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, 2007.**




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




**For
      the transition period from ____________ to ____________.**




o
            SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
                ACT OF 1934




**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**




Title
      of each class


Common
      Shares, $0.01 par value per share




**Securities
      registered or to be registered pursuant to Section 12(g) of the Act:
      None**





**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.
      3,741,946 Common Shares were outstanding as of March 31, 2007.**




**Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.**


**Yes** **o** **No o**




**If
      this report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of the Securities Exchange Act of 1934.**  **Yes** **o** **No x**





**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 whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):**





**Large
                accelerated filer o**
            
            **Accelerated
                filer o**
            
            **Non-accelerated
                filer****x**




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


**Item
      17** **o** **Item
      18** **x**




**If
      this is an annual report, indicate by check mark whether the registrant is
      a
      shell company (as defined in Rule 12b-2 of the Exchange
      Act).**  **Yes** **o** **No
      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
              2Item
                  4.
              Information
                  on the Company
              16Item
                  5.
              Operating
                  and Financial Review and Prospects
              30Item
                  6.
              Directors,
                  Senior Management and Employees
              42Item
                  7.
              Major
                  Shareholders and Related Party Transactions
              48Item
                  8.
              Financial
                  Information.
              49Item
                  9.
              The
                  Listing
              51Item
                  10.
              Additional
                  Information
              52Item
                  11.
              Quantitative
                  and Qualitative Disclosures About Market Risk.
              55Item
                  12.
              Description
                  of Securities Other Than Equity Securities
              56**PART
                  II**
              
              56Item
                  13.
              Defaults,
                  Dividend Arrearages and Delinquencies.
              56Item
                  14.
              Material
                  Modification to the Rights of Securities Holders and use of
                  Proceeds.
              57Item
                  15.
              Controls
                  and Procedures.
              57Item
                  16.
              Not
                  applicable.
              58Item 16A.
              Audit
                  Committee Financial ExpertItem
                  16B.
              Code
                  of EthicsItem
                  16C.
              Principal
                  Accountant Fees and ServicesItem
                  16D.
              Exemptions
                  From the Listing Standards for Audit Committees
              59Item
                  16E.
              Purchase
                  of Equity Securities by the Issuer and Affiliated
                  Purchasers
              59**PART
                  III**
              
              59Item
                  17.
              Not
                  applicable
              59Item
                  18.
              Financial
                  statements.
              59Item
                  19.
              Exhibits.
              60







**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,” and “predict” 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. References to
      “China” or “PRC” are to the People’s Republic of China, whereas references to
“Hong Kong” are to the Hong Kong Special Administrative Region of the People’s
      Republic of China. 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




1




**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 following selected statements of
      operations data for each of the three years in the period ended March 31,
      2007 and the balance sheet data as of March 31, 2006 and 2007 are derived
      from our consolidated financial statements and notes thereto included in this
      Annual Report. The selected statements of operations data for each of the two
      year periods ended March 31, 2003 and 2004 and the balance sheet data as of
      March 31, 2003, 2004 and 2005 were derived from the Company’s audited
      financial statements, which are not included in this Annual Report. 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.





Selected
      Consolidated Financial Information (In thousands, except per share
      data):




2003
            
            2004
            
            2005
            
            2006
            
            2007Statement
                of OperationsNet
                sales
            
            $
            20,370
            
            $
            25,356
            
            $
            27,678
            
            $
            25,843
            
            $
            31,469Gross
                profit
            
            
            3,882
            
            
            5,094
            
            
            5,130
            
            
            4,243
            
            
            6,236Operating
                income (loss)
            
            
            159
            
            
            875
            
            
            (269
            )
            
            602
            
            
            386Net
                income (loss)
            
            
            485
            
            
            982
            
            
            (152
            )
            
            42
            
            
            594Dividend
                declared and paid(1)
            
            
            0
            
            
            237
            
            
            323
            
            
            1,389
            
            
            1,288Per
                share amountsNet
                income (loss)-basic
            
            $
            0.17
            
            $
            0.32
            
            $
            (0.05
            )
            $
            0.01
            
            
            0.16Net
                income (loss)-diluted
            
            $
            0.17
            
            $
            0.30
            
            $
            (0.05
            )
            $
            0.01
            
            
            0.16Dividend
                declared & paid(1)
            
            
            0
            
            
            0.08
            
            
            0.10
            
            
            0.40
            
            
            0.36Weighted
                average shares:Basic
            
            
            2,902
            
            
            3,030
            
            
            3,260
            
            
            3,465
            
            
            3,636Diluted
            
            
            2,902
            
            
            3,258
            
            
            3,260
            
            
            3,544
            
            
            3,690Balance
                Sheet DataProperty,
                plant and equipment, net
            
            $
            3,657
            
            $
            3,780
            
            $
            3,473
            
            $
            2,787
            
            $
            3,980Working
                capital
            
            
            7,753
            
            
            8,774
            
            
            9,850
            
            
            9,960
            
            
            8,944Total
                assets
            
            
            16,494
            
            
            18,688
            
            
            20,100
            
            
            18,891
            
            
            22,414Long
                term debt
            
            
            230
            
            
            385
            
            
            967
            
            
            803
            
            
            1,133Shareholders’
                equity
            
            
            11,907
            
            
            12,842
            
            
            13,058
            
            
            12,274
            
            
            12,167







(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.




2




*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 at four facilities in China. The principal facility, at which over
      80%
      of the Company’s operations were conducted during the fiscal year ended March
      31, 2007, is located in Long Hua, Shenzhen, China. Pursuant to its six 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. The Company’s operations in
      Long Hua, Shenzhen, are conducted pursuant to agreements entered into between
      certain China companies 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, and may be terminated by either the Company or
      the
      landlord upon six months notice to the other party. It is currently uncertain
      whether the Company will be able to renew the Premises Lease prior to its
      expiration in February 2009. Because of the high demand for residential property
      in Shenzhen, increasing rental rates, and the new terms the landlord is expected
      to demand, it is doubtful that the Company will be able to, or will want to
      renew the Premises Lease. In the event that the Company is unable to renew
      the
      Premises Lease or unwilling to do so under the landlord’s new terms, the
      operations of the Company at its largest facility will have to be relocated
      to
      other, as yet unidentified, facilities. As a result, the Company must consider
      relocating its principal facilities from Long Hua, Shenzhen, to one or more
      alternative sites. Any such relocation will be costly and could disrupt the
      Company’s operations, and is expected to adversely affect on the Company, its
      operations, and its financial condition. While the Company believes that there
      are other suitable alternative facilities, most of which are located outside
      of
      Shenzhen, the terms of such alternate facilities could be less favorable to
      the
      Company than the terms under the Premises Leases. In addition, prior to February
      2009, 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.




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 no longer is active). 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.




3




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.




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 if the parties do not honor or extend the current
      arrangements or renew the BFDC Agreements or the Premises Leases,
      respectively.




In
      2005,
      the Company entered into an agreement with the He Yuan Foreign Trade &
Economy Cooperation Bureau for its manufacturing facilities in Hu Yuan, and
      in
      2006, the Company became a party to an agreement with the Shenzhen Longgang
      Pinghu Lisu Manufacturing Factory after its purchase of Golden Bright Plastic
      Manufacturing Company Limited. Both the He Yuan and Pinghu Lisu agreements
      are
      similar to the BFDC Agreements, and the Company is subject to the same risks
      at
      these new facilities as it is at its principal facility Long Hua, Shenzhen.




*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.




4




*Further
      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. In response to the demand for a revaluation of the
      renminbi, the Chinese government has on several occasions since 2005 permitted
      the RMB to appreciate in value. An increase in the value of the RMB may result
      in an increase of the Company’s operating costs in China. 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.




*Possible
      Reoccurrence of SARS or Bird Flu.* 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 principal 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. Hong Kong and southeast China have also
      experienced outbreaks of bird flu. Should SARS or bird flu 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 or
      bird
      flu 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. While China has a comprehensive system
      of
      laws, the application of these laws by the existing regional and local
      authorities 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 all 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 increase its compliance with the regulations and operate with
      the
      newly enforced rules and 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




China,
      having been a developing country that has experienced tremendous growth over
      the
      last 20 years, has had constantly evolving laws, rules and regulations dealing
      with many aspects of the operations of industrial companies (including the
      operations of the Company). Many of the original rules could not be followed
      and
      were difficult to interpret, while others were frequently changed and modified
      or even retroactively enforced. To date, the local Chinese authorities have
      acted as a buffer for local businesses by smoothening the implementation and
      partially enforcing various rules, thereby enabling industrial enterprises
      to
      operate with practical rules. Lately the Central Government of China is
      modernizing and trying to implement unified laws and regulations. These changes,
      during the transition period from the prior application of the rules to the
      new
      application and interpretation of the rules can be very disruptive to the
      operations of companies and can pose financial dangers for those companies
      that
      have previously operated under the prior rules and regulations. This
      transition period affects mainly businesses such as the Company that operate
      under agreements with the BFDC. In addition to the transitional difficulties,
      the authorities have, from time to time, severely penalized non-complying
      companies to set an example of the consequences of non-compliance. These
      penalties can be imposed at anytime and for very little reason. While the
      Company has been able to operate within the generally accepted rules and has
      not
      been subject to any material enforcement actions, no assurance can be given
      that
      the authorities will not find reason to impose regulatory actions against the
      Company.




6




*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 effectively pays the 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 4 of Consolidated
      Financial Statements for additional information on taxation.




*Tax
      Risks of Operating in China* .
      Although the Company’s operations in China are not taxed, the Company is subject
      to certain locally imposed taxes. For example, the local Chinese authorities
      have imposed a 20% levy on certain wire transfer payments from Hong Kong to
      China. Additional taxes and levies, such as the foregoing levy, could
      detrimentally affect the Company’s beneficial cost structure in China and its
      future results from operations. In addition, the Company is not required to
      withhold taxes in China for its Hong Kong based employees who reside less than
      183 days in China. While the Company carefully monitors the amount of time
      that
      its affected employees spend in China, an inadvertent violation of the
      employment restrictions in China by some of the Company’s employees could expose
      the Company to significant taxes in China.




*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 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
      Difficulties* .
      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, the
      recent governmentally imposed minimum wage increases, and the general rise
      in
      wages have forced the Company to increase its wages (directly and by having
      to
      pay overtime at higher rates), thereby negatively affecting its cost advantage
      it enjoyed compared to non-China manufacturers. Partially as a result of these
      labor issues in Long Hua, Shenzhen, the Company has been searching for one
      or
      more alternative locations for its manufacturing facilities in areas that have
      lower labor costs. In 2005, the Company established a new, smaller facility
      in
      He Yuan, a nearby county, and in 2006, the Company commenced operations in
      Wuxi,
      in the greater metropolitan Shanghai area. 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 severe 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 to grant its employees home leave and to, therefore, 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.




7




China’s
      strict, communist era labor laws are difficult to comply with and costly to
      implement. While governmental agencies, as a result of the economic development
      of China, have previously only required compliance with some of the labor laws,
      these agencies have recently increased compliance with the original labor laws.
      Employers found to be violating these labor rules are often severely penalized,
      partly in order to intimidate other companies into compliance. The strict
      enforcement of the labor laws, combined with the shortages in the available
      labor pool, have increased the Company’s costs of finding, hiring, paying, and
      otherwise providing for employees.




*Risks
      Related to Operations*




*Significant
      Financial and Operational Risks Related To Opening Additional Facilities in
      China.* During
      the fiscal year ended March 31, 2007, the Company completed the acquisition
      of
      one new operation and an additional facility. As a result, the Company currently
      has operations in four separate locations. The cost of acquiring, establishing,
      refurbishing, upgrading and integrating these new facilities has been
      substantial and has negatively affected the Company’s earnings and financial
      condition for the fiscal year ended March 31, 2007. For example, in 2006 the
      Company acquired Golden Bright Plastic Manufacturing Company Limited, a company
      engaged in the business of the manufacture and supply of plastic parts and
      products. The significant expenses that the Company has incurred to date as
      a
      result of the Golden Bright acquisition (including due diligence expenses,
      integration costs, the cost of upgrading certain machinery and equipment at
      Golden Bright’s facilities, and the significant costs incurred to upgrade and
      integrate the financial and accounting systems of Golden Bright with those
      of
      the Company) have to date reduced the Company’s overall cash flow and earnings.
      The acquisition and establishment of the other operations during 2006 (such
      as
      the tool making equipment the Company purchased from Kyoei Bright) have likewise
      negatively affected the Company’s earnings and cash position for the fiscal year
      ended March 21, 2007. While the Company believes that the acquisition of Golden
      Bright and the Kyoei Bright equipment have significantly enhanced the economic
      value and operating capabilities of the Company’s plastics operations and that
      these acquisitions will significantly contribute to the future growth of the
      Company and the expansion of the Company’s growing plastics manufacturing
      operations, the Company, to date these acquisitions have negatively affected
      the
      Company’s net income and financial condition. While the Company believes that
      these new acquisitions are on a path to profitability, no assurance can be
      given
      that these new acquisitions will, in fact, become profitable or will otherwise
      improve the Company’s overall operations, business or future
      profitability.




8




*The
      Company Must Continuously Adapt Its Operations To Suit Its Customers Needs,
      Or
      Else It Will Lose Customers.* The
      Company’s customers are continuously changing the mix of their products.
      Accordingly, the Company must continuously adapt its manufacturing abilities
      to
      suit the needs of its customers. The failure to anticipate, detect or react
      to
      its customers 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 future changes in the needs of its principal customers,
      or that its investments in equipment and machinery in anticipation of such
      changes will result in the anticipated return. Should the Company incorrectly
      react to changes in the needs of its current or future customers, 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, 2005, 2006 and 2007, the
      Company’s sales to its three largest customers for such periods accounted for
      approximately 43.9%, 51.3%, 46.9% 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. Since most of the Company’s sales transactions with its customers
      are based on purchase orders received by the Company from time to time, the
      Company is to a large extent dependent upon continuously receiving new purchase
      orders for its future sales. 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.




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, 2005, 2006 and 2007, accounts receivable from
      the
      five customers with the largest receivable balances at year-end represented
      67.4%, 76.6% and 44.9% of the total outstanding receivables, and the largest
      customer’s accounts receivable represented 15.1% of the Company’s total
      receivables as of March 31, 2007.




9




*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 at times during the past few years had to reduce
      its price and its operating margins. In addition, because of significant
      competition and the availability of alternate OEM suppliers for the Company’s
      customers, the Company has, at times, been unable to pass through significant
      materials cost increases. This has led to lower gross margins and even 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 negatively affected the Company’s net sales and
      lowered its market share. As a result of these factors, the Company will have
      to
      continue to operate at narrow profit margins, which could jeopardize the
      Company’s financial position.




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.
      However, since the Company first moved to Shenzhen as one of the first
      manufacturers in that locality, 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.




*Continuing
      Dependence on the Long Hua, Shenzhen, Factory Complex* .
      Until
      July 2005, all of the Company’s operations in China were based at a single
      facility in Long Hua, Shenzhen. In July 2005 the Company opened a second,
      smaller manufacturing facility, in He Yuan, China. In 2006, the Company also
      commenced operations at a small manufacturing facility in Wuxi, China, and
      purchased a plastic products manufacturer in Pinghu, approximately 15 kilometers
      from the Company’s main facility in Long Hua. As a result, at March 31, 2007,
      the Company was operating at four locations. However, despite these new sites,
      over 75% of the Company’s estimated operations for the current fiscal year
      ending March 31, 2008 are expected to be generated from the Long Hua, Shenzhen
      facility. Accordingly, the Company is still dependent upon its principal
      Shenzhen facility and will remain so despite the new facilities. The Company
      currently maintains fire, casualty and theft insurance aggregating approximately
      $27,000,000 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
      has diversified its operations with the new He Yuan and Wuxi facilities, the
      Company will continue to be principally dependent upon the Long Hua in the
      near
      future.




10




*The
      Company’s Operations May be Significantly Disrupted and Negatively Affected if
      The Company Relocates its Manufacturing Facilities.* The
      Company’s facilities leases in Long Hua, Shenzhen, expire in February 2009, and
      it is uncertain whether the Company will be able to obtain a new lease from
      its
      landlord. In addition, as a result of the increasing labor and utilities
      expenses related to operating in Long Hua, Shenzhen, the Company regularly
      evaluates the desirability of relocating its facilities to a new facility,
      either elsewhere in, or outside of Long Hua, Shenzhen. If the Company does
      relocate its facilities in 2009 (voluntarily or otherwise), its entire
      operations, including its business, its manufacturing operations, and its
      relationships with clients and local government offices and landlords, will
      be
      adversely affected 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
      will 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.




*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 sales to European customers, many of which are paid in euros, the
      Company is exposed to the risks associated with possible foreign currency
      controls, currency exchange rate fluctuations or devaluations. The Company’s
      financial results have, from time to time, been affected by currency
      fluctuations. For example, during the fiscal year ended March 31, 2006, the
      Company recognized a net foreign currency exchange loss for $614,000, while
      the
      Company had a currency exchange gain of $245,000 for the fiscal year ended
      March
      31, 2007. Notwithstanding these currency conversion rate 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 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.




11




*The
      New ROHS Regulations May Affect Our Operations And Expose Us To
      Liability* .
      The
      European Union and Japan have adopted, and other major markets (such as
      California, U.S.A.) are considering adopting, the Restriction on Hazardous
      Substances (“RoHS”) rules and regulations that prohibit the importation products
      and parts that contain certain levels of toxic materials (such as lead, cadmium
      and mercury). RoHS directives took effect in July 2006. Certain of the toxic
      materials on the RoHS banned list have previously been used, and may currently
      still be used in the manufacture of products that we purchase or that we supply
      to our customers. The Company’s European and Japanese customers have required
      that the Company comply with the new RoHS rules and regulations and that the
      Company give its customers assurance that the products and parts delivered
      by
      the Company are RoHS compliant. In the event that we cannot produce products
      that are RoHS compliant, we will lose sales of those products. In addition,
      there is a risk that shipments of our products may be seized and, if found
      to be
      non-compliant, that the we may be fined. Although the Company is attempting
      to
      comply with all of the new rules, and it is requiring that its parts suppliers
      comply with the new rules, no assurance can be given that the Company will
      be
      fully compliant or that its suppliers will correctly certify that the materials
      that they supply to the Company are compliant. Manufacturing products in
      compliance with RoHS will require the Company to incur additional manufacturing
      and administrative costs. However, failure to comply with the RoHS rules could
      result in the loss of sales, the loss of customers, and financial penalties.
      Since these rules have not yet been fully implemented, the costs and additional
      burdens on our business and operations of the RoHS rules and regulations are
      uncertain, but could be substantial.




*Future
      acquisitions or strategic investments may not be successful and may harm the
      Company’s operating results* .
      As part
      of its strategy, the Company intends to acquire or establish smaller facilities
      in China, and possibly elsewhere. For example, during the past two years, the
      Company has established three new manufacturing facilities in China in He Yuan,
      Wuxi and Pinghu. Future acquisitions or strategic investments could have a
      material adverse effect on the Company’s business and operating results because
      of:




·
            The
                assumption of unknown liabilities. Although the Company normally
                conducts
                extensive legal and accounting due diligence in connection with its
                acquisitions, there are many liabilities that cannot be discovered,
                and
                which liabilities could be material. For example, the Company could
                become
                subject to penalties due to the prior non-compliant practices of
                an
                acquired business under law, rules and regulations that most companies
                operating under agreements with the BFDC did not follow with the
                tacit
                approval of the local authorities.




·
            The
                Company may become subject to significant expenses related to bringing
                the
                financial, accounting and internal control procedures of the acquired
                business into compliance with U.S. GAAP financial accounting standards
                and
                the Sarbanes Oxley Act of 2002.




·
            The
                Company’s operating results could be impaired as a result of restructuring
                or impairment charges related to goodwill or amortization expenses
                associated with intangible assets.




12




·
            The
                Company could experience significant difficulties in successfully
                integrating any acquired operations, technologies, customers products
                and
                businesses with its operations.




·
            Future
                acquisitions could divert the Company’s capital and management’s attention
                to other business concerns.




·
            The
                Company many not be able to hire the key employees necessary to manage
                or
                staff the acquired enterprise
                operations.




