United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
20-F




 ̈
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934


or


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended March 31, 2010.




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


For
the transition period from ____________ to ____________.




 ̈
            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)




Po
Fong


Chief
Financial Officer


Suite
810, Level 8, Landmark North


39 Lung
Sum Avenue


Sheung
Shui


New
Territories, Hong Kong


telephone:
(852) 2344-4248


fax:
(852) 2343-4976


po.fong@highwayholdings.com


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)





Securities registered or to be
registered pursuant to Section 12(b) of the Act:





Title of each class
                  
                  Name of each exchange on which
      registeredCommon
      Shares, $0.01 par value per share
                  
                  NASDAQ
      Capital Market





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.  3,779,674 Common Shares were outstanding as of March 31,
2010.




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes   ̈   No  x




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 ̈Nox





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   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈




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   ̈
            
            Accelerated
      filer   ̈
            
            Non-accelerated
      filer x




Indicate
by check mark which basis of accounting the registration has used to prepare the
financial statements included in this filing:




U.S.
GAAP x




International
Financial Reporting Standards as issued by the International Accounting
Standards Board o




Other
 ̈




If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow:   Item 17   ̈  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 ̈Nox







TABLE OF
CONTENTS




PART
      I
                              
                              
                              1Item 1.
      Identity of Directors, Senior Management and Advisers
                              
                              
                              1Item 2. Offer
      Statistics and Expected Timetable
                              
                              
                              1Item 3. Key
      Information
                              
                              
                              1Item 4.
      Information on the Company
                              
                              
                              16Item
      4A.Unresolved Staff Comments
                              
                              
                              32Item 5.
      Operating and Financial Review and Prospects
                              
                              
                              32Item 6.
      Directors, Senior Management and Employees
                              
                              
                              42Item 7. Major
      Shareholders and Related Party Transactions
                              
                              
                              49Item 8.
      Financial Information.
                              
                              
                              50Item 9. The
      Listing
                              
                              
                              51Item 10.
      Additional Information
                              
                              
                              52Item 11.
      Quantitative and Qualitative Disclosures About Market
Risk.
                              
                              
                              56Item 12.
      Description of Securities Other Than Equity Securities
                              
                              
                              58PART
      II
                              
                              
                              58Item 13.
      Defaults, Dividend Arrearages and Delinquencies.
                              
                              
                              58Item 14.
      Material Modification to the Rights of Securities Holders and Use of
      Proceeds.
                              
                              
                              58Item 15.
      Controls and Procedures.
                              
                              
                              58Item 16. Not
      applicable.
                              
                              
                              59Item
      16A.
                              Audit
      Committee Financial Expert
                              
                              
                              59Item
      16B.
                              Code
      of Ethics
                              
                              
                              59Item
      16C.
                              Principal
      Accountant Fees and Services
                              
                              
                              59Item
      16D.
                              Exemptions
      from the Listing Standards for Audit Committees
                              
                              
                              60Item
      16E.
                              Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                              
                              
                              60Item
      16F. Change in Registrant’s Certifying Accountant
                              
                              
                              60Item
      16G. Corporate Governance
                              
                              
                              61PART
      III
                              
                              
                              61Item 17.
      Financial statements.
                              
                              
                              61Item 18.
      Financial statements.
                              
                              
                              61Item 19.
      Exhibits.
                              
                              
                              61


i


FORWARD
- LOOKING STATEMENTS




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




Readers
should not place undue reliance on forward-looking statements, which reflect
management’s view only as of the date of this Report. The Company undertakes no
duty to update any forward-looking statement to conform the statement to actual
results or changes in management’s expectations. Readers should also carefully
review the risk factors described in other documents the Company files from time
to time with the U.S. Securities and Exchange Commission, which we refer to in
this Report as the “SEC.”




CONVENTIONS




Highway
Holdings Limited is a holding company that 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 (excluding Hong Kong), 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.  “RMB” and “Renminbi” are references to the legal currency of
China.




PART
I




Item
1.Identity of Directors, Senior Management and
Advisers




Not
Applicable




Item
2.Offer Statistics and Expected Timetable




Not
Applicable




Item
3.Key Information




Our
historical Consolidated Financial Statements are prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) and
presented in United States dollars.  The following selected statements
of operations data for each of the three years in the period ended March 31,
2010 and the balance sheet data as of March 31, 2010 and 2009 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 years ended
March 31, 2007 and 2006 and the balance sheet data as of March 31,
2006, 2007 and 2008 were derived from the Company’s consolidated financial
statements, which are not included in this Annual Report, and have been
retrospectively adjusted for the adoption of the new accounting standards
related to the presentation and disclosure requirements for non-controlling
interests.  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 for per share data):


2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2010Statement of OperationsNet
      sales
                    
                    $
                    25,843
                    
                    
                    $
                    31,469
                    
                    
                    $
                    33,164
                    
                    
                    $
                    33,729
                    
                    
                    $
                    21,739Gross
      profit
                    
                    
                    4,243
                    
                    
                    
                    6,236
                    
                    
                    
                    5,074
                    
                    
                    
                    6,704
                    
                    
                    
                    4,700Operating
      (loss) income
                    
                    
                    602
                    
                    
                    
                    386
                    
                    
                    
                    (2,277
                    )
                    
                    
                    881
                    
                    
                    
                    333Net
      (loss) income
                    
                    
                    42
                    
                    
                    
                    594
                    
                    
                    
                    (1,921
                    )
                    
                    
                    768
                    
                    
                    
