
                
                
                -Stock
                    options exercised
                
                
                -
                
                
                -
                
                
                1.8871
                
                
                (85,500
                )Stock
                    options lapsed/cancelled
                
                
                -
                
                
                -
                
                
                3.0000
                
                
                (14,500
                )March
                    31, 2004
                
                $
                1.7154
                
                
                132,781
                
                $
                2.0217
                
                
                308,500Stock
                    options granted
                
                
                -
                
                
                -
                
                $
                1.0000
                
                
                50,000Stock
                    purchase rights exercised
                
                
                2.200
                
                
                (32,781
                )
                
                -
                
                
                -Stock
                    options exercised
                
                
                -
                
                
                -
                
                $
                1.8047
                
                
                (209,350
                )Stock
                    options lapsed/cancelled
                
                
                -
                
                
                -
                
                $
                1.4700
                
                
                (7,000
                )March
                    31, 2005
                
                $
                1.55
                
                
                100,000
                
                $
                1.9374
                
                
                142,150
 
 At
                    of March 31, 2004 and 2005, there were 273,281 and 242,150, respectively,
                    of stock options/purchase rights
                    exercisable.
 
 Additional
                    information on options and stock purchase rights outstanding
                    at March 31,
                    2005 is as follows:
 Exercise
                        prices
                    
                    
                    Numberoutstanding
                    
                    
                    Weighted
                        average
                          remaining
                            contractual
                              life
                                (years)$1.1875
                    
                    
                    10,500
                    
                    
                    0.10$1.4700
                    
                    
                    27,000
                    
                    
                    3.17$1.5500
                    
                    
                    100,000
                    
                    
                    3.17$3.1700
                    
                    
                    54,650
                    
                    
                    3.57$1.0000
                    
                    
                    50,000
                    
                    
                    0.72242,150
                    
                    
                    1.51
  F-25
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
 14.
                STOCK
                    COMPENSATION
 
 The
                    Company entered into an employment contract with a director on
                    April 1,
                    2004, which entitles the director to an annual bonus of 29,154
                    shares upon
                    completion of his service with the Company for the year ended
                    March 31,
                    2005.
 
 The
                    shares were issued to the director on June 3, 2005. The Company
                    recorded a
                    compensation expense of $160 for the year ended March 31, 2005,
                    based on
                    the intrinsic value of the shares as of April 1,
                    2004.
 
 
 15.
                SEGMENT
                    INFORMATION
 
 The
                    Company's chief operating decision maker evaluates segmentperformanceand allocates resources based on several factors, of which the
                    primary
                    financial measure is operating
                    income.
 
 The
                    Company considers its reportable segments to be metal stamping,
                    the
                    manufacture and trading of cameras, and clocks, watches and others.
                    A
                    summary of the net sales, profitability information and asset
                    information
                    by segment and geographical areas is shown
                    below:
 
 Year
                    ended March 31,2003
                
                2004
                
                2005Net
                    sales:Metal
                    stamping:Unaffiliated
                    customers
                
                $
                11,688
                
                $
                14,786
                
                $
                17,792Intersegment
                    sales
                
                
                529
                
                
                1,190
                
                
                1,35712,217
                
                
                15,976
                
                
                19,149Cameras:Unaffiliated
                    customers
                
                
                4,910
                
                
                5,990
                
                
                3,836Intersegment
                    sales
                
                
                618
                
                
                413
                
                
                2065,528
                
                
                6,403
                
                
                4,042Clocks,
                    watches and others:Unaffiliated
                    customers
                
                
                3,772
                
                
                4,580
                
                
                6,050Intersegment
                    sales
                
                
                205
                
                
                415
                
                
                1,1763,977
                
                
                4,995
                
                
                7,226Corporate:Intersegment
                    sales
                
                
                1,506
                
                
                1,209
                
                
                1,497Intersegment
                    eliminations
                
                
                (2,858
                )
                
                (3,227
                )
                
                (4,236
                )Total
                    net sales
                
                $
                20,370
                
                $
                25,356
                
                $
                27,678Operating
                    income (loss):Metal
                    stamping
                