*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 $1.00. However, due to the currency turmoil that has affected many
      countries in Southeast Asia, there has been pressure to re-value the Hong Kong
      dollar. All dollar amounts (“$”) 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
      euros. As a result, the Company would be negatively affected if the value of
      the
      Hong Kong dollar and renminbi were to appreciate. An appreciation of the
      renminbi (as occurred in 2005 and in 2007) or Hong Kong dollar against the
      U.S.
      dollar or euro 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.




13




*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.




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). 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(b) 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.




14




*Failure
      to establish and maintain effective internal controls over financial reporting
      could have a material and adverse effect on the accuracy in reporting our
      financial results or preventing fraud* ***.*** **** We
      are
      subject to the reporting obligations under the U.S. securities laws. The SEC,
      as
      required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules
      requiring public companies to include a report of management on the
      effectiveness of such companies’ internal control over financial reporting in
      its annual report. **** In
      addition, an independent registered public accounting firm for a public company
      must attest to and report on management’s assessment of the effectiveness of our
      company’s internal control over financial reporting. **** These
      requirements will first apply to the Company’s annual report on Form 20-F for
      the current fiscal year ending March **** 31,
      2008.
      As a result of certain existing weaknesses in the Company’s internal controls
      over its financial reporting system (which have been exacerbated by the recent
      acquisitions of the Golden Bright and Wuxi facilities), management may not
      be
      able to conclude that the Company’s internal control over financial reporting is
      fully effective. Moreover, even if management concludes that the Company’s
      internal control over financial reporting is effective, the Company’s
      independent registered public accounting firm may still decline to attest to
      management’s assessment or may issue a report that is qualified if such firm is
      not satisfied with the Company’s internal controls over financial reporting or
      the level at which those controls are documented, designed, operated or
      reviewed, or if such firm interprets the relevant requirements differently
      from
      the Company. In addition, during the course of such evaluation, documentation
      and testing, the Company may identify deficiencies which the Company may not
      be
      able to remedy in time to meet the deadline imposed by the Sarbanes-Oxley Act
      for compliance with the requirements. Any of these possible outcomes could
      result in an adverse reaction in the financial marketplace due to a loss of
      investor confidence in the reliability of our reporting processes, which in
      turn
      could harm the Company’s business and negatively impact the trading price of the
      Company’s common shares.




*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. 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
      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 current fiscal year ending March 31, 2008.




15




**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 seven 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 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, electronic and electrical parts and products.
      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 metal 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.




After
      establishing its metal manufacturing operations, the Company in 1991 began
      a
      camera manufacturing business by acquiring the Hi-Lite Camera Company, a Hong
      Kong camera company. The Company’s camera operations consisted primarily of
      manufacturing 35mm cameras and recycling single-use cameras. The Company mainly
      manufactured cameras for distribution in Europe, the United States and Hong
      Kong. As a result of the advent and massive proliferation during the past few
      years of digital cameras and mobile telephones with photographic capabilities,
      demand for the Company’s film-based cameras dramatically decreased. Accordingly,
      in the fiscal year ended March 31, 2006, the Company terminated virtually all
      of
      its single-use camera operations and sold most of its existing inventory of
      camera products. The Company currently still manufactures some camera related
      products (such as underwater camera specialty products) for its OEM customers,
      but revenues from such products no longer contribute significantly to the
      Company’s overall operations.




16




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 Casio), as well as clocks for the
      Company’s own account (which clocks were sold under the Company’s own “Kienzle”
brand name). 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. The Company also
      manufactured and sold watches, both under its “Kienzle” brand name and for sale
      under other labels. However, as with the camera operations, the market for
      clocks and watches has, during the past few years, decreased and become
      extremely price competitive. As a result, in fiscal year ended March 31, 2006,
      the Company sold all of its rights to the “Kienzle” trademark for an aggregate
      purchase price of $2,160,000 and terminated most of its clock and watch
      operations. The Company now only manufactures clocks and watches on a limited
      basis as an OEM manufacturer for third party clock/watch companies.




**Revised
      Business Strategy—Increase In Manufacturing Capabilities and
      Facilities**




During
      the past several years, the Company operated as (i) an OEM manufacturer of
      various metal, plastic and electronic parts, components, subassemblies and
      completed products, (ii) a manufacturer of clocks and watches for sale both
      under the Company’s own “Kienzle” brandname and for third parties, and (iii) a
      manufacturer of film-based cameras and camera products. During the fiscal year
      ended March 31, 2006, the Company completed a major restructuring and
      reorganization of its operations, which reorganization resulted in the
      termination of virtually all of the Company’s camera and clock/watch
      manufacturing operations as well as selling off the “Kienzle” trademark and
      related manufacturing and trading operations. In connection the restructuring,
      the Company wound down its marketing office in Germany (it now only maintains
      a
      small part of that office for client relations purposes in dealing with the
      Company’s European clients).




The
      principal goal and outcome of the reorganization was to terminate the Company’s
      unprofitable camera and clock/watch manufacturing and marketing operations,
      and
      to shift the Company’s resources and focus primarily to the its profitable OEM
      manufacturing and ODM design operations. Accordingly, since its organization,
      the Company’s principal business has been as an integrated OEM manufacturer of
      metal, plastic and electric parts, components, subassemblies and competed
      products. 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
      electric parts, the Company has the ability to manufacture and assemble high
      quality components, subassemblies and products that require all of the foregoing
      metal, plastic and electric manufacturing capabilities. The Company business
      strategy is to 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
      European and Japanese customers to further expand its manufacturing operations.
      In addition, the Company is attempting to leverage these advantages by upgrading
      its equipment and machinery, expanding its manufacturing capabilities, and
      diversifying is manufacturing locations to take advantage of cost and logistical
      advantages. During the past two years, the Company has taken the following
      steps
      to achieve these goals:




1.  Additional
      Facilities .
      During
      the past two years, the Company has established three new manufacturing
      facilities in China in He Yuan, Wuxi and Pinghu.




17




He
      Yuan .
      In July
      2005, the Company established a new, smaller facility in He Yuan, China, which
      commenced operations in November 2005 and currently employs about 70 employees
      in its light fixture manufacturing operations. The He Yuan facility was
      established in order to evaluate the costs, benefits and difficulties of
      operating a large facility at He Yuan. Depending on the outcome of the Company’s
      evaluation of the He Yuan operations, the Company may increase its operations
      at
      that site and may move some of its Shenzhen operations to He Yuan. The Company
      is currently leasing its 3,500 square meter facilities in He Yuan. He Yuan
      is
      located about 180 kilometers from the Company’s current site in Long Hua,
      Shenzhen. The Company is currently considering a possible purchase the land-use
      rights of a 50,000 square meter lot in He Yuan on which a manufacturing facility
      could be established, and has made a refundable deposit of 20% of the purchase
      price for the potential purchase of this lot.




Wuxi .
      In
      December 2005, the Company also incorporated Kayser (Wuxi) Metal Precision
      Manufacturing Limited, a new subsidiary in Wuxi, China, to manufacture metal
      tools and parts for the internal Chinese market. Unlike the facilities in
      Shenzhen and He Yuan the Wuxi subsidiary is able to sell its products in China
      to Chinese purchasers for use in China. The Wuxi subsidiary was established
      for
      the purpose of accessing the growing business opportunities in the Shanghai
      region and to serve the large number of European and Japanese OEMs in the
      region. The Wuxi subsidiary was established by the Company purchasing the assets
      and business of an existing manufacturing operations. In February 2007, the
      Company relocated the Wuxi facilities to its current location. Kayser (Wuxi)
      Metal Precision Manufacturing Limited is currently 100% owned by
      the Company, although the former owners and the new general manager of that
      facility collectively have a 30% beneficial interest in the Wuxi company. The
      Wuxi facility currently employs approximately 65 employees.




Pinghu .
      In
      September 2006, the Company acquired all of the shares of Golden Bright Plastic
      Manufacturing Company Limited, a company primarily engaged in the business
      of
      the manufacture and supply of plastic parts and products. Golden Bright Plastic
      Manufacturing specializes in tool making, plastic injection molding, silk screen
      printing, spray painting and mechanic and electronic assembly. Golden Bright
      produces components, subassemblies and finished products for its OEM customers.
      Golden Bright is located in Pinghu, approximately 15 kilometers from the
      Company’s principal facilities in Long Hua, Shenzhen. The Golden Bright facility
      currently employs approximately 390 employees at a 9,400 square
      meter facility. The Company purchased the shares of Golden Bright for an initial
      cash payment of $514,000 (HK $4,000,000) and subsequent additional payments
      of
      up to approximately $1.0 million, subject to certain performance measures,
      payable over a three-year period. The purchase price payments are as follows:
      (i) $514,000 (HK $4,000,000) was paid at the closing in September 2006; (ii)
      Subject to the satisfaction of certain conditions, the Company is obligated
      to
      make three equal additional payments of $171,333 totaling $514,000 (HK
      $4,000,000) in September 2007, September 2008 and September 2009; and (iii)
      A
      final contingent purchase price payment of $514,000 (HK $4,000,000) is due
      in
      Sept 2009 if certain additional contingencies are met. As security for the
      obligation of the Company to make the foregoing final contingent $514,000 (HK
      $4,000,000) purchase price payment, the Company issued 128,534 of its common
      shares to the sellers, which shares are held in escrow by an escrow agent.
      The
      parties to the purchase of the Golden Bright shares agreed that the foregoing
      escrowed shares have a value of U.S. $514,138, or HK $4,000,000 at the currency
      conversion rate in effect on the closing date. The escrowed shares are
      restricted and may not be sold or transferred in any manner until the end of
      the
      36 th calendar
      month following the closing date. At the end of the 36 th calendar
      month following the closing date, providing that all of the contingencies have
      been fully satisfied, the Company shall repurchase all of the 128,534 common
      shares for a cash purchase price of HK $4,000,000, and the escrow agent
      shall return the escrowed shares to the Company for cancellation. If any of
      the
      conditions have not been satisfied, the escrow agent shall return all of the
      128,534 escrowed shares to the Company, which shares shall thereupon be
      cancelled. However, if all of the conditions have been satisfied and the Company
      fails, for any reason to repurchase the shares for HK $4,000,000, the
      restrictive legend may be removed from the shares, and the escrow agent shall
      then deliver the shares to the sellers, who shall thereafter have the right
      to
      sell all such shares and retain the relevant proceeds of sale thereof. If the
      proceeds of the sale of such shares are less than $514,000 (HK $4,000,000),
      the
      Company is responsible for any deficiency.




18




2.  Upgrading
      Equipment .
      In
      order to attract major European and Japanese OEM customers, the Company has
      been
      upgrading the design and manufacturing equipment at its facilities. During
      the
      fiscal year ended March 31, 2007, the Company made significant investments
      in
      new tool making equipment, including the purchase of seven state-of-art machines
      for use at the plastics manufacturing facilities at Golden Bright. The new
      Golden Bright equipment includes five CNC tooling machines, one CNC measurement
      machine, and one electronic injection molding machine. The asset purchase was
      completed for $300,000 and the issuance of 30,000 common shares of its stock.
      Concurrently, the Company entered into a cooperation agreement with Kyoei
      Engineering Co. Ltd., a Japanese company, for the use and operation of this
      equipment. Pursuant to the cooperation agreement, the Company has agreed to
      permit Kyoei Engineering to utilize the measurement equipment for up to 50
      percent of the available operating time, calculated weekly, during normal
      business hours, for its own purposes and benefit, provided that Kyoei
      Engineering supplies a full-time Japanese engineer to operate the machinery
      for
      both the Company and Kyoei Engineering.




In
      addition, during the fiscal year ended March 31, 2007, the Company also
      purchased new equipment to upgrade and expand its Long Hua operations. The
      total
      investment during the past fiscal year in new equipment and machinery was
      approximately $2,137,000, and the Company currently anticipates investing an
      additional $1,000,000 in new equipment and machinery this fiscal year ending
      March 31, 2008.




19




As
      its
      manufacturing capabilities and the quality of its products have improved, the
      Company has received additional product orders from its larger customers and
      has
      attracted new clients, including new customers from the U.S. The Company has
      also 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. The Company has received and actively maintains
      its ISO 9001 quality management system certification and its ISO 14001
      environmental management systems certification.




3.  Increased
      Capabilities .
      As part
      of offering its major European and Japanese customers additional facilities
      and
      modern, upgraded manufacturing equipment, the Company has also been enhancing
      its manufacturing capabilities. In order to become a one-stop manufacturing
      facility for the design, development and manufacture of components,
      subassemblies and complete products that require metal, plastic and electronics
      capabilities, the Company has been improving its plastics manufacturing and
      assembly capabilities. As indicated above, the Company has purchased Golden
      Bright to expand its plastics operations, and has complemented those operations
      with the state of the art equipment it purchased for that facility. In addition,
      by utilizing the expertise that it developed from prior its electronic clock
      making and camera operations, the Company has organically been growing and
      improving its electronic manufacturing abilities.




As
      a
      result of the foregoing strategic changes, the Company’s OEM manufacturing
      business and operations have expanded significantly beyond merely manufacturing
      and assembling metal parts used in subsystems or other products. Under its
      revised business strategy, the Company now manufactures a wider variety of
      parts
      and components for its European OEM customers, including, for example, electric
      motors, dishwasher and washing machines water control assemblies, turbines
      for
      vacuum cleaners, wireless chimes, coils for induction generators, complete
      lighting fixtures, ventilation units, as well as various functional units such
      as hinges, stands and spring pack assemblies for laptop computers and flat
      panel
      monitors.




**Business
      Overview**




The
      Company is primarily a fully integrated manufacturer of high quality metal,
      plastic, electric and electronic components, subassemblies and finished products
      for major Japanese, German and United States OEMs and contract manufacturers.
      All of the Company’s manufacturing activities are currently conducted in China.
      The Company’s principal, and oldest factory complex is located in Long Hua, in
      Shenzhen, China, at which the Company currently employs approximately 1,200
      employees in all areas of its operations. In July 2005, the Company established
      a new, smaller facility in He Yuan, China, which commenced operations in
      November 2005 and currently employs about 70 employees in its light fixture
      manufacturing operations. In 2006, the Company commenced operations at its
      new
      Kayser (Wuxi) Metal Precision Manufacturing Limited subsidiary in Wuxi, China,
      to manufacture metal tools and parts for the internal Chinese market. The Wuxi
      facility currently employs 65 persons.
      In September 2006, the Company acquired Golden Bright Plastic Manufacturing
      Company Limited, a company primarily engaged in the business of the manufacture
      and supply of plastic parts and products. The Golden Bright facility employs
      approximately 400 persons. Accordingly, as of March 31, 2007, the Company
      operated at four facilities in China.




20




The
        Company currently manufactures and supplies a wide variety of high quality
        metal, plastic and electric parts, components and products to its OEM clients,
        which products 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, electrical 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 manufacturing process and provides a broad array of other
        manufacturing and engineering services. The metal manufacturing services
        include
        metal stamping, 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 components
        assembly of printed circuit boards. Because it is able to provide these
        services, the Company eliminates the need to outsource these needed functions,
        and 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 breadth of its manufacturing capabilities, and (vi)
        its
        engineering design and development capabilities (which it uses to assist
        its
        customers to design their products).




The
      Company has continuously tried to strategically align its manufacturing
      operations with the needs of its major customers to attract new OEM clients
      and
      retain its existing clients. For example, the Company is now capable of
      manufacturing and assembling a wide variety of complex products that require
      metal, plastics and electronics manufacturing capabilities. In order to
      distinguish itself from the many other smaller metal stamping operations with
      which it used to compete in Shenzhen, the Company has adopted a plan to shift
      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 while maintaining reasonable gross
      margins. The Company believes that its restructured strategy will lead to
      additional business opportunities to provide manufacturing services to certain
      of its existing clients.




During
      the fiscal year ended March 31, 2007, the Company also continued to manufacture
      certain clocks and clock components on an OEM basis for internationally known
      clock companies. The Company also manufactures underwater digital camera casings
      and waterproof video/flash lights for various OEM customers. Neither the
      clock/watch sales, nor the camera product sales represent material on-going
      operations of the Company.




21




**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. As a result
      of the restructuring and reorganization of the Company during the two fiscal
      years ended March 31, 2007, approximately 94% of its revenues were derived
      from
      the metal, plastics and electric OEM manufacturing operations of the
      Company.




The
      Company first commenced its metal stamping operations in China in 1991. 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 50 kilometers 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.




Historically,
      the Company has manufactured high-quality metal parts, mostly for Japanese
      customers. Recently, however, the Company has focused on manufacturing products
      for European (primarily German) companies. The Company also is actively
      attempting to expand its OEM business to U.S. based companies, and has to date
      received OEM orders from some U.S. based customers.




**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.




*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 electronic 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.




22




*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. During the past two years, the Company has established a new
      manufacturing facility in He Yuan and has purchased two existing manufacturing
      operations in Wuxi and in Pinghu, China. The Company continues to consider
      and
      evaluate other possible acquisitions, both in China and elsewhere to gain
      technology know how, additional management and technicians and an increased
      customer base.




In
      addition to expanding its manufacturing capabilities in China through
      acquisition, merger, etc., the Company may also acquire and/or establish
      additional manufacturing facilities in other countries. However, no such other
      locations have been selected, and no assurance can be given that the Company
      will be able to duplicate its China business in other countries.




*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 and German 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 and maintained its 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.




**Manufacturing**




The
      Company’s manufacturing business consists of various stages: (i) tooling design
      and production; (ii) manufacturing parts made by metal stamping and plastic
      injection 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 and
      plastic 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 various computer controlled manufacturing equipment to produce
      a
      long lasting, high quality tools 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.




23




The
      tool
      making process for 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 highly sophisticated plastic injection molds based on its
      customers’ orders and requirements in a manner similar to the Company’s metal
      tool manufacturing process.




*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 and plastic molding 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.




*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 and/or Hong Kong.




24




**Raw
      Material, Component Parts and Suppliers**




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 few years, 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 few years 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.




The
      parts, components and products manufactured by the Company include various
      plastic injected and metal stamped components, as well as integrated circuits,
      electronic components and paper packaging products. The Company manufactures
      many of these products, but also purchases many other products that it uses
      in
      its products. These materials are subject to price fluctuations, and the Company
      has, at times, been materially adversely affected by price increases or
      shortages of supply. Under many of its OEM agreements, the Company does not
      have
      the right to change the price it charges its customers, despite increases in
      the
      Company’s cost of raw materials or the price of parts that the Company has to
      purchase. Nevertheless, many of the Company’s customers have, when cost
      increases are significant, permitted the Company to change its pricing.




**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 addition, the Company’s customers have recently elected
      to use the Shenzhen sea port rather than the port of Hong Kong. In considering
      establishing new manufacturing facilities for the Company, the Company may
      move
      away from Shenzhen and Hong Kong. However, any new facility that the Company
      considers must 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.




25




The
      Company’s new Golden Bright facilities in Pinghu are located near Hong Kong, and
      its new facility in He Yuan has easy access by highway or rail to Hong Kong
      and
      the other major markets and sea ports. Similarly, the new Wuxi subsidiary has
      good access to the Shanghai ports by highway and railroads. However, unlike
      its
      other facilities, it is expected that most of Wuxi’s products will be provided
      to local customers and not to sold to foreign markets.




**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, 2005, 2006 and 2007:




Year
                Ended March 312005
            
            2006
            
            2007GEOGRAPHIC
                AREAS:Hong
                Kong & China
            
            
            62.4
            %
            
            54.1
            %
            
            53.3
            %Europe
            
            
            30.8
            %
            
            39.9
            %
            
            41.7
            %Other
                Asian countries
            
            
            1.4
            %
            
            2.0
            %
            
            0.6
            %United
                States
            
            
            4.0
            %
            
            3.8
            %
            
            4.0
            %Others
            
            
            1.4
            %
            
            0.2
            %
            
            0.4
            %





The
      Company’s customers for its parts, components, and subassemblies generally are
      themselves manufacturers. The Company’s products are sold primarily to Japanese
      and German owned companies that are finished goods manufacturers 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 foreign sales person to complement the
      activities of Mr. Kohl and Saito. Due to the international nature of senior
      management, the Company believes that it 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.




26




**Major
      Customers**




For
      the
      fiscal year ended March 31, 2007, three customers each accounted for more than
      10% of the Company’s net revenues (or 46.9 %
      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 those 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.




Customers
      place 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 always 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 manufactured products to
      established existing clients are primarily on credit terms of up to 45 to 90
      days with payment in Hong Kong dollars, while the sale to new or lesser known
      customers are completed on a wire transfer payment basis before shipment or
      other similar payment terms. 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.