                    420Dividend
      declared and paid (1)
                    
                    
                    1,389
                    
                    
                    
                    1,288
                    
                    
                    
                    132
                    
                    
                    
                    0
                    
                    
                    
                    113Per
      share amountsNet
      (loss) income -basic
                    
                    $
                    0.01
                    
                    
                    $
                    0.16
                    
                    
                    $
                    (0.50
                    )
                    
                    $
                    0.21
                    
                    
                    $
                    0.11Net
      (loss) income -diluted
                    
                    
                    0.01
                    
                    
                    
                    0.16
                    
                    
                    
                    (0.50
                    )
                    
                    
                    0.20
                    
                    
                    
                    0.11Dividend
      declared & paid (1)
                    
                    
                    0.40
                    
                    
                    
                    0.36
                    
                    
                    
                    0.035
                    
                    
                    
                    0
                    
                    
                    
                    0.03Weighted
      average number of shares:Basic
                    
                    
                    3,465
                    
                    
                    
                    3,636
                    
                    
                    
                    3,810
                    
                    
                    
                    3,744
                    
                    
                    
                    3,755Diluted
                    
                    
                    3,544
                    
                    
                    
                    3,690
                    
                    
                    
                    3,810
                    
                    
                    
                    3,774
                    
                    
                    
                    3,758Balance Sheet DataProperty,
      plant and equipment, net
                    
                    $
                    2,787
                    
                    
                    $
                    3,980
                    
                    
                    $
                    3,646
                    
                    
                    $
                    2,840
                    
                    
                    $
                    2,051Working
      capital
                    
                    
                    9,960
                    
                    
                    
                    8,944
                    
                    
                    
                    7,556
                    
                    
                    
                    9,040
                    
                    
                    
                    9,803Total
      assets
                    
                    
                    18,891
                    
                    
                    
                    22,414
                    
                    
                    
                    20,490
                    
                    
                    
                    17,811
                    
                    
                    
                    16,352Long
      term debt
                    
                    
                    803
                    
                    
                    
                    1,133
                    
                    
                    
                    833
                    
                    
                    
                    553
                    
                    
                    
                    295Shareholders’
      equity
                    
                    
                    12,274
                    
                    
                    
                    12,167
                    
                    
                    
                    10,545
                    
                    
                    
                    11,449
                    
                    
                    
                    11,672Common
      shares issued and outstanding
                    
                    
                    3,525,558
                    
                    
                    
                    3,779,746
                    
                    
                    
                    3,819,900
                    
                    
                    
                    3,720,520
                    
                    
                    
                    3,779,674





(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, which 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.  Since January 2010, virtually
all of the Company’s manufacturing operations are conducted at a single facility
located in Long Hua, Shenzhen, China (approximately 2% of the Company’s revenues
for the fiscal year ended March 31, 2010 were generated from a second, small,
facility that the Company still operates in Wuxi, China).  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”).  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, 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.




The BFDC
Agreements are dependent on the Company’s continuing good relationship with the
designees of the local government.  In the event of a dispute
involving these government agencies involving the BFDC Agreements, the Company
could have difficulty trying to enforce its rights under these agreements
because the parties to the agreements are Chinese governmental
agencies.  The Company’s operations and prospects would be materially
and adversely affected if the governmental parties to the BFDC Agreements do not
honor the current agreements under the BFDC Agreements.




To date,
the Company and the BFDC have been dealing with each other on terms different in
certain respects from those contained in their respective BFDC
Agreements.  There can be no assurance that the BFDC will insist upon
a change in the current practices so as to require stricter adherence to the
terms of their agreements, which strict adherence could be less favorable to the
Company than the practices currently in effect.  If the Company were
required to adhere to the terms of the BFDC Agreements, the Company’s business
and results of operations could be materially and adversely
affected.


3


Termination of Long Hua Leases, or
Failure to Renew the Long Hua Leases Would Materially Change The Company’s
Future Operations and Organizational
Structure.    The Company’s main manufacturing
facilities, located in Long Hua, Shenzhen, consist of approximately 450,000
square feet of space for manufacturing operations and dormitory
facilities  These facilities are leased pursuant to six leases (the
“Premises Leases”).  The Premises Leases were renewed in 2008 and
currently expire on February 28, 2012.  The Premises Leases may also
be terminated by either the Company or the landlord upon six months notice to
the other party.  Should either the Company or the landlord elect to
terminate the Premises Leases prematurely (because of a breach of the leases by
the Company, or pursuant to its six-month right to do so), the Company would
have to relocate its largest facility to other, as yet unidentified,
facilities.  The Company believes that currently there are other
alternative facilities available to the Company in or near Long Hua,
Shenzhen.  However, because the Company operates under special
arrangements (such as the BFDC Agreements), any relocation would have to be
within the current customs area in order for the Company to retain its current
special tax and operating status.  If the Company were to move outside
of its current customs area, it would lose its special tax and operating status
and would be subject to significantly greater governmental controls and
taxes.  Accordingly, in order to maintain its current operating
status, the Company anticipates that it would attempt to relocate its
manufacturing facilities within the current limited customs
area.  While the Company believes that there are other facilities
available within the current customs area, the number of such other facilities
is limited, and the Company may not be able to find facilities that both suit
its needs and that are financially acceptable.  If the Company has to
move its manufacturing facilities as a result of the termination of the Premises
Leases and is unable to find suitable alternative facilities within its customs
area, the Company’s entire operating and financial structure would be adversely
changed.  Such a change in the Company’s tax and operating status is
expected to have a material adverse affect on the Company’s operations,
financial condition, and stock price.  In addition, even if the
Company does find suitable alternative facilities, if necessary, any relocation
of the Company’s principal manufacturing facilities to alternative facilities
would be costly, would materially disrupt the Company’s operations, could result
in the Company having to pay increased rent and fees (including higher customs
deposits), and would adversely affect the Company’s operations, its business,
and its financial condition during the relocation and for at least one year
thereafter.  Accordingly, the termination of the Premises Leases would
have a material adverse affect on the Company’s operations and financial
condition in the near future.  No assurance can be given that the
Company’s landlord will not terminate the Premises Leases, or that the Company
will be able to re-negotiate and extend the Premises Leases upon their
expiration in 2010.