                $
                1,054
                
                $
                1,304
                
                $
                1,371Cameras
                
                
                (234
                )
                
                41
                
                
                (891
                )Clocks,
                    watches and others
                
                
                (466
                )
                
                (323
                )
                
                (605
                )Corporate
                    expenses (net)
                
                
                (195
                )
                
                (147
                )
                
                (144
                )Total
                    operating income
                
                $
                159
                
                $
                875
                
                $
                (269
                )
  F-26
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  15. SEGMENT
          INFORMATION - continued
  Year
                    ended March 31,2003
                
                2004
                
                2005Interest
                    expense:Metal
                    stamping
                
                $
                55
                
                $
                67
                
                $
                100Cameras
                
                
                5
                
                
                2
                
                
                -Clocks,
                    watches and others
                
                
                4
                
                
                8
                
                
                10Total
                    interest expense
                
                $
                64
                
                $
                77
                
                $
                110Depreciation
                    and amortization expense:Metal
                    stamping
                
                $
                636
                
                $
                588
                
                $
                647Cameras
                
                
                126
                
                
                148
                
                
                88Clocks,
                    watches and others
                
                
                268
                
                
                290
                
                
                327Corporate
                    assets
                
                
                100
                
                
                86
                
                
                86Total
                    depreciation and amortization
                
                $
                1,130
                
                $
                1,112
                
                $
                1,148Capital
                    expenditure:Metal
                    stamping
                
                $
                165
                
                $
                896
                
                $
                813Cameras
                
                
                99
                
                
                95
                
                
                85Clocks,
                    watches and others
                
                
                201
                
                
                209
                
                
                211Corporate
                    assets
                
                
                18
                
                
                17
                
                
                6Total
                    capital expenditure
                
                $
                483
                
                $
                1,217
                
                $
                1,115
 
 As
                    at March 31,2004
                
                2005Identifiable
                    assets:Metal
                    stamping
                
                $
                10,635
                
                $
                11,489Cameras
                
                
                3,078
                
                
                1,807Clocks,
                    watches and others
                
                
                4,316
                
                
                6,116Corporate
                    assets
                
                
                659
                
                
                688Total
                    identifiable assets
                
                $
                18,688
                
                $
                20,100Long-lived
                    assets:Metal
                    stamping
                
                $
                2,924
                
                $
                3,006Cameras
                
                
                293
                
                
                13Clocks,
                    watches and others
                
                
                1,242
                
                
                921Corporate
                    assets
                
                
                1
                
                
                3Total
                    long-lived assets
                
                $
                4,460
                
                $
                3,943
  F-27
 HIGHWAY
                HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
                  in thousands except per share data)
  15. SEGMENT
          INFORMATION - continued
  All
          of
          the Company's sales are co-ordinated through its head office in Hong Kong
          and
          the breakdown by destination is as follows:
  Year
                    ended March 31,2003
                
                2004
                
                2005Net
                    sales:Hong
                    Kong and China
                
                $
                12,975
                
                $
                16,748
                
                $
                17,284Other
                    Asian countries
                
                
                259
                
                
                596
                
                
                387Europe
                
                
                5,245
                
                
                6,004
                
                
                8,517USA
                
                
                1,533
                
                
                621
                
                
                1,096Others
                
                
                358
                
                
                1,387
                
                
                394$
                20,370
                
                $
                25,356
                
                $
                27,678
 
 The
          locations of the Company's identifiable assets are as follows:
 
 As
                    at March 31,2004
                
                2005Hong
                    Kong
                
                $
                9,103
                
                $
                10,049China
                
                
                7,666
                
                
                8,007Europe
                
                
                1,603
                
                
                1,787USA
                
                
                316
                
                
                257$
                18,688
                
                $
                20,100
 
 
 16.
                SUBSEQUENT
                    EVENTS
 
 On
                    April 23, 2005, the Company decided to cease the manufacturing
                    of single
                    use camera but continues to the trading of this
                    business.
 
 
 *
          * * * *
          *
  F-28