**Industrial
      Property Rights**




As
      a
      manufacturer of parts, components and finished products for OEMs and contract
      manufacturers, the Company has no industrial property rights, such as patents,
      licenses, franchises, concessions or royalty agreements, which it considers
      material to its OEM manufacturing business. The Company does, however, currently
      own some patents on its clock and camera technologies. Since the Company does
      not currently generate significant revenues from products covered by these
      patents, the patents currently are not relevant to the Company’s principal
      operations, and their carrying value has been written off on the Company’s
      consolidated financial statements.




27




**Competition**




The
      Company competes against numerous manufacturers, including both smaller local
      companies as well as 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 in China, 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. However, since some of the Company’s customers are large international
      enterprises that source their products from many international sources, the
      Company also competes against metal manufacturing companies in other low cost
      manufacturing countries. 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. In addition, since
      the Company’s main manufacturing facilities are located in the Shenzhen area,
      near some of its OEM customers, the Company has a competitive advantage by
      being
      able to reduce delivery times and transportation costs for these customers,
      by
      being able to offer “just in time” supply services, and by being able to recycle
      packaging materials for multi-use purposes.




**Other
      Activities**




Because
      the Company has been established in Shenzhen for over a decade, its also has
      some other minor activities in that area unrelated to its manufacturing
      operations. These other activities usually are conducted to test the market
      for
      potential expansion of the Company’s operations into other businesses that that
      could benefit from the Company’s capabilities. For example, the Company owns two
      apartments in Shenzhen that it acquired for investment purposes, and the Company
      operates a minor food facility in Shenzhen. However, none of these other
      activities is material to the Company’s operations or financial condition.




**Organizational
      Structure**




Highway
      Holdings Limited is a holding company that operates through its subsidiaries.
      As
      of March 31, 2007, Highway Holdings Limited owned twelve subsidiaries, all
      of
      which were wholly-owned by Highway Holdings Limited. However, the Company
      currently conducts its business primarily through seven of these
      subsidiaries, all of which are incorporated in Hong Kong. The Company also
      still
      owns a subsidiary that is incorporated in Germany, but this subsidiary is
      currently being wound down and currently operates only as a small liaison office
      for the Company’s European customers. 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.




28




**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 2008. The Company believes that
      suitable alternative facilities are available if the Company cannot extend
      the
      lease on satisfactory terms.




The
      Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong at
      a
      rental cost of $1,600 per month under an agreement that expires in December
      2007.




*China*




The
      Company currently leases a total of approximately 45,000 square meters 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 37,800 square meters 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, 2007 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.




29






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 180 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 pays $3,300 per month as rent. The facilities are currently
      used solely for manufacturing light fixtures.




As
      part
      of its acquisition of Golden Bright Plastic Manufacturing Company Limited in
      Pinghu, the Company assumed that company’s obligations under an agreement for
      the Shenzhen Longgang Pinghu Lisu Manufacturing Factory. The Golden Bright
      facility consists of an approximately 94,000 square
      feet manufacturing facility and dormitory living quarters that are leased under
      a lease that expires in June, 2012.




The
      Company’s Wuxi subsidiary has leased a 46,000 square feet facility in February
      2007. The facilities are leased for $4,100 per month under a lease that expires
      in February 2016.




*Germany*




When
      the
      Company reorganized its operations in Germany in 2005, it closed the larger
      offices and in February 2006 opened a smaller 1,370 square
      foot marketing in Villingen-Schwenningen, Germany. The lease for this office
      expires in February 2009. The Company currently has no intention of continuing
      its operations in Germany after the lease expires.




**Item
      5.** **Operating
      and Financial Review and Prospects**




**Overview**




The
      Company’s net sales during the past three years were derived primarily from (i)
      the manufacture and sale of metal, plastic and electronic components, assemblies
      and products for its multi-national clients, and (ii) to a lesser extent, the
      manufacture and sale of clocks, watches, watch components, and cameras. The
      manufacture and sale of clocks, watches and cameras for the Company’s own
      accounts was terminated by March 31, 2006.




During
      the past two years, the Company has established one new manufacturing facility
      and acquired two other businesses. The cost and effort of acquiring,
      establishing, refurbishing, and integrating these three new operations into
      the
      Company’s overall business have significantly and adversely affected the
      Company’s operations and its earnings during those periods. Among others
      effects, the recent acquisitions burdened the Company’s technical,
      administrative and managerial staffs and have negatively impacted some of the
      internal operational targets and Company goals. Although the Company
      manufactures metal, plastic and electronic parts and products for its customers,
      it treats all of these interrelated OEM manufacturing operations as one business
      segment.




30




The
      Company is not taxed in the British Virgin Islands, the state of its
      incorporation. 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. However, because of the Company’s multi-jurisdictional
      operations, the Company’s overall tax rate varies from the current 17.5%
      rate.




Under
      the
      BFDC Agreements that apply to the Company’s principal operations in Shenzhen,
      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. The
      facilities that the Company opened in fiscal 2006 in He Yuan and the Golden
      Bright subsidiary that it acquired in Pinghu in fiscal 2007 both operate on a
      similar basis as in Shenzhen, and the Company therefore does not directly pay
      taxes on its He Yuan or Pinghu operations in China. However, since the Company
      has now opened a wholly-owned subsidiary in Wuxi that is a registered company
      in
      China and that is authorized to manufacture and sell products for China domestic
      market, the Company will have to pay Chinese domestic taxes with respect to
      its
      Wuxi operations.




Net
      sales
      to customers by geographic area are generally determined by where the customer
      is incorporated. For example, if a customer is incorporated in the USA, the
      sale
      is recorded as a sale to the U.S.




**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, plastic
      and electronic parts, (ii) clocks, clock movements and watches, (iii) cameras
      and camera accessories, and (iv) OEM manufacture of electric components and
      products. Revenues during the fiscal year ending March 31, 2006 also include
      revenues generated by the Company from the sale of “Kienzle” branded watches and
      other products that it did not manufacture. As described elsewhere in this
      Annual Report, in its recent reorganization and restructuring, the Company
      sold
      the rights to the “Kienzle” trademark and substantially terminated all
      clock/watch and camera manufacturing operations, other than a small amount
      of
      OEM manufacturing of these products.




31




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 31,2005
            
            2006
            
            2007Net
                Sales
            
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            81.5
            
            
            83.6
            
            
            80.2Gross
                profit
            
            
            18.5
            
            
            16.4
            
            
            19.8Operating
                income/(loss)(1)
            
            
            (1.0
            )
            
            2.3
            
            
            1.2Non-operating
                income /(loss)(2)
            
            
            0.7
            
            
            (1.8
            )
            
            0.8Income/(loss)
                before income taxes before minority interest
            
            
            (0.3
            )
            
            0.5
            
            
            2.0Income
                taxes
            
            
            (0.3
            )
            
            (0.3
            )
            
            (0.2
            )Income/(loss)
                before minority interest
            
            
            (0.6
            )
            
            0.2
            
            
            1.8Net
                income/(loss)
            
            
            (0.6
            )%
            
            0.2
            %
            
            1.8





Note:




(1)
            Operating
                income/(loss) for the year ended March 31,2006 includes (i) impairment
                loss of long-lived assets, and (ii) gain on sale of “Kienzle” industrial
                property rights.


(2)
            Non
                operating income /(loss) includes (i) exchange gain (loss) net, and
                (ii)
                interest income / (loss) net.




*Year
      Ended March 31, 2007 Compared to Year Ended March 31, 2006*




Net
      sales
      for the fiscal year ended March 31, 2007 (“fiscal 2007”) increased by
      $5,626,000, or 21.8%, from the year ended March 31, 2006 (“fiscal 2006”). The
      increase in net sales was due to (i) an increase in sales from the Company’s
      existing OEM clients, (ii) and the addition of an entire year’s revenues from
      the new He Yuan facility (that facility opened in November 2005 and therefore
      only contributed to net sales in fiscal 2006 for less than five months), and
      (iii) the addition of revenues from the Golden Bright facilities that the
      Company acquired in September 2006 and the Wuxi subsidiary that started
      operations in February, 2006. These increases offset the loss of revenues that
      the Company experiences due to the termination of its camera, watch and clocks
      operations in fiscal 2006.




The
      Company’s gross profits as a percentage of its net sales increased from 16.4%
      fiscal 2006 to 19.8% in fiscal 2007. The Company’s gross profits increased to
      $6,236,000 in fiscal 2007 from $4,243,000 in fiscal 2006 due to the increase
      in
      new sales and the increase in the Company’s gross margins. Traditionally, the
      Company’s OEM net sales have a higher gross margin than the gross margins it
      derives from its clocks and camera sales. During fiscal 2007 substantially
      all
      of its net sales were the result of the higher margin OEM sales, whereas the
      Company still had a significant amount of net sales in fiscal 2006 from its
      lower margin clock and camera operations. In addition, during fiscal 2006,
      the
      Company sold a large part of its single-use cameras at prices less than the
      historical prices in order to liquidate its inventory. The inventory of
      single-use cameras, as well as all the watch and clock inventory not directly
      related to the watch and clock OEM business that remained at March 31, 2006,
      was
      written off. Although the Company’s future revenues will be primarily generated
      by its OEM metal, plastics and electronics manufacturing operations, the Company
      expects its future gross margins from these operations to be somewhat lower
      than
      historical rates for OEM sales due to continuing increases in raw material,
      energy, transportation, labor and other manufacturing costs, and to the
      Company’s attempt to increase sales of its OEM operations (which may require the
      Company to reduce some of its margins in order to attract additional business).
      During fiscal 2007, the value of the Chinese renminbi appreciated compared
      to
      the U.S. dollar, which increased some of the Company’s manufacturing costs in
      China. Future appreciation of the value of the renminbi may further increase
      the
      Company’s manufacturing costs and reduce its future gross margins.




32




The
      reorganization and restructuring of the Company during fiscal 2006 resulted
      in
      various expenses that negatively affected the Company’s financial performance.
      Included in the impacts were (i) an approximately $358,000 charge attributed
      to
      the liquidation of inventory below cost and the write-off of $592,000 of the
      unsold inventory; (ii) an approximately $197,000 impairment loss of property,
      plant and equipment and a $60,000 impairment loss of industrial property rights,
      and (iii) an approximately $80,000 expense to close the Company’s offices in
      Germany.




Selling,
      general and administrative expenses for fiscal 2007 increased by $ 685,000 ,
      or 13.3 %,
      over
      fiscal 2006. The principal reason for the increase was the addition of the
      three
      additional facilities that the Company added during fiscal 2006 and fiscal
      2007.
      The increase in selling, general and administrative expenses was partially
      offset by a decrease in general and administrative expenses at the Company’s
      operations in Germany, which operations that Company is winding down. Selling,
      general and administrative expenses also increased due to the significant
      additional costs the Company incurred in establishing and integrating the
      financial and accounting functions of its new facilities, particularly those
      of
      the new Golden Bright subsidiary that it acquired in September 2006. Approximately
      $85,000 was recorded as an expense for the additional payments for acquiring
      Golden Bright. In
      addition, the Company’s operating expenses also increased due to the
      appreciation during fiscal 2007 of the Chinese renminbi against the U.S. dollar.
      Selling, general and administrative expenses are expected to increase further
      in
      fiscal 2008 due to
      additional financial controls and procedures that the Company will have to
      implement for the first time in the current fiscal year ending March 31, 2008
      under Section 404 of the Sarbanes-Oxley Act of 2002. Although the amount of
      selling, general and administrative costs increased in fiscal 2007, as a
      percentage of net sales those expenses decreased from 20.0% of total net sales
      in fiscal 2006 to 18.6 %
      in
      fiscal 2007.




The
      Company’s operating income was negatively affected during the fiscal 2006 due to
      a $614,000 currency exchange net loss as a result of adverse currency rate
      fluctuations. However, in fiscal 2007, the Company realized a currency exchange
      rate gain of $245,000. The currency exchange loss in fiscal 2006 was the result
      of the decrease in the value of the euro compared to the U.S. dollar, which
      decreased the value of payments the Company received in euros from its sales
      in
      Europe. As the Company’s sales to European customers increases (sales to
      European customers who paid in euros represented approximately 20% of the
      Company’s net sales in fiscal 2007), so does the Company’s risk exposure to
      currency exchange rate fluctuations. Since the Company does not undertake any
      currency hedging transactions, its financial results will continue to be
      affected by the fluctuations of currencies (the Company does, however, have
      agreements with certain of its European customers that limit the risk of
      currency fluctuations to 5%).




33




During
      fiscal 2006, the Company realized a gain of $1,781,000 from the sale of its
      industrial property rights (mostly the sale of the rights to the “Kienzle”
trademark). No such gain was realized in fiscal 2007. As a result of this
      one-time gain in fiscal 2006, the Company experienced operating income of
      $602,000 in fiscal 2006 compared to operating income of $ 386,000 in
      fiscal 2007.




The
      Company’s interest expenses increased in fiscal 2007 by $108,000 over the prior
      fiscal year, but the increased interest expense was partially offset by a
      $95,000 increase in interest income. The increase in the amount of interest
      that
      the Company earned was due to an increase in the interest rates and the finance
      lease.




As
      a
      result of an increase in sales, higher gross margins and gross profits, and
      lower selling, general and administrative expenses as a percentage of sales,
      the
      Company generated net income $ 594,000 in
      fiscal
      2007 compared to net income of $42,000 in fiscal 2006.




The
      Company believes that the results of its fiscal 2007 operations reflect the
      success of the reorganization and restructuring that the Company has been
      implementing since fiscal 2005. Net sales have increased from $27,678,000 in
      fiscal 2005 to $31,469,000 in fiscal 2007. In addition, excluding the $1,781,000
      one-time gain that the Company recognized in fiscal 2006 as a result of the
      sale
      of the “Kienzle” industrial property rights, the Company realized net income in
      fiscal 2007 for the first time during the past three years.




*Year
      Ended March 31, 2006 Compared to Year Ended March 31, 2005*




Net
      sales
      in fiscal 2006 decreased by $1,835,000, or 6.6%, from the year ended March
      31,
      2005 (“fiscal 2005”). The decrease in net sales was due to the Company’s
      restructuring and reorganization in which it substantially reduced its clock
      and
      watch operations and its camera operations (other than its niche underwater
      camera operations). As a result of the Company’s decision to cease most of its
      camera operations and most of its clock/watch manufacturing operations, net
      sales of cameras decreased from $5,990,000 in fiscal 2004, to $3,836,000 in
      fiscal 2005 to $1,487,000 in fiscal 2006. Likewise, the sale of clocks/watches
      decreased from $4,301,000 in fiscal 2005 to $2,630,000 in fiscal 2006. The
      decrease in camera operations and in clocks/watches sales was partially offset
      by a $1,612,000 increase in metal and electronic OEM net sales. The Company’s
      strategic plan that it implemented in fiscal 2006 was to decrease its
      unprofitable clock/watch and camera operations and increase its higher margin,
      profitable OEM manufacturing operations. Metal, mechanical and electric OEM
      net
      sales represented $21,726,000, or 84.1% of the Company’s total net sales of
      $25,843,000.




The
      Company’s gross profits as a percentage of its net sales decreased from 18.5% in
      the year ended March 31, 2005 to 16.4% fiscal 2006. As a result of decreased
      sales in fiscal 2006 and lower gross margins, the Company’s gross profits
      decreased from $5,130,000 in fiscal 2005 to $4,243,000 in fiscal 2006. A major
      reason for the decrease in the Company’s gross margin percentage was the
      liquidation of inventory at reduced prices in connection with the termination
      of
      its camera and clock/watch operations. During fiscal 2006, the Company sold
      a
      large part of its single-use cameras at prices less than the historical prices
      in order to liquidate its inventory. The inventory of single-use cameras, as
      well as all the watch and clock inventory not directly related to the watch
      and
      clock OEM business that remained at March 31, 2006, was written off. Cost of
      sales as a percentage of net sales also was negatively impacted by continuing
      increases in the cost of certain raw materials and labor costs in Shenzhen.
      The
      new, smaller facility that the Company opened in He Yuan during fiscal 2006
      was
      intended to offset the higher costs of operations in Shenzhen, but did not
      have
      a material impact in fiscal 2006 due to its limited operations during fiscal
      2006 and the inefficiencies normally associated with initiating operations
      at a
      new facility.




34




The
      reorganization and restructuring of the Company during fiscal 2006 resulted
      in
      various expenses that negatively affected the Company’s financial performance.
      Included in the impacts were (i) an approximately $358,000 charge attributed
      to
      the liquidation of inventory below cost and the write-off of $592,000 of the
      unsold inventory; (ii) an approximately $197,000 impairment loss of property,
      plant and equipment and a $60,000 impairment loss of industrial property rights,
      and (iii) an approximately $80,000 expense to close the Company’s offices in
      Germany.




Selling,
      general and administrative expenses for fiscal 2006 increased by $180,000,
      or
      3.6%, over fiscal 2005. As a result of the increase in selling, general and
      administrative expenses and the decrease in net sales, those expenses
      represented 20.0% of total net sales, compared to 18.0% in fiscal 2005. The
      increase in selling, general and administrative expenses was due in part to
      the
      significant costs incurred in closing most of the Company’s operations in
      Germany, and increased professional fees. Selling, general and administrative
      expenses also increased due to increases in marketing activities, through trade
      shows, advertisements, and new catalogues.




The
      Company’s net income was negatively affected during the fiscal 2006 due to a
      $614,000 currency exchange net loss as a result of adverse currency rate
      fluctuations. In fiscal 2005, the Company had realized a currency exchange
      rate
      gain of $249,000. The loss in fiscal 2006 was the result of the decrease in
      the
      value of the euro compared to the U.S. dollar, which decreased the value of
      payments the Company received in euros from its sales in Europe. A number of
      the
      Company’s European customers have elected to pay the Company in euros.




The
      Company’s interest expenses increased in fiscal 2006 by $24,000 over the prior
      fiscal year, but the increased interest expense was offset by a $52,000 increase
      in interest income. The increase in the amount of interest that the Company
      earned was due to an increase in the amount of cash held by the Company (at
      March 31, 2006, the Company had $6,384,000 in cash and cash equivalents,
      compared to $3,948,000 on March 31,2005) and by an increase in interest
      rates.




Despite
      the decrease in sales, lower gross margins, lower gross profits, and increased
      selling, general and administrative expenses, the Company generated income
      from
      operations of $602,000 due to the sale of all of its rights to the “Kienzle”
trademark (the trademark was sold for $2,160,000). As a result of the “Kienzle”
sale income, the Company had net income of $42,000 for fiscal 2006, compared
      to
      a net loss of $152,000 in the prior fiscal year.




35




**Liquidity
      and Capital Resources**




The
      following table sets forth a summary of our cash flows for the periods
      indicated:


**Year
                  Ended March 31,****2005**
              
              
              **2006**
              
              
              **2007****(****In
                  thousands****)**Net
                  cash provided by operating activities
              
              $
              708
              
              $
              1,315
              
              $
              1,655Net
                  cash (used in) provided by investing activities
              
              
              (170
              )
              
              1,984
              
              
              (1,518
              )Net
                  cash provided by (used in) financing activities
              
              
              (665
              )
              
              (995
              )
              
              (1,244
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (127
              )
              
              2,304
              
              
              (1,107
              )Cash
                  and cash equivalents at beginning of period
              
              
              4,158
              
              
              3,948
              
              
              6,384Effect
                  of exchange rate changes
              
              
              (83
              )
              
              132
              
              
              22Cash
                  and cash equivalents at end of period
              
              $
              3,948
              
              $
              6,384
              
              $
              5,299




At
      March
      31, 2007, the Company had a working capital of $ 8,944,000 compared
      to working capital of $9,960,000 at March 31, 2006. The Company’s working
      capital decreased in fiscal 2007 due to the cash outlays incurred in (i)
      acquiring, establishing and integrating its new Wuxi and Pinghu operations
      and
      (ii) upgrading the property, plant and equipment of all of its operations and
      as
      a result of the $1,288,000 cash dividends that Company paid its shareholders
      in
      fiscal 2007. Including the cost of purchasing Golden Bright, in fiscal 2007,
      the
      Company expended $2,137,000 on property, plant and equipment, thereby increasing
      the total amount of its property, plant and equipment at March 31, 2007 (net
      of
      depreciation) to $3,980,000.