Recent Changes in Labor Laws,
Environmental Regulation, Safety Regulation and Business Practices, and
Operating Costs in China, and in Shenzhen in Particular, Have Significantly
Increased the Costs and Risks of Doing Business.  As described
elsewhere in this Annual Report, the Chinese government has during the past few
years significantly changed and/or increased the enforcement of a number of laws
affecting employees (including regulations regarding their salaries and
benefits, labor unions, working conditions and overtime restrictions, and
contract duration—in particular, requirements leading to life long employment),
and safety regulations for buildings and workers.  In addition, the
Chinese government has also changed or increased the enforcement of certain
environment protection laws, which have restricted some common practices and/or
increased the Company’s cost of operations.  Economic development in
China, particularly in Shenzhen, China, may be limited as well by other factors,
such as the overburdened infrastructure, inadequate transportation, power, and
water supplies.  Certain parts of China, including the Company’s
facilities in Long Hua, Shenzhen, have in the past experienced 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.  The foregoing factors have increased the risks of doing
business in China and have caused many companies to terminate their operations
in Southern China and have caused most of the remaining companies operating in
Shenzhen, China to restructure their operations.  The foregoing
changes adversely affected the Company’s recent financial results.  No
assurance can be given that other business changes will not be implemented that
will further negatively affect the Company and that the Company will, in fact,
be able to continue to operate and/or prosper under any new business or
regulatory conditions.


4




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.  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.




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.  Since the fixed China currency exchange
rate ended in July 2005, the yuan has appreciated relative to the U.S.
dollar.  Nevertheless, the United States (or “U.S.”) and certain
European countries have continued to call 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
permitted the RMB to appreciate in value (over 20% of cumulative appreciation
since July 2005, when China abolished the yuan's peg to the dollar). There
remains significant international pressure on the PRC government to adopt a more
flexible currency policy, which could result in a further and more significant
appreciation of the renminbi against the U.S. dollar. Since an increase in the
value of the RMB results in an increase of the Company’s operating costs in
China, any future increases in the value of the RMB compared to the U.S. dollar
and other currencies will have a negative affect on the Company’s financial
results.  Should the RMB continue to appreciate in value compared to
the U.S. dollar, the Company’s cost structure and pricing would change and have
a material negative effect on its operations, sales and financial
results.




Labor Shortages, Increased Wages And
Recent Changes In The China’s Labor Laws Negatively Affect The Company’s
Operations And Increase Its Operating Costs.  During the fiscal
year ended March 31, 2010 (“fiscal 2010”), the Company experienced major
shortages in available labor.  As a result of the unavailability of
workers, the Company was unable to complete the manufacture and delivery of a
significant amount of goods ordered by the Company’s customers.  The
Company’s factory labor force (excluding administrative and other employees)
during fiscal 2010 shrank from 750 workers to 350 workers before the Company was
able to attract the necessary amount of workers (as of March 31, 2010, the
Company employed approximately 750 employees).  In order to fill its
need for additional workers, the Company had to pay higher wages (as much as 60%
higher), incur overtime charges, and had to pay its workers sign-up and
retention bonuses.  All of these actions significantly increased the
Company’s cost of operations and affected the Company’s gross margins, and the
failure to timely complete its customers’ orders because of the lack of workers
resulted in reduced revenues during fiscal 2010 and strained relations with
certain of the Company’s customers. The Company believes that these labor
shortages are likely to persist and will increase its cost of operations in the
future.  In addition, these labor shortages may become worse as the
recent worldwide recession eases and economic development and manufacturing
increases in China.  In order to reduce the cost and risks associated
with the decreasing availability of workers and the increasing cost of its
workers, the Company has embarked on a plan to increase its automation and its
use of robotics in its operations.  Although the cost of acquiring and
installing automation equipment initially is high, the Company believes that in
the long term these costs will be offset by increases in productivity and a
decrease in the marginal cost of production.


5




In June
2007, the National People’s Congress of the PRC enacted new labor law
legislation called the Labor Contract Law and more strictly enforced certain
existing labor laws.  The new law, which became effective on January
1, 2008, amended and formalized workers’ rights concerning overtime hours,
pensions, layoffs, employment contracts and the role of trade
unions.  As a result of the new law, the Company has had to reduce the
number of hours of overtime its workers can work, substantially increase
salaries of its workers, provide additional benefits to its workers, and revise
certain other of its labor practices.  The increase in labor costs has
increased the Company’s operating costs, which increase the Company has not
always been able to pass through to its customers.  The Company’s
attempt to increase its prices to reflect the increase in labor and other costs
has strained its relations with certain of its principal
customers.  In addition, under the new law, employees who have worked
for the Company for 10 years or more or who have had two consecutive fixed-term
contracts must be given an “open-ended employment contract” that, in effect,
constitutes a lifetime, permanent contract, which is terminable only in the
event the employee materially breaches the Company’s rules and regulations or is
in serious dereliction of his duty.  Such non-cancelable employment
contracts will substantially increase its employment related risks and limit the
Company’s ability to downsize its workforce in the event of an economic
downturn.  The changes in the labor laws directly contributed to four
strikes in the fiscal year ended March 31, 2008 at the Company’s manufacturing
facilities.  No assurance can be given that the Company will not in
the future be subject to additional labor cost increases or even labor strikes
or other disruptions as a result of the labor issues caused by the new
laws.