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. For the fiscal year ended March 31, 2007, the Company generated
      $ 1,655,000 of
      cash
      from its operating activities. The cash generated from operations was offset
      by
      an increase in cash used in investment activities due to the purchase of $
      934 ,000 in
      equipment and $ 331,000 for the
      purchase of Golden Bright.




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
      credit facilities extended to the Company by the Hong Kong and Shanghai Banking
      Corporation Limited (HSBC), by DBS Bank (Hong Kong) Limited, and by
      Overseas-Chinese Banking Corporation Limited (OCBC).




36




The
      HSBC
      credit facility, as of the date of this Annual Report, provides for a maximum
      credit facility of $2,571,000 (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.




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 $3,048,000 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 5 months
      to
      48 months. Interest rates under the DBS capital expenditure facility are set
      at
      0.25% below the prime rate quoted by the bank 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.




The
      OCBC
      credit facility, as of the date of this Annual Report, provides for a maximum
      credit facility of $1,221,000 (subject to various sub-limits). The OCBC 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.




As
      of
      March 31, 2007, the Company had borrowings of a total of $2,418,000 outstanding
      under its credit facilities and had a total of $3,302,000 of available credit
      remaining under the three credit facilities. The Company’s long-term debt was
      $1,133,000 as of March 31, 2007.




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. Assuming
      that
      certain conditions are met, the Company will be required to make a payment
      of
      approximately $170,000 in September 2007 in connection with the purchase of
      the
      Golden Bright subsidiary. The Company also expects to incur additional
      administrative costs in the current fiscal year as it implements the additional
      financial internal controls and procedures that it is required to maintain
      under
      Section 404 of the Sarbanes Oxley Act of 2002.




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.




37




The
      following is a summary of the Company’s contractual obligations as of March 31,
      2007 is as follows:




**Payment
                due by Year Ended March 31,****Contractual
                Obligations**
            
            **Total**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012
                and thereafter****000’s**
            
            **000’s**
            
            **000’s**
            
            **000’s**
            
            **000’s**
            
            **000’s**Facility
                Leases
            
            
            2,668
            
            
            1,071
            
            
            978
            
            
            221
            
            
            199
            
            
            199Finance
                Leases
            
            
            1,133
            
            
            478
            
            
            260
            
            
            200
            
            
            195
            
            
            —Capital
                commitment on purchase of property, plant and equipment
            
            
            426
            
            
            426Purchase
                obligations
            
            
            2,979
            
            
            2,979
            
            
            
            
            
            
            
            
            —
            
            
            —Short
                term borrowing
            
            
            3,097
            
            
            3,097
            
            
            
            
            
            
            
            
            —
            
            
            —Interest
                commitments
            
            
            141
            
            
            68
            
            
            41
            
            
            24
            
            
            8
            
            
            —Total
            
            
            10,444
            
            
            8,119
            
            
            1,279
            
            
            445
            
            
            402
            
            
            199





**Impact
      of Inflation**




The
      rapid
      growth of China’s economy in general, and the growth in Shenzhen in particular,
      has resulted in increased levels of price inflation for raw materials, fuel
      and
      labor. These increased costs have affected the Company’s cost of operations.
      While the Company has attempted to pass through most of these costs to its
      customers, certain of these increased expenses have negatively affected the
      Company’s gross margins and its overall administrative costs. If inflation
      continues, the Company’s costs will likely further increase, and there can be no
      assurance that the Company will be able to increase its prices to an extent
      that
      would offset the increase in expenses.




**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. In addition, during the one month
      before and the one month after the New Year holidays, the Company normally
      experiences severe labor shortages, which further impact the operations during
      this period. 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.




The
      Company makes its payments under the BFDC Agreements for its manufacturing
      facilities and factory workers in both Shenzhen and He Yuan in renminbi (RMB),
      as management fees and other operating charges are based on RMB. The exchange
      rate between the U.S. dollar and the RMB has changed during the past two years
      as the value of the RMB compared to the U.S. dollar has increased by almost
      7%.
      Accordingly, the Company’s costs (in U.S. dollars) has increased.




Furthermore,
      the Company’s sales to its European customers are increasingly denominated in
      euros, thereby further increasing the Company’s risks of exchange rate
      fluctuations. For the fiscal year ended March 31, 2007, 20% of the Company’s net
      sales were paid in euros. During the fiscal year ended March 31, 2006, the
      Company experienced a net currency exchange loss of $614,000 due to the decrease
      in the value of the euro compared to the U.S. dollar. For the fiscal year ended
      March 31, 2007, however, the Company had a $245,000 currency exchange gain.




38




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. In order to mitigate the effects of
      significant fluctuations in the value of the euro, the Company has, however,
      entered into agreements with certain of its European customers that limits
      the
      exposure to currency fluctuations to 5%.




**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, and intangible assets. The Company bases its estimates
      and
      judgments on historical experience and on various other factors that the Company
      believes are reasonable. Actual results may differ from these estimates under
      different assumptions or conditions.




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


Principles
        of consolidation -
        The
        consolidated financial statements include the financial statements of the
        Company and all
        its majority-owned subsidiaries . 
        All significant intercompany transactions and balances have been eliminated
        on
        consolidation. The
        results of subsidiaries acquired have been consolidated from the date of
        acquisition.  The excess of fair value over purchase consideration has been
        allocated to reduce the amounts otherwise assigned to the eligible acquired
        assets.
  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 (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.




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. The
      allowances are determined by (1) analyzing specific customer accounts that
      have
      known or potential collection issues and (2) applying historical loss rates
      to
      the aging of the remaining accounts receivable balances. The allowances for
      doubtful accounts were $31,000 and $13,000 in fiscal years ended March 31,
      2006
      and 2007, respectively. If
      the
      financial condition of its customers changed, changes to these allowances may
      be
      required, which would impact the Company’s future operating
      results.




39




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.




Foreign
      currency translation - The company uses the United States dollar as its
      reporting currency. Assets and liabilities of non-United States dollar function
      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 income (loss). Foreign
      currency transactions are translated into the functional currency at exchange
      rates prevailing on the transaction date. Foreign currency denominated monetary
      assets and liabilities are translated into the functional currency using
      exchange rates prevailing on the balance sheet date. Gains
      or
      losses from currency transactions are included in net income
      (loss).




Impairment
      of assets - The Company’s long-lived assets principally include property, plant
      and equipment and intangible assets. The Company reviews the carrying value
      of
      its long-lived assets for impairment whenever events or changes in circumstances
      indicate that the carrying value may not be recoverable. The Company assesses
      the recoverability of the carrying value of long-lived assets by first grouping
      its long-lived assets with other assets and liabilities at the lowest level
      for
      which identifiable cash flows largely independent of the cash flows of other
      assets and liabilities (the asset group) and, secondly, estimating the
      undiscounted future cash flows that are directly associated with and expected
      to
      arise from the use of and eventual disposition of such asset group. The Company
      estimates the undiscounted cash flows over the remaining useful life of the
      primary asset within the asset group. If the carrying value of the asset group
      exceeds the estimated undiscounted cash flows, the Company records an impairment
      charge to the extent the carrying value of the long-lived asset exceeds its
      fair
      value. The Company determines fair value through quoted market prices in active
      markets or, if quoted market prices are unavailable, through the performance
      of
      internal analysis of discounted cash flows or obtains external appraisals from
      independent valuation firms. The undiscounted and discounted cash flow analyses
      are based on a number of estimates and assumptions, including the expected
      period over which the asset will be utilized, projected future operating results
      of the asset group, discount rate and long-term growth rate. The Company’s
      assessments of impairment of long-lived assets and its periodic review of the
      remaining useful lives of its long-lived assets are an integral part of the
      Company’s ongoing strategic review of its business and operations. Therefore,
      future changes in the Company’s strategy and other changes in the operations of
      the Company could impact the projected future operating results that are
      inherent in the Company’s estimates of fair value, resulting in impairments in
      the future. Additionally, other changes in the estimates and assumptions,
      including the discount rate and expected long-term growth rate, which drive
      the
      valuation techniques employed to estimate the fair value of long-lived assets
      could change and, therefore, impact the assessments of impairment in the future. Due
      to
      the poor financial performance of the manufacturing of cameras, clocks and
      watches, the Company reassessed its property, plant and equipment and industrial
      property rights for impairment, and an impairment loss of $347,000 and $67,000,
      respectively, was recognized during the fiscal year ended March 31, 2005, and
      the Company further recognized an impairment loss of $197,000 for property,
      plant and equipment, and an impairment loss of $60,000 for industrial property
      rights during the fiscal year ended March 31, 2006.




40




Stock-based
        compensation - The Company has
        a
        stock-based employee compensation plan, as more fully described in note 18.
         Prior to April 1, 2006, the Company accounted
        for stock-based compensation arrangements under Accounting Principles Board
        ("APB") Opinion No. 25, "Accounting for Stock Issued to
        Employees" ** and
        provided additional financial statement disclosure in accordance with SFAS
        No. 123, "Accounting for Stock-Based Compensation".  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 and as a result
        no
        expense was recognized for grant period to April 1, 2006.  The Company recognized
        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.
  Effective April 1, 2007, the Company has adopted the provision of Statement
        of
        Financial Accounting Standards No. 123R,  "Share-Based Payment" ("SFAS
        123R"). This statement establishes accounting for equity instruments exchanged
        for service.  The stock-based compensation cost is measured at the grant
        date based on the fair value of the award and is recognized as expense over
        the
        employee's requisite service period.
  Upon adoption, the Company applied the modified-prospective transition approach
        and accordingly financial statement amounts for the prior periods presented
        have
        not been restated to reflect the fair value method of expensing share-based
        compensation.
  As a result of adopting SFAS 123R, there was no cumulative effect on the
        net
        income for the year ended March 31, 2007, as all awards granted in prior
        years
        had vested before April 1, 2006.




41


**Item
      6.** **Directors,
      Senior Management and Employees**




**Directors
      and Executive Officers**




The
      Directors and executive officers of the Company as of June 29, 2007 are listed
      below. The Directors hold office until the next annual meeting of shareholders,
      which currently is scheduled to be held on August 9, 2007.




Name
            
            Age
            
            PositionsRoland
                W. Kohl
            
            
            58
            
            
            Chief
                Executive Officer, Director, Chairman of the BoardSatoru
                Saito
            
            
            58
            
            
            Sales
                Director, Metal Stamping Operations, DirectorFong
                Po Shan
            
            
            41
            
            
            Chief
                Financial Officer, SecretaryMay
                Tsang Shu Mui
            
            
            47
            
            
            Chief
                Administrative Officer, DirectorQuan
                Vinh Can (Joseph)
            
            
            58
            
            
            Chief
                Operating Officer, Metal Stamping OperationsTiko
                Aharonov(1)(2)
            
            
            60
            
            
            DirectorDirk
                Hermann
            
            
            43
            
            
            DirectorUri
                Bernhard Oppenheimer(1)(2)
            
            
            71
            
            
            DirectorShlomo
                Tamir(1)(2)
            
            
            60
            
            
            DirectorKevin
                Yang Kuang Yu(1)
            
            
            50
            
            
            DirectorIrene
                Wong Ping Yim(1)
            
            
            41
            
            
            DirectorBrian
                Geary(1)(2)
            
            
            50
            
            
            DirectorGeorge
                Leung Wing Chan(1)
            
            
            54
            
            
            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.




42




**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. He was a bank manager for
      a
      leading Israeli commercial and retail bank from
      1969
      to 1989  and has
      operated his own real estate and investment company for high net worth
      individuals desiring to invest in real estate in Israel. Mr.
      Tiko
      also represents investors in real estate in Bulgaria.




**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, and in 2005 became the Company’s Chief
      Administrative Officer. 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, responsible
      for all of the Company’s manufacturing operations. Mr. Quan currently is the
      Company’s Chief Operating Officer, Metal Stamping Operations. He 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.




**Dirk
      Hermann.** Dr.
      Hermann was appointed to the Board of Directors in January 2003. Dr. Hermann
      has
      served since 2006 as a sales executive for VKB AG, a leading insurance company
      in Germany. Prior thereto, he used to work for Allianz Versicherungs-AG as
      a
      regional marketing director for southwest Germany. 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.




**Uri
      Bernhard Oppenheimer.** Mr.
      Oppenheimer was elected to the Board of Directors in July 2005. Mr. Oppenheimer
      is founder, managing director and the majority owner of U.B. Oppenheimer GmbH
      in
      Germany and MIG Germany GmbH in Germany.




**Shlomo
      Tamir.** Mr.
      Tamir was elected to the Board of Directors in July 2005. Mr. Tamir has worked
      with Taman/Israel Aircraft Industry since 1969, holding various positions,
      including Director of Product Assurance, Program Manager, and most recently
      as a Group
      of
      Programs Manager.




43




**Kevin
      Yang Kuang Yu.** Mr.
      Yang
      was elected to the Board of Directors in July 2005. He has, since 2004 been
      the
      China-USA Director of Holt Asia LLC in the U.S. Prior thereto, from 2000 to
      May
      2003, Mr. Yang set up and managed a factory in Shanghai for CHT Co., Ltd. and
      controlled and managed other manufacturing facilities in China. Mr. Yang has
      also been involved with trading companies that were engaged in exporting
      products to the U.S.




**Irene
      Wong Ping Yim.** Ms.
      Wong
      was elected to the Board of Directors in July 2005. Ms. Wong has been the Chief
      Accountant of CNIM HK Ltd. in Hong Kong since 2003. Prior thereto, she spent
      two
      years earning a Master of Business Administration from Deakin University in
      Australia. From 1994 to 2001, Mr. Wong was the Accounting Manager of Highway
      Holdings.




**Brian
      Geary.** Mr.
      Geary was
      appointed to the Board of Directors in December 2005. Mr. Geary has since 2002
      been a director of LMI Aerospace, a public company that manufactures components,
      assemblies, and kits for the aerospace, defense, and technology industries,
      From 1978
      until 2002, Mr. Geary was the President and owner Versaform Corp. and Versaform
      Canada ,
      two
      companies that were sold to LMI Aerospace in 2002.




**George
      Leung Wing Chan** .
      Mr.
      Leung was appointed to the Board of Directors in December 2005. Since 2004,
      Mr.
      Leung has been a management consultant. Prior thereto, from 1995 to 2004, he
      was
      the Managing Director/Vice President or Lucky Metal & Plastic Mfg. Co., Ltd.




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.




**Compensation
      of Directors and Officers**




The
      aggregate amount of compensation (including non-cash benefits) paid by the
      Company and its subsidiaries during the year ending on March 31, 2007 to all
      of
      the directors and officers listed above, as a group (13 people), for services
      rendered to the Company and its subsidiaries in all capacities was approximately
      $ 1,247,000.




During
      the past fiscal year, the Company paid each non-executive director (Tiko
      Aharonov, Dirk Hermann, Uri Bernhard Oppenheimer, Shlomo Tamir, Kevin Yang
      Kuang
      Yu, Irene Wong Ping Yim, Brian
      Geary, and George
      Leung Wing Chan) an annualized director’s fee of $6,000, and reimbursed them for
      their reasonable expenses incurred in connection with their services as
      directors. In addition, members of any Board committee and the Chairman of
      the
      Audit Committee are paid an additional fee of $1,000 per year for each committee
      on which they serve. On June 24, 2006, the Company granted to each director
      a
      five-year option to purchase 5,000 shares at an exercise price of $3.42 (the
      last sale price on the first business day following the option grant). The
      options become vested and are exercisable only after the first anniversary
      (June
      24, 2007) of the option grant date.




44




**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 Audit Committee of the Board of Directors currently are Uri
      Bernhard Oppenheimer, Shlomo Tamir, Kevin Yang Kuang Yu, Irene Wong Ping Yim,
      Brian Geary, George Leung Wing Chan and Tiko Aharonov. 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 (one of the members has an advanced degree in business
      administration). Ms. Wong 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 2006. The Audit Committee operates under a formal charter that
      governs its duties and conduct.




*Compensation
      Committee* During
      the past fiscal year, the Compensation Committee of the Board of Directors
      consisted of consisted of Shlomo Tamir, Uri Bernhard Oppenheimer, Brian Geary
      and Tiko Aharonov. The Compensation Committee administers the Company’s 1996
      Stock Option Plan and established the salaries and incentive compensation of
      the
      executive officers of the Company.




All
      eleven of the Company’s current directors ( seven of whom
      are independent directors) have participated in the selection of 2006 director
      nominees. Accordingly, the Board of Directors has not yet found it necessary
      to
      have a separate Nominating Committee. 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.




45




**Employees**




As
      of
      March 31, 2007, the Company had a total of 1,625 persons
      were working on a full-time basis for the Company. Of these, 1,584 workers
      in China were supplied to the Company by the BFDC under the BFDC Agreements,
      the
      Company’s agreement with the He Yuan Foreign Trade & Economy Cooperation
      Bureau, and the Golden Bright’s agreement with the Shenzhen Longgang Pinghu Lisu
      Manufacturing Factory. As with the employees in Shenzhen, the employees at
      He
      Yuan and Pinghu are technically employed by the local authorities, not by the
      Company. However, since the Company’s Wuxi subsidiary is a registered Chinese
      company, the employees at the Wuxi facility are employees of the Company’s Wuxi
      subsidiary. The Company only has one full-time employee and one consultant
      left
      at its office in Germany. As of March 31, 2007, 41 employees in Hong Kong were employees of the Company’s subsidiaries. Of the
      foregoing workers and employees, 100 were
      engaged in the administration of the Company, 1,350 were
      engaged in manufacturing (including research and development, design,
      engineering, quality control, and shipping), 20 were
      engaged in marketing, and the balance ( 155 employees) were engaged in miscellaneous other supporting functions. 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
      number of workers employed by the Company 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 complexes in 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.




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.




46




**Options
      of Directors and Senior Management**




The
      following table sets forth the number of options to purchase Common Shares
      that
      each current Director and executive officer of the Company owns as of June
      29,
      2007, 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
                PriceTiko
                Aharonov
            
            
            3,000
            
            
            June
                2, 2008
            
            $
            1.476,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            
            
            June
                23, 2011
            
            $
            3.42May
                Tsang Shu Mui
            
            
            10,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            
            
            June
                23, 2011
            
            $
            3.42Satoru
                Saito
            
            
            6,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            
            
            June
                23, 2011
            
            $
            3.42Dirk
                Hermann
            
            
            1,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            
            
            June
                23, 2011
            
            $
            3.42Quan
                Vinh Can (Joseph)
            
            
            10,000
            
            
            June
                30, 2010
            
            $
            3.50Fong
                Po Shan
            
            
            10,000
            
            
            June
                30, 2010
            
            $
            3.50Kevin
                Yang Kuang Yu
            
            
            5,000
            
            
            June
                23, 2011
            
            $
            3.42Irene
                Wong Ping Yim
            
            
            5,000
            
            
            June
                23, 2011
            
            $
            3.42Shlomo
                Tamir
            
            
            5,000
            
            
            June
                23, 2011
            
            $
            3.42Brian
                Geary
            
            
            5,000
            
            
            June
                23, 2011
            
            $
            3.42George
                Leung Wing Chan
            
            
            5,000
            
            
            June
                23, 2011
            
            $
            3.42Uri
                Bernhard Oppenheimer
            
            
            5,000
            
            
            June
                23, 2011
            
            $
            3.42





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.




47




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, 2007,
      options granted under the Option Plan to purchase a total of 140,250 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, 2007 was $3.387 per share.




As
      of
      June 29, 2007 the Company had outstanding stock options for an aggregate total
      of 140,250 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 until 2009, 29,154 Common Shares. As required by the
      employment agreement, Mr. Kohl was issued 29,154 in 2007.




**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 29, 2007, 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 Identify of Group(1)
            
            Number
                of Common Shares Beneficially Owned
            
            Percent
                Beneficial Owned(**)Roland
                W. Kohl
            
            
            497,259
            
            
            12.59
            %Tiko
                Aharonov
            
            
            265,000
            (2)
            
            6.71
            %Dirk
                Hermann
            
            
            21,000
            (3)
            
            *Satoru
                Saito
            
            
            370,980
            (4)
            
            9.39
            %May
                Tsang Shu Mui
            
            
            84,171
            (5)
            
            2.13
            %George
                Leung Wing Chan
            
            
            5,000
            (6)Brian
                Geary
            
            
            10,000
            (6)
            
            *Irene
                Wong Ping Yim
            
            
            5,000
            (6)Kevin
                Yang Kung Yu
            
            
            13,244
            (6)
            
            *Shlomo
                Tamir
            
            
            5,000
            (6)Uri
                Bernhard Oppenheimer
            
            
            5,000
            (6)Cartwright
                Investments Limited
            
            
            346,830
            
            
            8.78
            %Fong
                Po Shan
            
            
            11,283
            (7)
            
            *Quan
                Vinh Can
            
            
            43,665
            (7)
            
            *




*
            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.