The Uneven Application of Labor and
Environmental Laws in China Negatively Affects the Company’s Ability to
Compete.  China has adopted new, and more stringent labor,
safety and environmental laws and regulations.  These new regulations
have made operating in China significantly more difficult and
expensive.  However, based on its internal observations, the Company
believes that these new labor, safety and environmental laws and regulations are
being enforced by the Chinese government primarily against non-Chinese companies
operating in China.  As a result, the additional costs and burdens of
new labor, safety and environmental laws and regulations primarily burden
non-Chinese companies, such as the Company, and not the local
companies.  This uneven application of the laws makes it more
difficult for the Company to compete against Chinese companies.


6


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 is
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 companies operating under the
BFDC arrangements, have periodically been taxed on foreign currency bank
transfers, which taxes have been substantial (these bank transfer fees are,
effectively, an additional compensation tax on BFDC companies).  In
addition, it is often extremely burdensome for businesses to comply with some of
the local and regional laws and regulations.  Recently, 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 within 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 laws 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.




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 3 of Consolidated Financial Statements for
additional information on taxation.




Current Tax Benefit for the
Company’s Chinese Subsidiary.  The Company’s Kayser (Wuxi)
Metal Precision Manufacturing Limited subsidiary was incorporated in the PRC and
commenced operations in November 2006.  As a result, the subsidiary
qualified for a tax holiday and a 50% tax reduction through
2010.  There is no assurance that the Chinese government will not
cancel or revise this tax holiday before 2010. To date, Kayser (Wuxi) Metal
Precision Manufacturing Limited has not been able to generate profits and has
not been able to utilize these tax benefits.


7




Tax Risks of Operating in
China.  The Company’s operations are subject to certain locally
imposed taxes, the imposition of which is unpredictable and
burdensome.  For example, until early 2009, the Company operated a
light fixture manufacturing facility in He Yuan.  The Company was
previously informed that its operations in He Yuan would be treated
substantially the same as those in Shenzhen and, therefore, would not be subject
to local taxation.  However, after initiating operations in He Yuan,
the Company was told that its operations in He Yuan would, in fact, be
taxed.  The amount of the unexpected tax made the facility in He Yuan
unviable, and resulted in the Company’s decision to terminate its operations in
He Yuan.  As a result, the He Yuan facilities were closed in April
2009, and the operations of that facility are being relocated back to Long Hua,
Shenzhen.  No assurance can be given that the Company will not become
subject to other unexpected taxes and levies that could detrimentally affect the
Company’s cost structure in China and its future results from
operations.




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
additional taxes in China.




Political Or Trade Controversies
Between China And The United States Could Harm The Company’s Operating Results
Or Depress The Stock Price.  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 have threatened the business relations between the
countries.  These strains on U.S./China relations could affect the
ability of foreign companies operating in China, such as the Company, from
engaging in business with, or selling to the U.S. or U.S.
companies.  Any disruption of the current trade relations with the
U.S. could have a material adverse effect on the Company’s
business.  No assurance can be given that these and any other future
controversies will not change the status quo involving peaceful trade relations
between the U.S. and China, or that the Company’s business and operations in
China will not be materially and adversely affected.  Even if trade
relations between the U.S. and China are not affected by political difficulties
between the two countries, such political friction could adversely affect the
prevailing market price for the Company’s Common Shares.




Labor Shortages and Employee
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 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.  Any material or prolonged
shortage of labor would have a material adverse effect on the Company’s results
of operations.


8


During
the past few years, the Chinese government has made sweeping changes to labor
laws, including increasing minimum wages, limiting overtime hours, permitting
workers to join labor unions, permitting workers to sue their employers to
enforce labor law violations, and requiring employers to provide other employee
benefits.  As a result of the foregoing labor law changes, the cost of
hiring workers has substantially increased, which has negatively affected the
Company’s cost advantage it enjoyed compared to non-China
manufacturers.  Employers found to be violating these labor rules are
often severely penalized.  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




The Global Economic Weakness Has
Adversely Affected The Company’s Business And Short-Term Earnings, Liquidity And
Financial Condition And, Until Global Economic Conditions Improve, Is Expected
To Continue To Do So.  Most of the Company’s customers are
international companies that operate globally or serve global
markets.  As a result, the Company’s customers have been affected by
the unstable global financial and credit markets and by the recent downturn in
many economies. Worldwide economic conditions have been weak and may be further
deteriorating. The instability of the markets and weakness of the global economy
has adversely affected, and could continue to affect adversely, the demand for
the Company’s customers’ products, the amount and timing of their orders, the
financial strength of those customers and the Company’s suppliers, and/or the
Company’s suppliers’ and customers’ ability to fulfill their
obligations.  For example, the Company’s revenues decreased by
$11,990,000 (or 36%) in fiscal 2010 compared to revenues for the fiscal year
ended March 31, 2009 as the Company’s customers reduced their purchase
orders.  Although purchase orders have increased recently, these
factors are expected to continue to affect the Company’s operations, earnings
and financial condition.  This instability also could affect the
prices at which the Company can sell its products, which also could adversely
affect the Company’s earnings and financial condition.




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.  During the years ended March 31, 2008, 2009 and 2010, the
Company’s sales to its three largest customers for such periods accounted for
approximately 46.1%, 48.2% and 50.5% of net sales respectively.  See
“Business—Major Customers.”  While the Company believes that there are
material benefits to limiting is customer base to a few, large well-established
and financially strong customers, having fewer customers also has significant
risks.  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 are 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.


9




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, 2008, 2009 and
2010, accounts receivable from the five customers with the largest receivable
balances at year-end represented 61.0%, 66.9% and 68.8% of the total outstanding
receivables.




There Are Significant Financial and
Operational Risks Related To Opening Additional Facilities in
China.  The Company has in the past expanded its operations
through acquisitions and by establishing new facilities.  All of these
actions initially have strained the Company’s financial resources and reduced
the Company’s profitability.  In addition, most of the Company’s
acquisitions and newly established operations have not been successful, have
reduced the Company’s profitability, and have had to be
closed.  Nevertheless, the Company may, in the future, continue to
selectively acquire other companies or establish new facilities.  The
cost of acquiring, establishing, refurbishing, upgrading and integrating new
facilities normally is substantial and can negatively affected the Company’s
future earnings and financial condition.  Although the Company intends
to carefully select new acquisitions or facilities, no assurance can be given
that any new acquisitions will, in fact, become profitable or will otherwise
improve the Company’s overall operations, or that future additional acquisitions
or facilities will not likewise have a negative impact on the Company’s
short-term cash position and on its results of operations.




The Company Is Highly Dependent Upon
Its Executive Officers And Its Other Managers.  The Company is
highly dependent upon Roland Kohl, the Company’s Chief Executive Officer, and
its other officers and managers.  Although the Company has signed
employment contracts with Mr. Kohl and many of its other key officers/managers,
no assurance can be given that those employees will remain with the Company
during the terms of their employment agreements.  The loss of the
services of any of the foregoing persons would have a material adverse effect on
the Company’s business and operations.  Mr. Kohl’s employment
agreement expires in March 2014.  The Company currently owns a life
insurance policy for Mr. Kohl in the amount of $2,000,000, but otherwise does
not carry key man life insurance on any of its other officers or key
managers.




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.


10




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 Original Equipment Manufacturing (“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 lost manufacturing contracts because of its price increases, which losses
have resulted in lower net sales and have reduced its market
share.  As a result of these factors, the Company will have to
continue to operate at narrow gross 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 on 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 at sites outside of China, which
have given those competitors the ability to shift their manufacturing to those
locations whenever costs at those other locations are 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.  Recent events in China have significantly increased the
cost of operating in China, including changes in labor laws, changes in
environmental regulations and in the enforcement of such regulations, increases
in safety regulations, and a general increase in the cost of doing business have
all collectively significantly eroded the advantages of operating in
China.  No assurance can be given that the Company will continue to be
able to compete effectively against companies outside of China in its principal
businesses.




Dependence on the Long Hua,
Shenzhen, Factory Complex.  In order to reduce the Company’s
dependence on a single facility in Long Hua, Shenzhen, the Company in July 2005
opened a second, smaller manufacturing facility, in He Yuan,
China.  Thereafter in 2006, the Company also commenced operations at a
small manufacturing facility in Wuxi, China, and a plastic products manufacturer
in Pinghu, approximately 15 kilometers from the Company’s main facility in Long
Hua.  As a result, during the fiscal year ended March 31, 2009, the
Company was operating at four locations.  However, as a result of
unanticipated taxes imposed on  the Company’s He Yuan facility and the
unprofitable operations at the Pinghu facility, the Company has, during the past
18 months, closed those two facilities.  As a result, the Company is
once again dependent upon it main Long Hua, Shenzhen facility for virtually all
of its operations and revenues.  The loss of this facility, or any
material disruption of its operations at this facility would be costly, would
materially disrupt the Company’s overall operations, and would have a material
and adverse impact on the Company’s operations and financial
condition.  The Company currently maintains fire, casualty and theft
insurance aggregating approximately $24,500,000 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.


11




The Cost Of Purchasing Components
Has Been Erratic And Could Increase, Thereby Negatively Affecting The Company’s
Margins And Operating Results.  The Company purchases many of
the components used in manufacturing its products.  An estimate of the
cost of these components is included in the price that the Company quotes to its
customers.  However, the Company does not have written agreements with
most of its suppliers of components. This typically results in the Company
bearing the risk of component price increases because the Company may be unable
to procure the required materials at a price level necessary to generate
anticipated margins.  Accordingly, unanticipated increases in
component prices could materially and adversely affect the Company’s gross
margins and operating results.




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, the Company had a currency exchange loss
of $330,000 for the fiscal year ended March 31, 2009 and a foreign currency
exchange gain of $173,000 for the fiscal 2010.  Because a significant
amount of the Company’s orders are paid in Euros, the current devaluation of the
Euro compared to the dollar will have a negative impact on the Company’s
revenues and profitability.  Notwithstanding these currency conversion
rate fluctuations, the Company does not attempt to hedge its currency exchange
risks and, therefore, will continue to experience certain gains or losses due to
changes in foreign currency exchange rates.  The Company does attempt
to limit its currency exchange rate exposure in certain of its OEM contracts
through contractual provisions, which may limit, though not eliminate, these
currency risks.  In addition, the Company has an understanding with
many of its larger European customers that the Company’s quoted prices will be
periodically adjusted to reflect currency exchange rate
fluctuations.