48




(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 24,000 Common Shares which are currently
                exercisable.


(3)
            Includes
                stock options to purchase 16,000 Common Shares which are currently
                exercisable.


(4)
            Includes
                stock options to purchase 21,000 Common Shares which are currently
                exercisable.


(5)
            Includes
                stock options to purchase 15,000 Common Shares which are currently
                exercisable.


(6)
            Includes
                stock options to purchase 5,000 Common Shares which are currently
                exercisable.


(7)
            Includes
                stock options to purchase 10,000 Common Shares which are currently
                exercisable.




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, 2007.




**Item
      8.** **Financial
      Information.**




The
      Company’s consolidated financial statements for the three-year period ended
      March 31, 2006 are set forth under Item 18 “Financial Statements.” The
      Company’s unaudited quarterly financial information for the year ended March 31,
      2005 and 2006 are set out below:




Selected
      Consolidated Financial Information In Thousands, Except Per Share
      Data




**1****st******
              **Quarter**
            
            **2****nd******
              **Quarter**
            
            **3****rd******
              **Quarter**
            
            **4****th******
              **Quarter**2006Net
                Sales
            
            $
            6,563
            
            $
            6,855
            
            $
            6,448
            
            $
            5,977Gross
                profit (restated for 3rdquarter)
            
            
            1,381
            
            
            1,202
            
            
            1,030
            
            
            630Operating
                income (loss) (restated for 1stand 3rdquarters)
            
            
            982
            
            
            (195
            )
            
            544
            
            
            (729
            )Net
                income (loss)
            
            
            540
            
            
            (112
            )
            
            411
            
            
            (797
            )Income
                per share (loss) - basic
            
            
            0.16
            
            
            (0.03
            )
            
            0.12
            
            
            (0.24
            )Income
                per share (loss) - diluted
            
            
            0.16
            
            
            (0.03
            )
            
            0.12
            
            
            (0.24
            )2007Net
                Sales
            
            $
            7,295
            
            $
            7,428
            
            $
            8,800
            
            $
            7,946Gross
                profit
            
            
            1,526
            
            
            1,464
            
            
            1,817
            
            
            1,429Operating
                income (loss)
            
            
            339
            
            
            221
            
            
            222
            
            
            (396
            )Net
                income (loss)
            
            
            570
            
            
            188
            
            
            278
            
            
            (442
            )Income
                per share (loss) - basic
            
            
            0.16
            
            
            0.05
            
            
            0.08
            
            
            (0.13
            )Income
                per share (loss) - diluted
            
            
            0.16
            
            
            0.05
            
            
            0.08
            
            
            (0.13
            )




49




Certain
      quarterly financial information related to the first and third fiscal quarters
      of the fiscal year ended March 31, 2006 have been restated and differ from
      previously announced information in the Forms 6-K furnished to the SEC on July
      29, 2005 and January 30, 2006 as a result of the following:




a) *Gain
      from the sale of the “Kienzle” trademark rights in the first and third quarter
      of the fiscal year.* The
      Company classified $940,000 and $841,000 gain on sale of “Kienzle Trademark”
related to non-clock and clock business respectively as operating income rather
      than non-operating income respectively in the first and third quarter and thus
      it increased the original reported operating income in the Form 6-K dated July
      29, 2005 and January 30, 2006.




b) *Results
      of Kienzle Germany and Balkan in the third quarter of the fiscal
      year.* The
      Company reclassified $475,000 from discontinued operations of Kienzle Germany
      to
      cost of goods sold as the terminated operations did not meet all the
      requirements the Financial Accounting Standards Board (“FASB”) Statement No. 144
      for a discontinued operations. This resulted the decrease of the gross profit
      from $1,505,000 to $1,030,000. On the other hand, the Company reclassified
      $84,000 from discontinued operation of Kienzle Germany and Kienzle Balkan to
      operating income.




The
      foregoing restated amounts did not affect net income or earnings per
      share .




Dividend
      Policy .
      The
      Company attempts to pay a cash dividend annually to all holders of its common
      shares, subject to its profitability and cash position. During the fiscal year
      ended March 31,2007, the Company made two dividend payments; one dividend
      payment of $0.20 per share in July 2006 and a second dividend of $0.16 in
      November 2006. During the prior fiscal year ended March 31, 2006, the Company
      made two cash dividend payments of $0.20 per share each ($0.40 during the fiscal
      year), based on profits it derived in part from the sale of its “Kienzle”
trademark. The Company also paid a cash dividend of $0.10 per share in August
      2004, and a cash dividend of $0.08 per share in August 2003. 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.




Legal
      Proceedings .




The
      Company may occasionally become subject to legal proceedings and claims that
      arise in the ordinary course of our business. The Company currently is not
      involved in any material legal proceedings.




50




**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 22, 2007, the last reported sale price of our common
      shares on The Nasdaq Capital Market was $4.69 per share. As of June 22, 2007,
      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, 2007:




Year
                Ended
            
            High
            
            LowMarch
                31, 2007March
                31, 2006
            
            $
            5.48
            
            $
            2.77March
                31, 2005
            
            $
            5.80
            
            $
            3.09March
                31, 2004
            
            $
            7.39
            
            $
            1.40March
                31, 2003
            
            $
            2.00
            
            $
            0.47





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, 2007
            
            $
            7.30
            
            $
            4.10December
                31, 2006
            
            $
            4.67
            
            $
            3.28September
                30, 2006
            
            $
            5.19
            
            $
            2.68June
                30, 2006
            
            $
            4.66
            
            $
            2.59March
                31, 2006
            
            $
            5.48
            
            $
            3.25December
                31, 2005
            
            $
            3.59
            
            $
            2.77September
                30, 2005
            
            $
            3.95
            
            $
            3.20June
                30, 2005
            
            $
            4.55
            
            $
            3.26





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, 2007
            
            $
            4.76
            
            $
            4.22April
                30, 2007
            
            $
            4.98
            
            $
            4.18March
                31, 2007
            
            $
            4.96
            
            $
            4.10February
                28, 2007
            
            $
            5.49
            
            $
            4.33January
                31, 2007
            
            $
            7.30
            
            $
            4.12December
                31, 2006
            
            $
            4.40
            
            $
            3.59




51




**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, 2007 and June 29, 2007, there were 3,741,946
      and 3,771,100 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). As of March 31,
      2007, no warrants to purchase Common Shares were 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.




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.




52




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.




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.




53




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, during the two years immediately preceding the filing
      of
      this Annual Report:




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”.




For
      a
      description of the agreement pursuant to which the Company purchased Golden
      Bright, please see “Revised Business Strategy—Increase In Manufacturing
      Capabilities and Facilities—Additional Facilities,” above.




The
      Company is subject to the information requirements of the Securities and
      Exchange Act of 1934, and, in accordance with the Securities Exchange Act of
      1934, the Company files annual reports on Form 20-F and submit other reports
      and
      information under cover of Form 6-K with the SEC. You may read and copy this
      information at the SEC’s public reference room at 450 Fifth Street, N.W.,
      Washington, D.C. 20549. Recent filings and reports are also available free
      of
      charge though the EDGAR electronic filing system at www.sec.gov.




**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. However,
      while the Company has been able to repatriate its income from the operations
      conducted in China by its Hong Kong subsidiaries, it may not be able to do
      so
      with respect to its Kayser (Wuxi) Metal Precision Manufacturing Limited
      subsidiary that owns and operates the Wuxi facility. 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.




54




**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.




Under
      current Hong Kong tax 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.




**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.




**Item
      11.** **Quantitative
      and Qualitative Disclosures About Market Risk.**




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. 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 and its balance sheet. For example, 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. Currently, most
      of
      the Company’s currency fluctuation exposure is tied to the exchange rate between
      the U.S. dollar and the euro.




To
      the
      extent that the Company has to convert U.S. dollars into renminibi for its
      operations, an appreciation in the value of the renminbi compared to the U.S.
      dollar would reduce the amount of renminbi the Company would receive upon
      conversion. Accordingly, an appreciation of the renminbi’s value would require
      the Company to pay more U.S. dollars to fund it renminbi operating expenses.
      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. During the past year, the exchange rate between the yuan and
      the U.S. dollar changed slightly as China allowed the yuan to appreciate in
      value compared to the U.S. dollar. Currently, because the amount of transactions
      conducted by the Company in renminbi is relatively low, even a 5% appreciation
      in the value of the yuan would not materially change the Company’s expenses. For
      example, if the renminbi had been 1% and 5% less valuable against the U.S.
      dollars than the actual rate as of March 31, 2007, our net asset value, as
      presented in U.S. dollars, would have been approximately reduced by $63,000
      and
      $326,000, respectively. Conversely, if the renminbi had been 1% and 5% more
      valuable against the U.S. dollars as of that date, then our net asset value
      would have increased by $63,000 and $326,000, respectively. We believe our
      most
      significant foreign exchange risk results from material sales made in euro.
      Approximately 20% of our net sales were made in euros in fiscal year ended
      March
      31, 2007. If the euro had been 1% and 5% less valuable against the U.S. dollars
      than the actual rate as of March 31, 2007, our net asset value, as
      presented in U.S. dollars, would have been approximately reduced by $63,000
      and
      $319,000, respectively. Conversely, if the euro had been 1% and 5% more valuable
      against the U.S. dollars as of that date, then our net asset value would have
      increased by $63,000 and $319,000, respectively . However,
      should the Chinese government allow a significant renminbi appreciation, or
      should the Company’s operating expenses in renminbi significantly increase in
      the future, the Company’s cost structure and pricing could change and have a
      material negative effect on its operations, sales and financial
      results.




55




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 $ 3,097,000 of
      short-term borrowings that are subject to interest rate changes and $1,133,000
      of long-term borrowings outstanding as of March 31, 2007. However, taking into
      consideration that the Company had cash and cash equivalents of $ 5,299,000 available as of March 31, 2007, 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.




56




**Item
      14.** **Material
      Modification to the Rights of Securities Holders and Use of
      Proceeds.**




Not
      applicable.




**Item
      15.** **Controls
      and Procedures.**




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s Exchange Act reports
      is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission’s rules and forms and that
      such information is accumulated and communicated to this Company’s management,
      including the Company’s Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow for timely decisions regarding required disclosure. In
      designing and evaluating the disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management is required to apply its judgment in evaluating
      the
      cost-benefit relationship of possible controls and procedures.




As
      required by Securities and Exchange Commission Rule 13a-15(b), the Company
      carried out an evaluation, under the supervision and with the participation
      of
      the Company’s management, including the Company’s Chief Executive Officer and
      the Company’s Chief Financial Officer, of the effectiveness of the design and
      operation of the Company’s disclosure controls and procedures as of the end of
      the fiscal year covered by this report. Based on the foregoing, the Company’s
      Chief Executive Officer and Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures were not effective as of March 31, 2007
      for
      the following reasons:




The
      Company currently operates four facilities in various locations in China. As
      a
      result, senior management of the Company does not have the ability to actively
      monitor all of the financial functions performed at these locations. In
      addition, because the Company experiences significant turnover in its accounting
      and financial reporting personnel and has had difficulty in hiring and keeping
      highly qualified accounting personnel, some persons involved in the Company’s
      financial reporting activities have limited experience with the financial
      reporting system required by the SEC’s rules. As a result, the Company cannot be
      certain that its controls are always implemented as required. Furthermore,
      the
      Company transacts certain financial transactions in China in cash. Cash
      transactions are by their nature more difficult to monitor and carry a higher
      risk of loss by theft or fraud. In addition, neither Wuxi Kayser nor Golden
      Bright, the two businesses that the Company recently acquired and established,
      had internal controls in place that complied with those required for a U.S.
      public company. Accordingly, those acquisitions diverted management’s attention
      to integrating these operations into those of the Company, thereby affecting
      the
      Company’s overall internal controls and procedures.




In
      September 2006 ,
      the
      Company acquired all of the shares of Golden Bright Plastic Manufacturing
      Company Limited. Prior to the acquisition, Golden Bright did not maintain its
      financial records in accordance with GAAP. In addition, Golden Bright did not (1)
      have
      proper records of the movement of its inventory, (2) prepare the sales invoices
      in timely basis, (3) segregate its financial and accounting duties, and (4)
      implement proper controls over its daily operations.




57




In
      order
      to remedy the material weaknesses relating to Golden Bright’s internal controls,
      the Company has (1)
      hired
      more bookkeepers and a qualified accountant for preparing the financial
      statement in accordance with GAAP, (2) commenced the installation and
      implementation of a new ERP (enterprise resource planning) software system,
      (3)
      implement the internal controls policy at Golden Bright, and (4) sent management
      level employees from the Company’s Long Hua offices to Golden Bright to upgrade
      the operations at Golden Bright. ****




Except
      as
      set forth above, there were no changes in the Company’s internal controls over
      financial reporting that occurred during the period covered by this Annual
      Report that have materially affected, or are reasonably likely to materially
      affect, our internal controls over financial reporting.




**Item
      16.** **Not
      applicable.**




Item 16
      A. Audit Committee Financial Expert




The
      Company’s Board of Directors has determined that Ms. Irene Wong Ping Yim 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. Ms. Wong currently is the Chief Accountant of CNIM HK Ltd. in Hong
      Kong, holds a Master of Business Administration from Deakin University, and,
      from 1994 to 2001 was the Accounting Manager of Highway Holdings. 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.




All
      of
      the members of the audit committee are independent non-executive directors.




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, 2007 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,
      2007
      and will propose to the Annual General Meeting convening on August 9, 2007
      that
      Deloitte Touche Tohmatsu be ratified as the auditor for that fiscal year.




58




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, 2006 and 2007.




**2006**
            
            **2007**Audit
                Fees (1)
            
            $
            248,000
            
            $
            317,600Audit-Related
                Fees (2)
            
            
            -
            
            
            -Tax
                Fees (3)
            
            $
            31,000
            
            $
            33,600All
                Other Fees
            
            
            -Total
            
            $
            279,000
            
            $
            351,200





(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.




59


HIGHWAY
        HOLDINGS LIMITED
 
 Consolidated
        Financial Statements
 For
        each
        of the three years in the period ended March 31, 2007
 and
        Report of Independent Registered Public Accounting Firm
  
  HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 INDEX
 PageCONSOLIDATED
                    FINANCIAL STATEMENTReport
                    of Independent Registered Public Accounting Firm
                
                
                F
                    - 2Consolidated
                    Statements of Operations for each of the three years in the
                    periodended
                    March 31, 2007
                
                
                F
                    - 3Consolidated
                    Balance Sheets as of March 31, 2006 and 2007
                
                
                F
                    - 4Consolidated
                    Statements of Shareholders' Equity and ComprehensiveIncome
                    (loss) for each of the three years in the period ended March
                    31,
                    2007
                
                
                F
                    - 5Consolidated
                    Statements of Cash Flows for each of the three years in the
                    periodended
                    March 31, 2007
                
                
                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, 2006 and 2007, and the
        related consolidated statements of operations, shareholders' equity and
        comprehensive income (loss), and cash flows for each of the three years ended
        March 31, 2005, 2006 and 2007. These consolidated financial statements are
        the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these consolidated 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
        consolidated 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 audits 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 the Company as
        of
        March 31, 2006 and 2007, and the results of their operations and their cash
        flows for each of the three years ended March 31, 2005, 2006 and 2007, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 
 **Deloitte
        Touche Tohmatsu**
 Certified
        Public Accountants
 Hong
        Kong
 June
        24,
        2007
  F-2
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED
          STATEMENTS OF OPERATIONS
 (In
          thousands except for share and per share amounts)
 Year
                    ended March 31,2005
                
                2006
                
                2007$
                
                $
                
                $Net
                    sales:Third
                    parties
                
                
                27,633
                
                
                25,843
                
                
                31,469Affiliate
                
                
                45
                
                
                -
                
                
                -27,678
                
                
                25,843
                
                
                31,469Cost
                    of sales
                
                
                (22,548
                )
                
                (21,600
                )
                
                (25,233
                )Gross
                    profit
                
                
                5,130
                
                
                4,243
                
                
                6,236Selling,
                    general and administrative expenses
                
                
                (4,985
                )
                
                (5,165
                )
                
                (5,850
                )Impairment
                    of industrial property rights (note 2)
                
                
                (67
                )
                
                (60
                )
                
                -Impairment
                    of property, plant and equipment (note 2)
                
                
                (347
                )
                
                (197
                )
                
                -Gain
                    on sale of "Kienzle" industrial property rights (note 1)
                
                
                -
                
                
                1,781
                
                
                -Operating
                    income (loss)
                
                
                (269
                )
                
                602
                
                
                386Non-operating
                    income (expense):Exchange
                    gain (loss), net
                
                
                249
                
                
                (614
                )
                
                245Interest
                    expense
                
                
                (110
                )
                
                (134
                )
                
                (242
                )Interest
                    income
                
                
                14
                
                
                66
                
                
                161Other
                    income
                
                
                56
                
                
                195
                
                
                92Total
                    non-operating income (expense)
                
                
                209
                
                
                (487
                )
                
                256Affiliates:Impairment
                    of investment in an affiliate
                
                
                (5
                )
                
                -
                
                
                -Income
                    (loss) before income taxes and minority interests
                
                
                (65
                )
                
                115
                
                
                642Income
                    taxes (note 4)
                
                
                (86
                )
                
                (73
                )
                
                (48
                )Income
                    (loss) before minority interests
                
                
                (151
                )
                
                42
                
                
                594Minority
                    interests
                
                
                (1
                )
                
                -
                
                
                -Net
                    income (loss)
                
                
                (152
                )
                
                42
                
                
                594Net
                    income (loss) per share - basic
                
                
                (0.05
                )
                
                0.01
                
                
                0.16Net
                    income (loss) per share - diluted
                
                
                (0.05
                )
                
                0.01
                
                
                0.16Weighted
                    average number of shares outstanding-
                    basic
                
                
                3,260
                
                
                3,465
                
                
                3,636Weighted
                    average number of shares outstanding-
                    diluted
                
                
                3,260
                
                
                3,544
                
                
                3,690
  See
            accompanying notes to consolidated financial statements.
  F-3
 HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  CONSOLIDATED
            BALANCE SHEETS
 (In
            thousands except for share and per share amounts)
 March
                    31,2006
                
                2007$
                
                $ASSETSCurrent
                    assets:Cash
                    and cash equivalents
                
                
                6,384
                
                
                5,299Restricted
                    cash (note 10)
                
                
                965
                
                
                1,221Accounts
                    receivable, net of allowances fordoubtful
                    accounts of $31 in 2006 and $13 in 2007
                
                
                3,789
                
                
                4,742Inventories
                    (note 5)
                
                
                4,118
                
                
                6,104Investment
                    securities (note 6)
                
                
                300
                
                
                316Prepaid
                    expenses and other current assets
                
                
                546
                
                
                680Total
                    current assets
                
                
                16,102
                
                
                18,362Property,
                    plant and equipment, net (note 7)
                
                
                2,787
                
                
                3,980Intangible
                    assets, net (note 8)
                
                
                -
                
                
                70Investments
                    in affiliates (note 9)
                
                
                2
                
                
                2Total
                    assets
                
                
                18,891
                
                
                22,414LIABILITIES
                    AND SHAREHOLDERS' EQUITYCurrent
                    liabilities:Accounts
                    payable
                
                
                2,498
                
                
                3,990Short-term
                    borrowings (note 10)
                
                
                2,015
                
                
                3,097Obligations
                    under capital leases - current portion (note 11)
                
                
                481
                
                
                478Accrued
                    mould charges
                
                
                246
                
                
                253Accrued
                    payroll and employee benefits
                
                
                292
                
                
                446Other
                    liabilities and accrued expenses
                
                
                610
                
                
                1,154Total
                    current liabilities
                
                
                6,142
                
                
                9,418Obligations
                    under capital leases - net of current portion (note 11)
                
                
                322
                
                
                655Deferred
                    income taxes (note 4)
                