Significant Worldwide Political,
Economic, Legal And Other Risks Related To International
Operations.The Company is incorporated in the British Virgin
Islands, has administrative offices for its subsidiaries in Hong Kong, and has
all of its manufacturing facilities in China.  The Company sells its
products to customers in Hong Kong, North America, Europe, and Japan. As a
result, its 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 the Company’s
operations in that region.


12




Future Acquisitions Or Strategic
Investments May Not Be Successful And May Harm The Company’s Operating
Results.  As part of its strategy, the Company may acquire or
enter into strategic relationships with other enterprises in China and possibly
elsewhere.  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, including employee
      obligations.  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.




·
            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 amortization expenses associated with
      intangible assets.




·
            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 may 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.  Although the Joint Declaration provides Hong
Kong with a high degree of legislative, judicial and economic autonomy (except
in foreign and defense affairs), 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.


13




Risks Related To The Exchange Rate
Between Hong Kong Dollar and U.S. Dollar.  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 significant
amount of its expenses in Hong Kong dollars 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 were to
appreciate.  An appreciation of the Hong Kong dollar against the U.S.
dollar would increase the expenses of the Company when translated into U.S.
dollars and could adversely affect profit margins.  There can be no
assurance that the exchange rate of the Hong Kong dollar will not fluctuate in
the future and that such fluctuations will not have a materially adverse effect
on the Company’s business and results of operations.




Certain
Legal Consequences of Incorporation in the British Virgin Islands




The
Company is incorporated under the laws of the British Virgin Islands, and its
corporate affairs are governed by its Memorandum of Association and Articles of
Association and by the International Business Companies Act of the British
Virgin Islands.  Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of the Company’s
management, directors and controlling shareholders and the rights of the
Company’s shareholders differ from those that would apply if the Company were
incorporated in a jurisdiction within the U.S.  Further, the rights of
shareholders under British Virgin Islands law are not as clearly established as
the rights of shareholders under legislation or judicial precedent in existence
in most U.S. jurisdictions.  Thus, the public shareholders of the
Company may have more difficulty in protecting their interests in the face of
actions of the management, directors or controlling shareholders than they might
have as shareholders of a corporation incorporated in a U.S.
jurisdiction.  In addition, there is doubt that the courts of the
British Virgin Islands would enforce, either in an 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.




14




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.




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, commencing
with the fiscal year ending March31, 2011, an independent
registered public accounting firm for a public company must attest to and report
on the effectiveness of our company’s internal control over financial
reporting.  Because of the difficulty in hiring and keeping highly
qualified accounting personnel, 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 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.


15




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 that requires our independent registered public accounting
firm to attest to our internal controls, 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
continue to be a significant burden on 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, 2011.  In part because of the
requirements of Sarbanes-Oxley Act, the Company plans to implement a new
enterprise resource planning (ERP) computer-based system to manage its internal
and external resources, including tangible assets, financial resources,
materials, and human resources.  However, no assurance can be given
that this ERP system, when fully implemented, will enable the Company to fully
comply with the provisions of Section 404 of the Sarbanes-Oxley
Act.




We may not declare or pay cash
dividends.The Company attempts to pay a cash dividend annually to all
holders of its Common Shares, subject to its profitability and cash
position.  Because of the financial uncertainty concerning the global
economy and the effect that the slowdown in the global economy could have on the
Company, the Board did not declare or pay any dividends during the fiscal years
ended March 31, 2009. However, because of the Company’s cash position, despite
the economic downturn, the Company did pay a dividend in fiscal 2010 (a dividend
of $0.03 per share was paid in August 2009).  Dividends are declared
and paid at the discretion of the Board of Directors and 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,
in fact, pay any dividends in the future even if its has a profitable year or is
otherwise capable of doing so.  If we do not pay a cash dividend, our
shareholders will not realize a return on their investment in our Common Shares
except to the extent of any appreciation in the value of our Common Shares. Our
Common Shares may not appreciate in value, or may decline in
value.


16





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 administrative offices
for its subsidiaries are located in Hong Kong at Suite No. 810, Level 8,
Landmark North, Sheung Shui, New Territories, Hong Kong and the Company may be
contacted at (852)2344-4248.  Highway Holdings Limited currently
operates through five 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 Chinese 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’s
Long Hua operations are 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 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.


17


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, which 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,
because of the clock and alarm features of mobile telephones, the market for
clocks and watches has significantly 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.




In
addition to its largest and principal manufacturing facility in Long Hua,
Shenzhen, that it has operated since 1991, during fiscal 2009 the Company
operated three other manufacturing facilities located in Pinghu, Wuxi and He
Yuan in China.  These facilities were all acquired or established
during the past five fiscal years.  However, as explained below, the
Company has closed the Pinghu and He Yuan facilities.  The third, and
smallest facility, operated by its Kayser (Wuxi) Metal Precision Manufacturing
Limited subsidiary, is still operational, but may be sold, reorganized or closed
depending on its future operations.




Pinghu.  In
September 2006, the Company acquired all of the shares of Golden Bright Plastic
Manufacturing Company Limited, a Hong Kong company primarily engaged in the
business of the manufacture and supply of plastic parts and
products.  Golden Bright Plastic Manufacturing specialized in tool
making, plastic injection molding, silk screen printing, spray painting and
mechanic and electronic assembly.  Golden Bright produced components,
subassemblies and finished products for its OEM customers.  Golden
Bright maintained its factory in Pinghu, approximately 15 kilometers from the
Company’s principal facilities in Long Hua, Shenzhen.  The operations
of Pinghu were severely affected by the labor strikes that affected the Company
during the fiscal year ended March 31, 2008.  During fiscal 2009, the
Company eliminated some of the duplicative administrative functions at Pinghu
and consolidated those functions into its administrative headquarters in Hong
Kong.  Because the facilities in Pinghu were still underutilized, the
Company in early 2010 terminated its manufacturing operations at the Pinghu
facility and moved those operations to its main Long Hua
facility.  Golden Bright Plastic Manufacturing Company Limited
continues to operate as a trading company, engaged in the sale of plastic parts,
components and products.




Wuxi.  In
December 2005, the Company also incorporated Kayser (Wuxi) Metal Precision
Manufacturing Limited under the laws of China.  The new Chinese
subsidiary was established in Wuxi, China, to manufacture metal tools and parts
for the internal Chinese market. Unlike the facilities in Shenzhen and He Yuan,
because it is a Chinese company, 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, most of whom require local
delivery.  The Wuxi subsidiary was established by the Company by
purchasing the assets of an existing local manufacturing
operation.  During the fiscal year ended March 31, 2010, in accordance
with its prior agreement with the owners of the Wuxi assets, the Company
transferred a 29% stake in Kayser (Wuxi) Metal Precision Manufacturing Limited
to an unaffiliated person from whom the Company had previously purchased the
Wuxi factory assets. Accordingly, as of March 31, 2010, the Company owned a 71%
stock ownership interest in the Wuxi subsidiary and one unaffiliated shareholder
owns the remaining 29% interest.  The Wuxi facility currently employs
approximately 19 employees.  Kayser Wuxi has, to date, operated at a
negative cash flow.  As a result, unless the company increases its
revenues and commences operating at a profit, the Company may stop providing
financial support to the subsidiary, which could result in the closure, sale or
reorganization of this facility and its operations.




18




He
Yuan.  The He Yuan, China, manufacturing facility commenced
operations in November 2005 and was primarily used to manufacture light
fixtures.  The He Yuan facility, located in the city of He Yuan,
consisted of 3,500 square meter manufacturing facility was established under an
agreement with the government of He Yuan, and was intended to operate under a
tax free arrangement similar to the BFDC agreements in Long Hua,
Shenzhen.  However, after the facility was established and was fully
operational, the He Yuan government informed the Company that the facility was,
in fact, subject to substantial taxes (including taxes on presumed profits, even
though that facility had not yet produced profits).   As a result
of this change in the local government’s policy, the Company stopped all
operations at the He Yuan facility in April 2009 and thereafter relocated the He
Yuan equipment back to Long Hua.




Current
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.  During fiscal 2009, the Company’s manufacturing
activities were conducted in three facilities.  As a result of the
closure of the Pinghu facility earlier in 2010, all operations are now conducted
at two locations in China.  The Company’s principal, and oldest
factory complex is located in Long Hua, Shenzhen, China, at which the Company
currently employs approximately 950 employees in all areas of its
operations.  The Company’s Kayser (Wuxi) Metal Precision Manufacturing
Limited subsidiary in Wuxi, China, manufactures metal tools and parts for the
internal Chinese market.  The Wuxi facility currently employs 19
persons.




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
products such as photocopiers, laser printers, compact disc players, laser disc
players, cassette players, computer equipment, electrical components, electrical
connectors, cameras, automobile accessories, vacuum cleaners, light fixtures,
electro motors, wireless chimes, air pumps and dishwasher and other washing
machine components.  As part of its manufacturing operations, the
Company assists customers in the design and development of the tooling used in
the metal and plastic manufacturing process and provides a broad array of other
manufacturing and engineering services.  The metal manufacturing
services include metal stamping, 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,
American and Chinesenationals; (ii) its
comparatively 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).


19




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 regaining
reasonable gross margins. The Company believes that its restructured strategy
will lead to additional business opportunities which will increase the
utilization ratios of its facilities.




The
Company also manufactures underwater digital camera casings and waterproof LED
lights for various OEM customers.  Neither the camera casing sales nor
the LED product sales represent a material part of its current
business.




In
addition to its historical manufacturing operations, the Company in April 2009
formed a joint venture with Xenon Automatisierungstechnik GmbH, based in
Dresden, Germany, and Messrs. Torsten Friedrichs and Kai-Olaf Moller, to
manufacture and provide maintenance services for German-designed automation
equipment to be used in the manufacturing process of industrial companies in
Asia.  The newly formed joint venture will be named Xenon Automation
Asia Ltd. and initially utilize the Company’s facilities in Hong Kong and China
for its operations.  The Company is the largest shareholder of the
joint venture.  Under the current agreement, Xenon
Automatisierungstechnik GmbH, a highly regarded German automation equipment
company, will provide the design, development and technical expertise to the
joint venture, Mr. Torsten Friedrichs and Mr. Kai-Olaf Moller will provide the
marketing resources, and the Company will contribute the use of certain of
facilities and employees.  The business plan of the joint venture is
to design and build high quality equipment to meet the growing demand for
automation equipment in China and, if requested, in other markets in
Asia.  The Company and its joint venture partners believe that there
is a growing demand for automation equipment in China because the Chinese
manufacturing economy is transitioning from a system based on cheap labor to a
more industrialized manufacturing system.  To date, the joint venture
has designed and built one automatic assembly system (which was purchased by the
Company), and recently completed four other test machines for one of the
Company’s customers.  To date, the financial impact of this joint
venture on the Company’s financial condition has not been
material.