                
                153
                
                
                174Commitments
                    and contingencies (note 12)Shareholders'
                    equity:Common
                    shares $0.01 par value (Authorized: 20,000,000 shares,3,525,558
                    shares as of March 31, 2006, and 3,779,746 sharesas
                    of March 31, 2007 respectively, issued and outstanding)
                
                
                35
                
                
                38Additional
                    paid-in capital
                
                
                10,245
                
                
                11,304Retained
                    earnings
                
                
                2,133
                
                
                1,439Accumulated
                    other comprehensive loss
                
                
                (86
                )
                
                (48
                )Subscription
                    receivable - 128,534 shares
                
                
                -
                
                
                (513
                )Treasury
                    shares, at cost - 37,800 shares in 2006 and 2007
                
                
                (53
                )
                
                (53
                )Total
                    shareholders' equity
                
                
                12,274
                
                
                12,167Total
                    liabilities and shareholders' equity
                
                
                18,891
                
                
                22,414
  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 amounts)
 Common
                    shares,
                
                
                
                
                
                Accumulated
                
                
                
                
                
                
                
                Compre-issued
                    and
                
                Additional
                
                
                
                other
                
                
                
                Treasury
                
                Total
                
                hensiveoutstanding
                
                paid-in
                
                Retained
                
                comprehensive
                
                Subscription
                
                shares
                
                shareholders'
                
                incomeShares
                
                Amount
                
                capital
                
                earnings
                
                income
                    (loss)
                
                receivable
                
                at
                    cost
                
                equity
                
                (loss)Number
                
                $
                
                $
                
                $
                
                $
                
                $
                
                $
                
                $
                
                $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
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                160Unrealized
                    holding loss on investmentsecurities
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (13
                )
                
                -
                
                
                -
                
                
                (13
                )
                
                (13
                )Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (83
                )
                
                -
                
                
                -
                
                
                (83
                )
                
                (83
                )Cash
                    dividends ($0.1 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (323
                )
                
                -
                
                
                -
                
                
                -
                
                
                (323
                )Balance
                    at March 31, 2005
                
                
                3,316
                
                
                33
                
                
                9,820
                
                
                3,480
                
                
                (222
                )
                
                -
                
                
                (53
                )
                
                13,058
                
                
                (248
                )Issued
                    during the year
                
                
                209
                
                
                2
                
                
                265
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                267Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                42
                
                
                -
                
                
                -
                
                
                -
                
                
                42
                
                
                42Director's
                    stock compensation
                
                
                -
                
                
                -
                
                
                160
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                160Unrealized
                    holding gain on investmentsecurities
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4
                
                
                -
                
                
                -
                
                
                4
                
                
                4Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                132
                
                
                -
                
                
                -
                
                
                132
                
                
                132Cash
                    dividends ($0.4 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,389
                )
                
                -
                
                
                -
                
                
                -
                
                
                (1,389
                )Balance
                    at March 31, 2006
                
                
                3,525
                
                
                35
                
                
                10,245
                
                
                2,133
                
                
                (86
                )
                
                -
                
                
                (53
                )
                
                12,274
                
                
                178Issued
                    during the year
                
                
                254
                
                
                3
                
                
                861
                
                
                -
                
                
                -
                
                
                (513
                )
                
                -
                
                
                351Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                594
                
                
                -
                
                
                -
                
                
                -
                
                
                594
                
                
                594Director's
                    stock compensation
                
                
                -
                
                
                -
                
                
                160
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                160Employee's
                    share-based compensation
                
                
                -
                
                
                -
                
                
                38
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                38Unrealized
                    holding gain on investment securities
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                16
                
                
                -
                
                
                -
                
                
                16
                
                
                16Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                22
                
                
                -
                
                
                -
                
                
                22
                
                
                22Cash
                    dividends ($0.36 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,288
                )
                
                -
                
                
                -
                
                
                -
                
                
                (1,288
                )Balance
                    at March 31, 2007
                
                
                3,779
                
                
                38
                
                
                11,304
                
                
                1,439
                
                
                (48
                )
                
                (513
                )
                
                (53
                )
                
                12,167
                
                
                632
 See
          accompanying notes to consolidated financial statements.
  F-5
  HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (In
        thousands except for share and per share amounts)
 Year
                    ended March 31,2005
                
                2006
                
                2007$
                
                $
                
                $Cash
                    flows from operating activities:Net
                    income (loss)
                
                
                (152
                )
                
                42
                
                
                594Adjustments
                    to reconcile net income (loss) to netcash
                    provided by operating activities:Impairment
                    of industrial property rights
                
                
                67
                
                
                60
                
                
                -Impairment
                    of investment in an affiliate
                
                
                5
                
                
                -
                
                
                -Loss
                    (gain) on disposal of property, plant andequipment
                
                
                (49
                )
                
                -
                
                
                13Loss
                    on disposal of industrial property rights
                
                
                59
                
                
                -
                
                
                -Gain
                    on sale of "Kienzle" industrial property rights
                
                
                -
                
                
                (1,781
                )
                
                -Impairment
                    of property, plant and equipment
                
                
                347
                
                
                197
                
                
                -Gain
                    on disposal of a subsidiary
                
                
                -
                
                
                (3
                )
                
                -Gain
                    on disposal of an affiliate
                
                
                -
                
                
                (121
                )
                
                -Depreciation
                    of property, plant and equipment
                
                
                1,023
                
                
                968
                
                
                926Amortization
                    of industrial property rights
                
                
                125
                
                
                122
                
                
                -Amortization
                    of intangible assets
                
                
                -
                
                
                -
                
                
                13Minority
                    interests
                
                
                1
                
                
                -
                
                
                -Directors'
                    stock compensation
                
                
                160
                
                
                160
                
                
                160Deferred
                    income taxes
                
                
                (4
                )
                
                (21
                )
                
                21Stock
                    options granted to legal advisors
                
                
                177
                
                
                -
                
                
                -Stock
                    compensation
                
                
                -
                
                
                -
                
                
                38Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (1,402
                )
                
                1,376
                
                
                586Inventories
                
                
                (668
                )
                
                944
                
                
                (1,261
                )Prepaid
                    expenses and other current assets
                
                
                (82
                )
                
                175
                
                
                (97
                )Accounts
                    payable
                
                
                550
                
                
                (348
                )
                
                391Accrued
                    mould charges
                
                
                (25
                )
                
                38
                
                
                7Accrued
                    payroll and employee benefits
                
                
                10
                
                
                (39
                )
                
                154Other
                    liabilities and accrued expenses
                
                
                566
                
                
                (454
                )
                
                110Net
                    cash provided by operating activities
                
                
                708
                
                
                1,315
                
                
                1,655Investing
                    activities:Acquisition
                    of subsidiary
                
                
                -
                
                
                -
                
                
                (331
                )Purchase
                    of property, plant and equipment
                
                
                (178
                )
                
                (250
                )
                
                (934
                )Purchase
                    of industrial property rights
                
                
                (47
                )
                
                (93
                )
                
                -Proceeds
                    from disposal of an affiliate
                
                
                -
                
                
                121
                
                
                -Proceeds
                    from disposal of property, plant andequipment
                
                
                55
                
                
                46
                
                
                3Proceeds
                    from disposal of industrial property rights
                
                
                -
                
                
                2,160
                
                
                -Increase
                    in restricted cash
                
                
                -
                
                
                -
                
                
                (256
                )Net
                    cash (used in) provided by investing activities
                
                
                (170
                )
                
                1,984
                
                
                (1,518
                )
 See
          accompanying notes to consolidated financial statements.
  F-6
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF CASH FLOWS - continued
 (In
          thousands except for share and per share amounts)
 Year
                    ended March 31,2005
                
                2006
                
                2007$
                
                $
                
                $Financing
                    activities:Cash
                    dividends paid
                
                
                (323
                )
                
                (1,389
                )
                
                (1,288
                )Repayment
                    of long-term debt
                
                
                (308
                )
                
                (439
                )
                
                (535
                )(Decrease)
                    increase in short-term borrowings, net
                
                
                (484
                )
                
                566
                
                
                375Proceeds
                    from shares issued on exercise of options
                
                
                450
                
                
                267
                
                
                204Net
                    cash used in financing activities
                
                
                (665
                )
                
                (995
                )
                
                (1,244
                )Net
                    (decrease) increase in cash and cash equivalents
                
                
                (127
                )
                
                2,304
                
                
                (1,107
                )Cash
                    and cash equivalents, beginning of year
                
                
                4,158
                
                
                3,948
                
                
                6,384Effect
                    of exchange rate changes
                
                
                (83
                )
                
                132
                
                
                22Cash
                    and cash equivalents, end of year
                
                
                3,948
                
                
                6,384
                
                
                5,299Supplemental
                    disclosure of cash flow information:Interest
                    paid
                
                
                110
                
                
                134
                
                
                242Income
                    taxes paid
                
                
                61
                
                
                195
                
                
                32
 
 Supplemental
        disclosure of non-cash transactions:
  Additions
        to property, plant and equipment of $275 and $766 during the year ended March
        31, 2006 and 2007, respectively, were acquired under capital leases
        arrangements.
 
 In
        December 2006, 30,000 shares valued at $147 were issued to acquire
        certain machinery and equipment. The purchase price of this machinery
        and equipment was based on the fair value of the shares on the transaction
        date.
  See
          accompanying notes to consolidated financial statements.
  F-7
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 (In
          thousands except for share and per share amounts)
 
 1.
                ORGANIZATION
                    AND BASIS OF FINANCIAL
                    STATEMENTS
 
 Highway
                  Holdings Limited 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"), Shenzhen and He Yuan
                  of the
                  People's Republic of China ("China"), and in
                  Germany.
 
 The
                  Company operates in four principal business segments - metal stamping
                  and
                  mechanical original equipment manufacturing ("OEM"), electric OEM,
                  the
                  manufacture and trading of cameras and underwater products, and
                  clocks and
                  watches.The
                  Company's manufacturing activities are principally conducted in
                  Shenzhen,
                  He Yuan and Wuxi and its selling activities are principally conducted
                  in
                  Hong Kong and Wuxi.
 
 The
                  financial statements of theCompanyhave been prepared in accordance with accounting principles generally
                  accepted in the United States of America ("U.S.
                  GAAP").
 
 On
                  March 28, 2003, theCompanyacquired a 20% equity interest in Kienzle AG for $109. Kienzle
                  AG was
                  accounted as an affiliate using the equity method. TheGroupreassessed its investment in Kienzle AG in 2004 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
                  been recognized during the year ended March 31, 2004. TheGroupsold all "Kienzle" trademarks relating to clock and non-clock business
                  for
                  $2,160 and recognized gain on sale of $1,781 during the year ended
                  March
                  31, 2006.
 
 Additionally,
                  theCompanyreceived $121 for the sale of its 20% equity interest and recognized
                  a
                  gain of $121 on disposal of investment in Kienzle AG during the
                  year ended
                  March 31, 2006.
 
 Upon
                  the sale of the "Kienzle" trademark, the Companydid
                  not renew the lease on its marketing office in Germany and incurred
                  costs
                  related to involuntary termination of most of the employees in
                  its
                  marketing office in Germany. These costs were accrued and paid
                  in the year
                  ended March 31, 2006. There were no additional costs for exiting the
                  Kienzle clock business.
 
 TheCompanyacquired 100% equity interest in Golden Bright Plastic Manufacturing
                  Company Limited ("Golden Bright"), a company incorporated in Hong
                  Kong.Golden
                  Bright is engaged in the manufacturing and trading of plastic injection
                  products. The acquisition of Golden Bright will strengthen the
                  Company's
                  current original equipment manufacturing and technical capabilities.
                  Details of the acquisition are more fully described in Note
                  3.
 
 F-8
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 1.
              ORGANIZATION
                  AND BASIS OF FINANCIAL STATEMENTS-
                  continued
 
 At
                  March 31, 2007, details of the subsidiaries 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
                
                DormantHong
                    Kong
                
                Cavour
                    Industrial Limited
                
                May
                    9, 1989
                
                Providing
                    tooling, handling and repairing services in China and management
                    services
                    to fellow subsidiariesHong
                    Kong
                
                Hi-Lite
                    Camera Company Limited ("Hi-Lite")
                
                November
                    10, 1978
                
                Trading
                    of camera and underwater productsHong
                    Kong
                
                Kayser
                    Technik Limited
                
                June
                    23, 1994
                
                Sales
                    of metal partsHong
                    Kong
                
                Kienzle
                    Time (H.K.) Limited ("Kienzle HK")
                
                August
                    24, 1997
                
                Manufacturing
                    OEM business and trading of clocks, watches, camera and underwater
                    productsGermany
                
                Kienzle
                    Uhrenfabriken G.m.b.h. ("Kienzle Germany")
                
                April
                    1, 1999
                
                DormantHong
                    Kong
                
                Nissin
                    Precision Metal Manufacturing Limited ("Nissin")
                
                November
                    21, 1980
                
                Metal
                    stamping, tooling design and manufacturing and assembling OEM
                    productsHong
                    Kong
                
                Saiwan
                    Industries Limited
                
                August
                    10, 1990
                
                Manufacturing
                    of plastic injection parts to fellow subsidiariesHong
                    Kong
                
                Golden
                    Bright Plastic Manufacturing Company Limited
                
                May
                    19, 1992
                
                Manufacturing
                    and trading of plastic injection productsChina
                
                Kayser
                    (Wuxi) Metal Precision Manufacturing Limited ("Kayser Wuxi")
                
                December
                    21, 2005
                
                Metal
                    stampingChina
                
                Kayser
                    Restaurant (Shenzhen) Company Limited
                
                November
                    1, 2006
                
                Sales
                    of noodles and ice-cream
  All
                  the subsidiaries are wholly-owned.
  F-9
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
 2.
                SUMMARY
                    OF SIGNIFICANT ACCOUNTING
                    POLICIES
 
 **Principles
        of consolidation** -
        The
        consolidated financial statements include the financial statements of Highway
        Holdings Limited
        and all its majority-owned subsidiaries .
        All
        significant intercompany transactions and balances have been eliminated on
        consolidation. The
        results of subsidiaries acquired have been consolidated from the date of
        acquisition. The excess of fair value over purchase consideration has been
        allocated to reduce the amounts otherwise assigned to the eligible acquired
        assets.
 
 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.
 
 **Cash
                  and cash equivalents**-
                  Cash and cash equivalents include cash on hand, cash accounts,
                  interest
                  bearing savings accounts and certificates of time deposit, which
                  are
                  unrestricted as to withdrawal and use, and have maturity of three
                  months
                  or less at the time of purchase.
 
 **Investment
                  securities**-
                  Investment securities, which consist primarily of capital guaranteed
                  investment fund, have been categorized as available for sale and,
                  are
                  stated at fair value based on quoted market prices. Unrealized
                  holding
                  gains and losses are included as a component of accumulated other
                  comprehensive income (loss).
 
 **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 labour and overheads associated with the manufacturing
        process. Write-off of inventory is based on management's specific analysis
        of
        future sales and demand forecasts.
 
 **Property,
                  plant and equipment**-
                  Property, plant and equipment are stated at cost less accumulated
                  depreciation. Depreciation is computed on a straight line basis
                  over the
                  estimated useful lives of 10 years for machinery and equipment
                  and 2 to 5
                  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.
 
 **Intangible
                  assets**-
                  Identifiable intangibles acquired in a business combination are
                  determined
                  separately from goodwill based on their fair values, as determined
                  with
                  assistance of an independent valuation expert. In particular, an
                  intangible that is acquired in a business combination is recognized
                  as an
                  asset separate from goodwill if it satisfies either the
                  "contractual-legal" or "separability" criterion.The
                  intangible assets are carried at cost less accumulated amortization.
                  Amortization is computed using the straight line method over the
                  intangible assets' estimated useful
                  lives.
  F-10
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 Separately
                  identifiable intangible assets and their respective weighted average
                  estimated useful lives are as
                  follows:
  Estimateduseful
                    lifeCustomer
                    relationship
                
                
                7
                  yearsContract
                    backlog
                
                
                0.25
                    yearsNon-compete
                    agreement
                
                
                4
                    years
 **Impairment
                  on disposal 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
                  reviews
                  impairment by comparing the carrying value of the long-lived assets
                  to the
                  estimated undiscounted future cash flows expected 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 difference
                  between
                  the estimated fair value of the assets and the carrying
                  amount.
 
 Due
                  to the poor financial performance of cameras, clocks and watches,
                  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;
                  and $197 and $60 respectively, had been recognized during the year
                  ended
                  March 31, 2006. As of March 31, 2007, none of the long-lived assets
                  were
                  impaired.
 
 **Concentration
        of credit risk** -
        Financial instruments that potentially expose the Company to
        concentrations of credit risk consist primarily of cash and cash equivalents,
        and accounts receivable. The Company places
        its cash and cash equivalents with financial institutions with high-credit
        ratings and quality.
 
 The Company conducts
        credit evaluations of customers and generally does not require collateral
        or
        other security from its customers. The Company establishes
        an allowance for doubtful accounts primarily based upon the age of the
        receivables and factors surrounding the credit risk of specific
        customers.
  F-11
 HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
 
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 **Revenue
        recognition** - The Company recognizes revenue from the sale of products, 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.
 
 Revenue
                  from sales of products is recognized when the title is passed to
                  customers
                  upon shipment and when collectibility is assured. The Companydoes
                  not provide its customers with the right of return (except for
                  quality) or
                  price protection. There are no customer acceptance provisions associated
                  with the Company's products. All sales are based on firm customer
                  orders
                  with fixed terms and conditions, which generally cannot be
                  modified.
 
 **Foreign
        currency** -
        Highway
        Holdings Limited uses the United States dollar as its reporting currency.
        Assets
        and liabilities of subsidiaries whose functional currencies are other than
        the
        United States dollar are translated at year-end exchange rates, while
        revenues and expenses are translated at average currency exchange rates during
        the year. Unrealized gains or losses arising from such translation
        are reported as accumulated other comprehensive income (loss). Foreign
        currency transactions are translated into the functional currency at exchange
        rates prevailing on the transaction date. Foreign currency denominated monetary
        assets and liabilities are translated into the functional currency using
        exchange rates prevailing on the balance sheet date. Gains
        or
        losses from foreign currency transactions are included in net income
        (loss).
 
 **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. Deferred
        tax assets and liabilities are measured using the enacted rates applicable
        to
        the taxable income in the years in which the temporary differences are expected
        to be recovered or settled. Change in net deferred tax asset or liability
        is
        included in determination of net income. A
        valuation allowance is recorded 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 U.S. GAAP 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. Significant items subject to such
        estimates and assumptions include useful lives of property, plant and
        equipment and intangible assets; valuation allowances for doubtful
        receivables; valuation of share-based compensation; impairment of long-lived
        assets; allowance for inventories; and amounts recorded for
        contingencies. These estimates are often based on complex judgments and
        assumptions that management believe to be reasonable but are inherently
        uncertain and unpredictable. Actual results may differ from those
        estimates.
  F-12
  HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 **Stock-based
                  compensation**-TheCompanyhas
                  a stock-based employee compensation plan, as more fully described
                  in note
                  18. Prior to April 1, 2006, theCompanyaccounted
                  for stock-based compensation arrangements under Accounting Principles
                  Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
                  Employees"**and
                  provided additional financial statement disclosure in accordance
                  with SFAS
                  No. 123, "Accounting for Stock-Based Compensation". TheCompany'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
                  and as a result no expense was recognized for grants prior to April
                  1, 2006. TheCompanyrecognized
                  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.
 
 Effective
                  April 1, 2007, the Company has adopted the provision of Statement
                  of
                  Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS
                  123R"). This statement establishes accounting for equity instruments
                  exchanged for service. The stock-based compensation cost is measured
                  at
                  the grant date based on the fair value of the award and is recognized
                  as
                  expense over the employee's requisite service
                  period.
 
 Upon
                  adoption of SFAS 123R, the Company applied the modified-prospective
                  transition approach and accordingly financial statement amounts
                  for the
                  prior periods presented have not been restated to reflect the fair
                  value
                  method of expensing share-based
                  compensation.
 
 As
                  a result of adopting SFAS 123R, there was no cumulative effect
                  on the net
                  income for the year ended March 31, 2007, as all awards granted
                  in prior
                  years had vested before April 1,
                  2006.
  F-13
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 The
        following table illustrates the effect on net income (loss) per share as
        if the
        Company had applied the fair value recognition in 2005 and 2006.
 2005
                
                2006$
                
                $Net
                    (loss) income, as reported
                
                
                
                
                
                (152
                )
                
                42Less:
                    Stock based compensation costs under fairvalue
                    based method for all awards
                
                
                
                
                
                (152
                )
                
                (140
                )Net
                    (loss) income, pro forma
                
                
                
                
                
                (304
                )
                
                (98
                )Net
                      (loss) income per share - basic
                
                
                As
                    reported
                
                
                (0.05
                )
                
                0.01Pro
                    forma
                
                
                (0.09
                )
                
                (0.03
                )Net
                    (loss) income per share - diluted
                
                
                As
                    reported
                
                
                (0.05
                )
                
                0.01Pro
                    forma
                
                
                (0.09
                )
                
                (0.03
                )
  **Net
        income (loss) per share** -
        Basic
        net income (loss) per share is computed by dividing net income (loss)
        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.
 
 **Comprehensive
                  income****(loss)**-
                  Comprehensive income (loss) is defined to include all changes in
                  equity
                  except those resulting from investments by owners and distributions
                  to
                  owners. Comprehensive income (loss) for the years, which comprises
                  foreign
                  currency translation adjustments, unrealized holding gain (loss)
                  on
                  investment securities and net income (loss), has been disclosed
                  within the
                  consolidated statements of shareholders' equity and comprehensive
                  income
                  (loss).
  F-14
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
 
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 **Recently
                  issued accounting pronouncements**-In
                  February 2006, the Financial Accounting Standards Board ("FASB")
                  issued SFAS No. 155, "Accounting for Certain Hybrid Financial
                  Instruments - which amends FASB Statements No. 133 and 140". This
                  statement is effective for all financial instruments acquired or
                  issued
                  after the beginning of an entity's first fiscal year that begins
                  after
                  September 15, 2006.This
                  statement simplifies accounting for certain hybrid financial instruments
                  by permitting fair value measurement for a hybrid instrument that
                  contains
                  an embedded derivative that would otherwise require bifurcation.
                  TheCompanydoes
                  not expect that the adoption of SFAS 155 will have a material impact
                  on
                  its consolidated financial position, results of operations or cash
                  flows.
 
 In
                  June 2006, the FASB issued Interpretation No. 48, "Accounting for
                  Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting
                  for uncertainty in income taxes recognized in an enterpirse's financial
                  statements in accordance with FASB Statement No. 109, "Accounting
                  for
                  Income Taxes". FIN 48 prescribes a recognition threshold and measurement
                  attribute for the financial statement recognition and measurement
                  of a tax
                  position taken or expected to be taken in a tax return. FIN 48
                  also
                  provides guidance on derecognition, classification, interest and
                  penalties, accounting in interim periods, disclosure and transition.
                  FIN
                  48 is applicable from fiscal year beginning December 15, 2006.
                  TheCompanyis
                  currently evaluating the interpretation to determine the effect
                  on its
                  consolidated financial statements and related
                  disclosures.
 
 In
                  September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
                  ("SFAS 157"). SFAS 157 establishes a framework for the measuring
                  fair
                  value and expands disclosures about fair value measurements. The
                  changes
                  to current practice resulting from the application of this statement
                  relate to the definition of fair value, the methods used to measure
                  fair
                  value, and the expanded disclosures about fair value measurements.
                  SFAS
                  157 is effective for fiscal years beginning after November 15,
                  2007 and
                  interim periods within those fiscal years. TheCompanyis
                  currently evaluating the impact, if any, of SFAS 157 on its financial
                  position, results of operations and cash
                  flows.
 
 In
                  September 2006, the U.S. Securities and Exchange Commission issued
                  Staff
                  Accounting Bulletin No. 108, "Considering the Effects of Prior
                  Year
                  Misstatements when Quantifying Misstatements in Current Year Financial
                  Statements" ("SAB 108"). SAB 108 provides interpretive guidance
                  on how the
                  effects of the carryover or reversal of prior year misstatements
                  should be
                  considered in quantifying a current year misstatement. The SEC
                  Staff
                  believes that registrants should quantify errors using both a balance
                  sheet and an income statement approach and evaluate whether either
                  approach results in quantifying a misstatement that, when all relevant
                  quantitative and qualitative factors are considered, is material.
                  SAB 108
                  is effective for fiscal years ending after November 15, 2006. On
                  adoption of SAB 108, theCompanydid
                  not have a material impact on its consolidated financial position,
                  results of operations or cash
                  flows.
 
 In
                  February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
                  for
                  Financial Assets and Financial Liabilities" ("SFAS 159"), an amendment
                  of
                  FASB No. 115. This statement permits entities to choose to measure
                  many
                  financial instrument and certain other items at fair value. The
                  objective
                  is to improve financial reporting by providing entities with the
                  opportunity to mitigate volatility in reported earnings caused
                  by
                  measuring related assets and liabilities without having to apply
                  complex
                  hedge accounting provisions. SFAS No. 159 is effective from fiscal
                  year
                  commencing November 15, 2007. The Company is currently evaluating
                  the
                  impact of adopting SFAS No. 159 on its consolidated financial position,
                  cash flows, and results of
                  operations.
  F-15
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
 
 3.
                ACQUISITION
 
 On
        September 19, 2006 Highway Holdings acquired 100 % equity interest in Golden
        Bright for a cash consideration of $514. In accordance with the purchase
        agreement, additional consideration of $1,028 will be payable, contingent
        on the
        former substantial shareholders of Golden Bright continuing as employees
        for a
        requisite service period of three years and on the acquired subsidiary achieving
        a certain level of specified revenue and earnings targets.
 
 $514
        will
        vest on a straight-line basis over the requiste service period and as a result
        approximately $171 will become payable for each completed year of service.
        The
        remaining $514 will vest after completion of the employment period by the
        former
        substantial shareholders and upon Golden Bright achieving the revenue and
        earning targets.
 
 Golden
        Bright has been accounted as a subsidiary using the purchase method. The
        contingent payments represent compensation for post combination services
        and
        accordingly $85 has been accrued as compensation expense in the year ended
        March
        31, 2007.
 
 The
        assets and liabilities of Golden Bright have been recorded at fair values
        on the
        date of acquisition, after the eligible assets have been prorata reduced
        by
        $1,186, the excess of the net assets acquired over the purchase
        consideration.
 
 The
        cash
        consideration of $514 has been allocated to the assets acquired and liabilities
        assumed as follows:
 $Net
                    assets acquired, at fair value:Cash
                    and cash equivalents
                
                
                184Accounts
                    receivable
                
                
                1,539Inventories
                
                
                725Property,
                    plant and equipment
                
                
                288Intangible
                    assets
                
                
                83Accounts
                    payable
                
                
                (1,101
                )Short
                    term borrowings
                
                
                (707
                )Other
                    current liabilities
                
                
                (497
                )Purchase
                    consideration
                
                
                514
  F-16
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
  3.
                      ACQUISITION
                          - continued
 
 The
                  estimated fair value of intangible assets was derived from a valuation
                  report prepared with the assistance of an independent third party
                  valuation expert.
  $Net
                    cash outflow arising on acquisition is determined as
                    follows:Cash
                    consideration paid
                
                
                (514
                )Bank
                    balance and cash acquired
                
                
                183(331
                )
 
 The
                  following pro forma information summarizes the effect of the acquisition,
                  as if the acquisition of Golden Bright had occurred as of April
                  1, 2006.
                  This pro forma information is presented for information purposes
                  only. It
                  is based on historical information and does not purport to represent
                  the
                  actual results that may have occurred had the acquisition been
                  consummated
                  on April 1, 2006, nor is it necessarily indicative of future results
                  of
                  operations of the consolidated
                  enterprises:
 $(unaudited)Pro
                    forma net sales
                
                
                35,101Pro
                    forma operating income
                
                
                482Pro
                    forma income
                
                
                678
  4.
                INCOME
                    TAXES
 
 Income
                  is subject to taxation in the various countries in which theCompanyoperates.
 
 The
                  components of income (loss) before income taxes and minority interests
                  are
                  as follows:
  Year
                    ended March 31,2005
                
                2006
                
                2007$
                
                $
                
                $Hong
                    Kong
                
                
                1,211
                
                
                942
                
                
                793Europe
                
                
                (1,276
                )
                
                (827
                )
                
                (151
                )(65
                )
                
                115
                
                
                642
 The
        Company is not taxed in the British Virgin Islands.
 
 F-17
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
 
 4.
              INCOME
                  TAXES - continued
 
 The
        Company's operating subsidiaries, other than Kienzle Germany 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 Group and its designees
        (collectively, the "BFDC") (the agreements, collectively the "BFDC
        Agreements").
 
 In
                  connection with its recent establishment of its new facility in
                  China in
                  2006, theCompanyentered
                  into an agreement with the He Yuan Foreign Trade & Economy Cooperation
                  Bureau that is similar to the BFDC
                  Agreements.
 
 Under
                  the BFDC Agreements, theCompanyis
                  not considered by local tax authorities to be doing business in
                  China;
                  accordingly, theCompany'sactivities in China have not been subject 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
                  theCompanywill
                  not be subject to such taxes in the future. If China did impose
                  a tax upon
                  theCompany,
                  the tax could materially adversely affect theCompany'sbusiness
                  and results of operations.
 
 As
        the
        Company's 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.
 
 The
        provision for income taxes consists of the following:
 Year
                    ended March 31,2005
                
                2006
                
                2007$
                
                $
                
                $Hong
                    KongCurrent
                    tax
                
                
                90
                
                
                94
                
                
                27Deferred
                    tax
                
                
                (4
                )
                
                (21
                )
                
                2186
                
                
                73
                
                
                48
  F-18
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
  4.
              INCOME
                  TAXES - continued
 
 A
                  reconciliation between the provision for income taxes computed
                  by applying
                  the Hong KongProfitsTax
                  rate to income (loss) before income taxes and minority interests
                  and the
                  actual provision for income taxes is as
                  follows:
  Year
                    ended March 31,2005
                
                2006
                
                2007%
                
                %
                
                %Profits
                    tax rate in Hong Kong
                
                
                (17.5
                )
                
                17.5
                
                
                17.5Non-deductible
                    items/non-taxable income
                
                
                153.1
                
                
                (848.1
                )
                
                19.8Changes
                    in valuation allowances
                
                
                36.9
                
                
                1,027.8
                
                
                (38.8
                )Effect
                    of different tax rate of subsidiary operatingin
                    other jurisdiction
                
                
                (31.5
                )
                
                (100.7
                )
                
                2.2Other
                
                
                (8.7
                )
                
                (33.0
                )
                
                6.8Effective
                    tax rate
                
                
                132.3
                
                
                63.5
                
                
                7.5
 
 Deferred
                  income tax (assets) liabilities are as
                  follows:
  March
                    31,2006
                
                2007$
                
                $Deferred
                    tax liability:Property,
                    plant and equipment
                
                
                241
                
                
                226Deferred
                    tax asset:Operating
                    loss carryforwards
                
                
                (2,270
                )
                
                (2,368
                )Valuation
                    allowance
                
                
                2,182
                
                
                2,316Total
                    net deferred tax asset
                
                
                (88
                )
                
                (52
                )Net
                    deferred tax liability
                
                
                153
                
                
                174
 At
                  March 31, 2006 and 2007, tax losses amounting to approximately
                  $7,368 and
                  $5,667, respectively may be carried forward indefinitely, subject
                  to the
                  agreement of the Hong Kong Inland Revenue
                  Department.
 
 At
        March
        31, 2006 and 2007, the tax losses of a subsidiary in Germany amounting to
        approximately $3,551 and $2,249, respectively, may be carried forward
        indefinitely.
  F-19
 HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
            thousands except for share and per share amounts)
 
 5.
                INVENTORIES
 
 Inventories
        by major categories are summarized as follows:
 March
                    31,2006
                
                2007$
                
                $Raw
                    materials
                
                
                2,353
                
                
                3,752Work
                    in progress
                
                
                644
                
                
                711Finished
                    goods
                
                
                1,121
                
                
                1,6414,118
                
                
                6,104
  Inventories
                  amounting to $409, $592 and $94 were written off in the years ended
                  March
                  31, 2005, 2006 and 2007,
                  respectively.
  6.
                INVESTMENT
                    SECURITIES
  March
                    31,2006
                
                2007$
                
                $Cost
                
                
                322
                
                
                322Gross
                    unrealized holding loss
                
                
                (22
                )
                
                (6
                )Fair
                    value
                
                
                300
                
                
                316
 
 These
                  investment securities are pledged to secure banking facilities
                  granted
                  (note 10).
 
 F-20
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
        thousands except for share and per share amounts)
  7.
              PROPERTY,
                  PLANT AND EQUIPMENT, NET
 Property,
          plant and equipment, net consist of the following:
  March
                    31,2006
                
                2007$
                
                $At
                    cost:Machinery
                    and equipment
                
                
                9,764
                
                
                11,272Furniture
                    and fixtures
                
                
                35
                
                
                18Leasehold
                    improvements
                
                
                390
                
                
                1,008Motor
                    vehicles
                
                
                -
                
                
                97Total
                
                
                10,189
                
                
                12,395Less:
                    Accumulated depreciation
                
                
                (7,402
                )
                
                (8,415
                )Net
                    book value
                
                
                2,787
                
                
                3,980
 Depreciation
            expense charged to statements of operations for the years ended March
            31, 2005,
            2006 and 2007 were $1,023, $968 and $926, respectively.
 Included
              in property, plant and equipment, net assets held under capital leases
              with the
              following net book values:
  March
                        31,2006
                    
                    2007$
                    
                    $Machinery
                        and equipment, at cost
                    
                    
                    2,001
                    
                    
                    2,526Less:
                        Accumulated depreciation
                    
                    
                    (207
                    )
                    
                    (535
                    )Net
                        book value
                    
                    
                    1,794
                    
                    
                    1,991
  Depreciation
                  of machinery and equipment held under capital leases, which is
                  included in
                  depreciation expense were $185, $196 and $257 for the years ended
                  March
                  31, 2005, 2006 and 2007,
                  respectively.
 
 8.
              INTANGIBLE
                  ASSET
  NetAccumulated
                  
                  carryingCost
                  
                  amortization
                  
                  values$
                  
                  $
                  
                  $Customer
                      relationship
                  
                  
                  14
                  
                  
                  (1
                  )
                  
                  13Contract
                      backlog
                  
                  
                  4
                  
                  
                  (4
                  )
                  
                  -Non-compete
                      agreement
                  
                  
                  65
                  
                  
                  (8
                  )
                  
                  5783
                  
                  
                  (13
                  )
                  
                  70
  F-21
  HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
  8.
              INTANGIBLE
                  ASSET - continued
 The
          Company expects to record amortization expense of $18 for each of the year
          ending 2008 through 2010, $10 and $2 in the years ending 2011 and
          2012.
  9.
                INVESTMENTS
                    IN AND ADVANCE TO AFFILIATES
 
 On
                    January 25, 2000, theCompanyand
                    an unrelated party established Kienzle U.S.A. Limited ("Kienzle
                    USA"), a
                    company incorporated in the United States of America to sell
                    clocks, with
                    each party owning 50% of its common shares. Kienzle USA has been
                    inactive
                    since September 2002.
 
 On

                    August 5, 2003, theCompanyacquired
                    a 50% equity interest in Kayser Technik (Overseas) Inc. (K.T.I.)
                    ("Kayser
                    Technik (Overseas)") (formerly known as Kayser Photo (Overseas)
                    Corp.
                    (K.P.C.) ("Kayser Photo")), a company incorporated in the Republic
                    of
                    Panama, at a cash consideration of $5. Kayser Technik (Overseas)
                    is
                    engaged in the trading of camera batteries, films and disposable
                    cameras.
                    TheCompanyreassessed
                    its investment in Kayser Technik (Overseas) in 2005 and an impairment
                    loss
                    of $5 in respect of the investment in Kayser Technik (Overseas)
                    has been
                    recognized during the year ended March 31,
                    2005.
  10.
                SHORT-TERM
                    BORROWINGS
 
 Short-term
                    borrowings include import loans obtained from banks and bank
                    overdraft
                    amounting to $2,015 and $nil as of March 31, 2006, respectively
                    and $2,623
                    and $474 as of March 31, 2007,
                    respectively.
  March
                      31,2006
                  
                  2007$
                  
                  $Maximum
                      credit facilities available to the Company
                  
                  
                  3,856
                  
                  
                  5,720Weighted
                      average interest rate on borrowings atend
                      of year
                  
                  
                  6.3%
                  
                  
                  8.4%
  At
          March
          31, 2006 and 2007, the Company pledged bank deposits of $965 and $1,221,
          and
          investment securities of $300 and $316, 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.
  F-22
 
 HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 11.
                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 4
          years.
 
 Future
                    minimum lease payments as at March 31, 2007 are as
                    follows:
 $Year
                      ending March 312008
                  
                  
                  4782009
                  
                  
                  2602010
                  
                  
                  2002011
                  
                  
                  1951,133
  The
                    capital lease commitment amounts above exclude implicit interest
                    of $68,
                    $41, $24 and $8 payable in the years ending March 31, 2008, 2009,
                    2010 and
                    2011, respectively.
  12.
                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 $817, $879 and $1,040 in 2005, 2006 and 2007,
                    respectively.
 
 At
                    March 31, 2007, the Company is committed under operating leases
                    requiring
                    minimum lease payments as follows:
 $Year
                      ending March 31,2008
                  
                  
                  1,0712009
                  
                  
                  9782010
                  
                  
                  2212,270
 
 (b)
                The
                    Company had a total capital commitment of $496 and $426 for the
                    purchase
                    of property, plant and equipment as of March 31, 2006 and 2007,
                    respectively.
  F-23
  HIGHWAY
              HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 12.
                COMMITMENTS
                    AND CONTINGENCIES - continued
 
 (c)
                The
                    BFDC Agreements (see note 4) have all been extended to March
                    31, 2016
                    while one agreement with a China company was retired by mutual
                    consent of
                    both theCompanyand
                    the China company. Pursuant to the BFDC Agreements, theCompanyis
                    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 theCompany'sdealings
                    with the BFDC, or should the local or federal government change
                    the rules
                    under which theCompanycurrently
                    operates, all of theCompany'soperations
                    and assets could be jeopardized.
 
 In
                    addition, transactions between theCompanyand
                    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 theCompanyconsiders
                    less favorable to it than the practices currently in effect,
                    or that theCompanyor
                    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 theCompanywill
                    be able to negotiate extensions and further supplements to any
                    of the BFDC
                    Agreements or that theCompanywill
                    be able to continue its operations in China. If theCompanywere
                    required to adhere to the terms of the BFDC Agreements, theCompany'sbusiness and results of operations could be materially and adversely
                    affected.
 
 In
                    connection with the establishment of its new facility in China
                    during
                    fiscal 2006, theCompanyentered
                    into an agreement with the He Yuan Foreign Trade & Economy Cooperation
                    Bureau that is similar to the BFDC
                    Agreements.
 
 (d)
                As
                    discussed in note 3, the Company will be required to pay $1,028
                    contingent
                    payments for the acquisition of Golden Bright when certain criteria
                    as
                    specified in the sale and purchase agreement are fulfilled.
  F-24
 HIGHWAY
              HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 13.
                CAPITAL
                    STOCK
 
 In
                    August 1998, the Board of Directors authorized Highway Holdings
                    Limited 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,
                    6,000 shares were purchased for a total cash consideration of
                    $4 at prices
                    per share ranging from $0.60 to $1.41. At March 31, 2006 and
                    2007, these
                    shares were held in treasury and are not eligible to vote or
                    receive
                    dividends.
 
 In
                    September 2006, Highway Holdings Limited issued 128,534 common
                    shares and delivered to a professional legal practice as a security
                    for
                    its obligation to pay second contingent payment of $514 (HK$4
                    million)
                    relating the acquisition of Golden Bright.
 
 In
                    December 2006, 30,000 shares valued at $147 were issued to acquire
                    certain machinery and
                    equipment.
  14.
                SUBSCRIPTION
                    RECEIVABLE
  Highway
          Holdings issued 128,534 shares escrow as security for its obligation for
          the
          remaining consideration of $514 in relation to the acquisition of Golden
          Bright,
          payment of which is contingent upon certain conditions described in note
          3.
          These shares are held in escrow.
 
 On
          resolution of the contingency, Highway Holdings will repurchase these shares
          for
          a consideration of $514. If the contingencies remain unresolved these shares
          will be returned by the escrow agent and cancelled.
 
 F-25
 HIGHWAY
              HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 15.
                CONCENTRATIONS
                    OF CREDIT RISK AND MAJOR CUSTOMERS
 
 A
          substantial percentage of the Company's sales are made to three customers
          and
          are typically on an open account basis. Customers accounting for 10% or
          more of
          total net sales in any of the years ended March 31, 2005, 2006 and 2007
          are as
          follows:
 Year
                      ended March 31,2005
                  
                  2006
                  
                  2007%
                  
                  
                  %
                  
                  
                  %Company
                      A
                  
                  
                  18.1
                  
                  
                  19.0
                  
                  
                  N/ACompany
                      B
                  
                  
                  17.7
                  
                  
                  16.4
                  
                  
                  24.8Company
                      C
                  
                  
                  N/A
                  
                  
                  15.9
                  
                  
                  10.7Company
                      D
                  
                  
                  N/A
                  
                  
                  N/A
                  
                  
                  11.4
  Accounts
            receivable from the three customers with the largest receivable balances
            at
            March 31, 2006 and 2007 are as follows:
 Percentage
                        of accounts receivable2006
                    
                    2007%
                    
                    %Company
                        A
                    
                    
                    16.4
                    
                    
                    N/ACompany
                        B
                    
                    
                    N/A
                    
                    
                    10.7Company
                        C
                    
                    
                    32.1
                    
                    
                    15.1Company
                        D
                    
                    
                    12.1
                    
                    
                    6.9Three
                        largest receivable balances
                    
                    
                    60.6
                    
                    
                    32.7
  Details
            of the movements of the allowance for doubtful account are as
            follows:
 March
                        31,2005
                    
                    2006
                    
                    2007$
                    
                    $
                    
                    $At
                        beginning of year
                    
                    
                    111
                    
                    
                    99
                    
                    
                    31Allowance
                        for the year
                    
                    
                    57
                    
                    
                    9
                    
                    
                    4Amounts
                        written off
                    
                    
                    (69
                    )
                    
                    (77
                    )
                    
                    (22
                    )At
                        end of year
                    
                    
                    99
                    
                    
                    31
                    
                    
                    13
  F-26
 
  HIGHWAY
              HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 16.
                NET
                    (LOSS) INCOME PER SHARE
 
 The
                    following table sets forth the computation of basic and diluted
                    net income
                    (loss) per share for the years
                    indicated:
  Year
                      ended March 31,2005
                  
                  2006
                  
                  2007$
                  
                  $
                  
                  $Net
                      income (loss), basic and diluted
                  
                  
                  (152)
                  
                  
                  42
                  
                  
                  594Shares:Weighted
                      average common shares used in computing basicnet
                      income (loss) per share
                  
                  
                  3,260,144
                  
                  
                  3,465,390
                  
                  
                  3,635,517Effect
                      of dilutive securities:Weighted
                      average shares from assumed exercise ofstock
                      options and issuance of common shares
                  
                  
                  -
                  
                  
                  78,826
                  
                  
                  54,657Weighted
                      average common shares used in computing dilutednet
                      income (loss) per share
                  
                  
                  3,260,144
                  
                  
                  3,544,216
                  
                  
                  3,690,174Net
                      income (loss) per share, basic
                  
                  
                  (0.05)
                  
                  
                  0.01
                  
                  
                  0.16Net
                      income (loss) per share, diluted
                  
                  
                  (0.05)
                  
                  
                  0.01
                  
                  
                  0.16
  As
                    of March 31, 2005, the Company had 242,150 outstanding employee
                    stock
                    options and stock purchase rights, and 29,154 common shares had
                    been
                    granted to the director (note 19) that could have potentially
                    diluted
                    basic net loss per share in the future, but which were excluded
                    in the
                    computation of diluted net income (loss) per share in the year
                    presented,
                    as their effect would have been
                    anti-dilutive.
  17.
                FAIR
                    VALUE OF FINANCIAL INSTRUMENTS
 
 The
                    estimated fair value amounts have been determined by theCompany,
                    using available market information and appropriate valuation
                    methodologies. The estimates presented are not necessarily indicative
                    of
                    amounts that theCompanycould
                    realize in a current market
                    exchange.
  The
                    carrying amounts of cash and cash equivalents, restricted cash,
                    accounts
                    receivable, investment securities, accounts payable, short-term
                    borrowings
                    and obligations under capital leases are reasonable estimates
                    of their
                    fair value. The interest rates on theCompany'sobligations
                    under capital leases approximate those which would have been
                    available at
                    March 31, 2007 for capital lease of similar nature and repayment
                    period.
 
 F-27
 HIGHWAY
              HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 18.
                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 was approved by the shareholders during
                    Annual
                    General Meeting in August 2004.
 
 On
                    December 30, 2004, the Board of Directors approved and granted
                    50,000
                    stock options to legal advisors in accordance with the settlement
                    agreement and mutual release. The options were immediately vested.
                    The
                    Company recorded an expense of $177 for the options based on
                    the
                    Black-Scholes option-pricing model during the year ended March
                    31,
                    2005.
 
 The
                    fair value of options granted to employees and directors in 2006
                    and 2007
                    and legal advisors in 2005 was $1.155, $1.0017 and $3.531, respectively,
                    using the Black-Scholes option-pricing model based on the following
                    assumptions:
  2005
                  
                  2006
                  
                  2007Risk-free
                      interest rate
                  
                  
                  2.67
                  %
                  
                  3.84
                  %
                  
                  5.27
                  %Expected
                      life
                  
                  
                  1
                      year
                  
                  
                  5
                      years
                  
                  
                  2
                      yearsExpected
                      volatility
                  
                  
                  74
                  %
                  
                  55
                  %
                  
                  60
                  %Expected
                      dividend yield
                  
                  
                  1.90
                  %
                  
                  5.71
                  %
                  
                  6.00
                  %
  The
          Group
          used a blended volatility rate using a combination of historical stock
          price
          volatility and market implied volatility. The risk-free interest rate assumption
          is based upon the average daily closing rates during the preceding quarter
          for
          U.S. treasury notes that have a life which approximates the expected life
          of the
          option. The dividend yield assumption is based on the Company's history
          and
          expectation of dividend payouts. The expected life of employee stock options
          represents the weighted-average period the stock options are expected to
          remain
          outstanding. The expected life assumptions are established through the
          review of
          annual historical employee exercise behavior of option grants with similar
          vesting periods.
 
 The
                    options vest in accordance with the terms of the agreements entered
                    into
                    by the Company and the grantee of the
                    options.
  F-28
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
 (In
          thousands except for share and per share amounts)
 
 18.
                STOCK
                    OPTIONS AND STOCK PURCHASE RIGHTS -
                    continued
 
 The
          options granted under the Option Plan resulted in a compensation expense
          of $38
          in the year ended March 31, 2007, which is included in selling, general and
          administrative expenses. Options
          awards granted in 2007 are with an exercise price equal to the market price
          of
          the Company's stock at the date of grant; those option awards have a vesting
          period of 1 year. As of March 31, 2007, there were 11,111 non-vested stock
          options. The weighted-average exercise price and aggregate intrinsic value
          of
          these non-vested stock options was $3.42 per option and $7,
          respectively.
  As
          of
          March 31, 2007, there was $12 of unrecognized compensation cost related
          to
          non-vested stock options granted under the Option Plan. The cost is
          expected to be recognized over a weighted-average period of 80 days.
 
 The
                    following summarizes the stock purchase rights and options
                    outstanding:
 Stockpurchase
                      rights
                  
                  Stock
                      optionsAverage
                  
                  
                  
                  Averageexercise
                  
                  Number
                  
                  exercise
                  
                  Numberprice
                  
                  of
                      shares
                  
                  price
                  
                  of
                      shares$
                  
                  
                  
                  $March
                      31, 2005
                  
                  
                  1.55
                  
                  
                  100,000
                  
                  
                  1.9374
                  
                  
                  142,150Stock
                      options granted
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3.5
                  
                  
                  121,000Stock
                      purchase rights exercised
                  
                  
                  1.55
                  
                  
                  (100,000
                  )
                  
                  -
                  
                  
                  -Stock
                      options exercised
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1.4
                  
                  
                  (80,150
                  )Stock
                      options lapsed/cancelled
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (21,250
                  )March
                      31, 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3.2531
                  
                  
                  161,750Stock
                      options granted
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3.42
                  
                  
                  50,000Stock
                      options exercised
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3.0642
                  
                  
                  (66,500
                  )Stock
                      options lapsed/cancelled
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (5,000
                  )March
                      31, 2007
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3.6073
                  
                  
                  140,250
  At
                    of March 31, 2006 and 2007, there were 161,750 and 129,139, respectively,
                    of stock options exercisable.
 The
            total
            intrinsic value of options exercised in the year ended March 31, 2005,
            2006 and
            2007 was $696, $431 and $41, respectively. The aggregate intrinsic value
            of the
            stock options exercisable at March 31, 2007 was $72.
 Additional
                    information on options outstanding at March 31, 2007 is as
                    follows:
  WeightedaverageremainingNumber
                    
                    contractualExercise
                        prices
                    
                    outstanding
                    
                    life
                        (years)$1.4700
                    
                    
                    3,000
                    
                    
                    1.17$3.1700
                    
                    
                    14,750
                    
                    
                    1.57$3.4200
                    
                    
                    50,000
                    
                    
                    4.25$3.5000
                    
                    
                    72,500
                    
                    
                    3.25140,250
                    
                    
                    3.607
 F-29
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 
 19.
                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
                    common
                    shares upon completion of his service with the Company for the
                    years ended
                    from March 31, 2004 to 2009. The grant date of the share award
                    was
                    determined to be April 1, 2004.
 
 The
                    shares were issued to the director on June 3, 2006 and June 1,
                    2007
                    respectively. The Company recorded a compensation expense of
                    $160 for the
                    years ended March 31, 2006 and 2007, based on the fair value
                    of the shares
                    granted as of April 1, 2004.
  20.
                SEGMENT
                    INFORMATION
 
 TheCompany'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
                    and
                    mechanical OEM, electric OEM, the manufacture and trading of
                    cameras and
                    underwater products, and clocks and watches. A summary of the
                    net sales,
                    profitability information and asset information by segment and
                    geographical areas is shown below:
  Year
                      ended March 31,2005
                  
                  2006
                  
                  2007$
                  
                  $
                  
                  $Net
                      sales:Metal
                      stamping and Mechanical OEM:Unaffiliated
                      customers
                  
                  $
                  17,792
                  
                  $
                  19,404
                  
                  $
                  22,474Intersegment
                      sales
                  
                  
                  1,357
                  
                  
                  2,503
                  
                  
                  2,44819,149
                  
                  
                  21,907
                  
                  
                  24,922Electric
                      OEM:Unaffiliated
                      customers
                  
                  
                  1,749
                  
                  
                  2,322
                  
                  
                  7,233Intersegment
                      sales
                  
                  
                  1,109
                  
                  
                  794
                  
                  
                  9092,858
                  
                  
                  3,116
                  
                  
                  8,142Cameras
                      and underwater products:Unaffiliated
                      customers
                  
                  
                  3,836
                  
                  
                  1,487
                  
                  
                  511Intersegment
                      sales
                  
                  
                  206
                  
                  
                  120
                  
                  
                  624,042
                  
                  
                  1,607
                  
                  
                  573Clocks
                      and watches:Unaffiliated
                      customers
                  
                  
                  4,301
                  
                  
                  2,630
                  
                  
                  1,251Intersegment
                      sales
                  
                  
                  67
                  
                  
                  294
                  
                  
                  2394,368
                  
                  
                  2,924
                  
                  
                  1,490Corporate:Intersegment
                      sales
                  
                  
                  1,497
                  
                  
                  93
                  
                  
                  285Intersegment
                      eliminations
                  
                  
                  (4,236
                  )
                  
                  (3,804
                  )
                  
                  (3,943
                  )Total
                      net sales
                  
                  
                  27,678
                  
                  
                  25,843
                  
                  
                  31,469
  F-30
  HIGHWAY
            HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
  20.
                SEGMENT
                    INFORMATION - continued
  Year
                      ended March 31,2005
                  
                  2006
                  
                  2007$
                  
                  $
                  
                  $Operating
                      income (loss):Metal
                      stamping and Mechanical OEM
                  
                  
                  1,371
                  
                  
                  806
                  
                  
                  353Electric
                      OEM
                  
                  
                  202
                  
                  
                  12
                  
                  
                  277Cameras
                      and underwater products
                  
                  
                  (891
                  )
                  
                  (319
                  )
                  
                  142Clocks
                      and watches
                  
                  
                  (807
                  )
                  
                  388
                  
                  
                  (40
                  )Corporate
                      expenses (net)
                  
                  
                  (144
                  )
                  
                  (285
                  )
                  
                  (346
                  )Total
                      operating income (loss)
                  
                  
                  (269
                  )
                  
                  602
                  
                  
                  386Interest
                      expense:Metal
                      stamping and Mechanical OEM
                  
                  
                  100
                  
                  
                  126
                  
                  
                  210Electric
                      OEM
                  
                  
                  6
                  
                  
                  4
                  
                  
                  29Clocks
                      and watches
                  
                  
                  4
                  
                  
                  4
                  
                  
                  3Total
                      interest expense
                  
                  
                  110
                  
                  
                  134
                  
                  
                  242Depreciation
                      and amortization expense:Metal
                      stamping and Mechanical OEM
                  
                  
                  647
                  
                  
                  638
                  
                  
                  601Electric
                      OEM
                  
                  
                  113
                  
                  
                  220
                  
                  
                  259Cameras
                      and underwater products
                  
                  
                  88
                  
                  
                  13
                  
                  
                  9Clocks
                      and watches
                  
                  
                  214
                  
                  
                  216
                  
                  
                  45Corporate
                      assets
                  
                  
                  86
                  
                  
                  3
                  
                  
                  25Total
                      depreciation and amortization
                  
                  
                  1,148
                  
                  
                  1,090
                  
                  
                  939Capital
                      expenditure:Metal
                      stamping and Mechanical OEM
                  
                  
                  813
                  
                  
                  471
                  
                  
                  1,276Electric
                      OEM
                  
                  
                  88
                  
                  
                  36
                  
                  
                  491Cameras
                      and underwater products
                  
                  
                  85
                  
                  
                  -
                  
                  
                  -Clocks
                      and watches
                  
                  
                  123
                  
                  
                  167
                  
                  
                  97Corporate
                      assets
                  
                  
                  6
                  
                  
                  -
                  
                  
                  67Total
                      capital expenditure
                  
                  
                  1,115
                  
                  
                  674
                  
                  
                  1,931
  F-31
  HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 As
                  at March 31,2006
              
              2007$
              
              $Identifiable
                  assets:Metal
                  stamping and Mechanical OEM
              
              
              13,100
              
              
              13,556Electric
                  OEM
              
              
              3,198
              
              
              7,089Cameras
                  and underwater products
              
              
              680
              
              
              865Clocks
                  and watches
              
              
              1,764
              
              
              708Corporate
                  assets
              
              
              149
              
              
              196Total
                  identifiable assets
              
              
              18,891
              
              
              22,414Long-lived
                  assets:Metal
                  stamping and Mechanical OEM
              
              
              1,895
              
              
              2,467Electric
                  OEM
              
              
              641
              
              
              1,314Clocks
                  and watches
              
              
              251
              
              
              159Corporate
                  assets
              
              
              -
              
              
              40Total
                  long-lived assets
              
              
              2,787
              
              
              3,980
  All
        of
        the Company's sales
        are
        co-ordinated through its head office in Hong Kong. The Company considers
        revenues generated from physical location of customers and the breakdown
        by
        destination is as follows:
 Year
                    ended March 31,2005
                
                2006
                
                2007$
                
                $
                
                $Net
                    sales:Hong
                    Kong and China
                
                
                17,284
                
                
                13,981
                
                
                16,754Other
                    Asian countries
                
                
                387
                
                
                524
                
                
                204Europe
                
                
                8,517
                
                
                10,298
                
                
                13,118USA
                
                
                1,096
                
                
                978
                
                
                1,261Others
                
                
                394
                
                
                62
                
                
                13227,678
                
                
                25,843
                
                
                31,469
  F-32
 HIGHWAY
          HOLDINGS LIMITED AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - continued
 (In
          thousands except for share and per share amounts)
 20.
              SEGMENT
                  INFORMATION - continued
 
 The
        locations of the Company's identifiable
        assets are attributed to the location of identifiable assets and the breakdown
        by destination is as follows:
 March
                    31,2006
                
                2007$
                
                $Hong
                    Kong
                
                
                10,653
                
                
                12,171China
                
                
                7,751
                
                
                9,654Europe
                
                
                144
                
                
                105USA
                
                
                343
                
                
                48418,891
                
                
                22,414
  *
        * * * *
        *
 
 F-33




**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.)




1.3
            Form
                of Amendment to Articles of Association, as filed on November 2,
                2005.




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 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).




4.3
            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).




4.4
            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).




4.5
            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).




4.6
            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).




4.7
            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,
                2005).




4.8
            Form
                of Extension Agreement, dated January 26, 2005, between Shenzhen
                Long
                Cheng Nissin Precision Metal Plastic Factory and Nissin Precision
                Metal
                Manufacturing Limited (incorporated by reference to the registrant’s
                Annual Report on Form 20-F for the fiscal year ended March 31,
                2005).




60




4.9
            Form
                of Extension Agreement, dated January 26, 2005, between Bao An District
                Long Cheng Hi-Lite Electronic Factory and Hi-Lite Camera Company
                Limited
                (incorporated by reference to the registrant’s Annual Report on Form 20-F
                for the fiscal year ended March 31,
                2005).




4.10
            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. (incorporated by reference to the registrant’s Annual
                Report on Form 20-F for the fiscal year ended March 31,
                2005)




4.11
            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. (incorporated by reference to the registrant’s
                Annual Report on Form 20-F for the fiscal year ended March 31,
                2005)




4.12
            Form
                of Longcheng Industrial Area Common Property Tenancy Contract No.
                WJ-002,
                dated July 4, 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, 2006)




4.13
            Tenancy
                Renewal, dated March 10, 2006, between Nissin Precision Metal
                Manufacturing Limited and SHK Sheung Shui Landmark Investment Limited.
                (incorporated by reference to the registrant’s Annual Report on Form 20-F
                for the fiscal year ended March 31,
                2006)




4.14
            Share
                Purchase Agreement, dated as of September 16, 2006, between Kienzle
                Time
                (H.K.) Limited and Highway Holdings Limited, on the one hand, and
                Wong Wai
                Chung, Peter, Wong Yuk, Paul, Wong Wai Yung, Augustine, and Wan Chi
                Cheong
                on the other hand, regarding the purchase of Golden Bright Plastic
                Manufacturing Company Limited.




4.15
            Rental
                Contract between Huayu Clothes & Costumes Manufacturing Factory of Wu
                Xi, Zhuang Wenhua, and Miao Guokang as Lessors, and Kayser (WuXi)
                Metal
                Precision Manufacturing Limited, dated January 28, 2007 regarding
                the
                rental of the Wuxi facilities.




4.16
            Rental
                Contract between Ping Hu City Xin Nan Li Yuan Xia Economic Corporation
                and
                Ping Hu Golden Bright Plastic Manufacturing Ltd., dated June 15,
                2002,
                regarding the rental of Golden Bright’s
                facilities.




4.17
            Agreement
                on Imported Material for Processing, dated February 17, 1993, between
                Golden Bright Plastic Manufacturing Co. Ltd. Shenzhen Long Gong City
                Ping
                Hu Golden Bright Factory.




4.18
            Supplementary
                Agreement on Imported Material for Processing, dated February 17,
                1993,
                between Golden Bright Plastic Manufacturing Co. Ltd. Shenzhen Long
                Gong
                City Ping Hu Golden Bright Factory.




61




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 (incorporated by reference to the registrant’s Annual Report on
                Form 20-F for the fiscal year ended March 31,
                2005)




12.1
            Certifications
                pursuant to Section 1350, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002




13.1
            Certifications
                pursuant to Section 1350, as adopted pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002


13.2
              Certifications
                  pursuant to Section 1350, as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of
                  2002




23.1
            Consent
                Of Independent Registered Public Accounting
                Firm




62


**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 29, 2007




63