20




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.  For the fiscal year ended March 31, 2010, approximately
64.0%% of the Company’s revenues were derived from OEM metal and mechanical
manufacturing, and approximately 36.0% was derived from OEM electric (including
plastics) 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 established a small, but active, customer base in the
U.S.




The
Company’s Strategy




The
Company’s future growth and profitability depend on its ability to compete as a
third party manufacturer.  The Company’s business strategy and focus
is to expand its operations as an integrated OEM manufacturer of metal, plastic
and electronic parts, components, subassemblies and competed products for blue
chip and international customers. 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
utilizing its cost and logistical advantages.


21




The
following are some of the elements that the Company believes will enable it to
compete as a third party manufacturer.




Capitalize on, and leverage its
manufacturing strength:  Unlike many of its metal parts
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.  For  example, manufacturing stepping motors,
just to mention one of the Company’s products, utilizes all of the Company’s
capabilities, starting with mold and die making for the metal and plastic parts,
metal stamping, deep drawing and plastic injection molding, electric coil
winding, soldering, and assembling all the parts by using spot welding and
riveting technologies.  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.  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.




Upgrading Equipment-Increased
Automation.  In order to attract major European and Japanese
OEM customers and in order to reduce its labor costs, the Company has during the
past few years upgraded the design and manufacturing equipment at its
facilities.  In the past few years, 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 and the
purchase of new stamping machines, spectrum analyzers and robotic
equipment.   The new equipment included five Computer Numerical
Control (“CNC”) tooling machines, one CNC measurement machine, and one
electronic injection molding machine. 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.




The
Company also is increasing the amount of automation equipment and robotics that
it uses in its manufacturing processes.  During the past fiscal year,
the Company used, and it intends to continue to use in the future the resources
of its new Xenon Automation Asia Ltd. automation equipment joint venture to
design and provide some of its automation equipment.  The Company
believes that its automation efforts, along with its restructured manufacturing
procedures have already significantly reduced the number of workers that it
needs in its manufacturing operations.  The automated/robot machinery
that the Company has installed is used to replace some of the repetitive
functions performed by workers.  The Company’s goal is to use
automation/robotics to reduce it labor costs, improve the consistency and
quality of its products, and to increase the quantity of products that it
manufactures at its work stations.  The newly installed automated
machinery has reduced the number of workers at the Company’s facilities, which
reduction is expected to continue in the future.


22




Maintaining customers and increasing
market share through financial strength:  Many of the Company’s
largest customers are global companies that require that their OEM manufacturers
have the financial strength to survive during financial and economic
downturns.  The Company has traditionally maintained a strong balance
sheet that has enabled it to continue to supply its customers during economic
downturns.  The Company’s financial policies enabled it to operate
during the Asian financial crisis that commenced in 1998 and has, to date,
enabled the Company to continue to operate during the current worldwide economic
crisis.  Many of the Company’s local competitors have failed during
the recent recession.  The failure of some of these other companies
has enabled the Company to strengthen its relationships with its existing
customers and to obtain additional orders that may otherwise have been gone to
competitors.




Expansion by acquisition, merger and
other means:  The Company believes it has the opportunity to
expand its business through acquisitions and through the establishment of
additional manufacturing facilities.  The Company continues to
consider and evaluate 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.  Management believes that the Company’s commitment to high
level service, it attention to detail, and the quality of its manufacturing has
the effect of providing customers with a sense of confidence and security that
their product requirements will be met and their products will be delivered on
time and at 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.


23




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.  Customers 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 efficiently produce high quality tools designed to produce a high
quality product.  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.




The tool
making process for metal parts generally takes between 14 to 60 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.




The
Company maintains its ISO 9001 quality management system certification and its
ISO 14001 environmental management systems certification.




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.


24


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 public
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.




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.  Many 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 fluctuated
significantly, and there have been shortages for some
materials.   The Company estimates that the cost of some metal
and plastic products increased during the past years by between 10% and
50%.




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.  As a result of the recent
worldwide economic crisis, many of the local providers of parts and components
used by the Company in its products have ceased operations, which has caused the
Company to experience temporary difficulties in obtaining parts and components
from local suppliers.


25




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 carrier” (“F.C.A.”) Hong Kong or “free-on-board” (F.O.B.)
Hong Kong.  The Company uses subcontract trucking services to
transport it products.  Recent improvements in the roads and highways
in China have facilitated intra-China transportation, and the Hong Kong and
China customs departments have opened additional border crossings, extended
their operating hours, and generally have improved the flow of cross-border
goods.  The Company’s facilities in Long Hua are located near Hong
Kong and the sea port in Shenzhen.  Many of the Company’s customers
use the Shenzhen sea port rather than the port of Hong Kong.




Similarly,
the Wuxi subsidiary has good access to the Shanghai ports by highway and
railroads.  However, unlike its Long Hua facilities, most of Wuxi’s
products are sold to local customers and not 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 physical locations of the
Company’s customers.  For example, if the products are delivered to
the customer in Hong Kong, the sales are recorded as generated in Hong Kong and
China; 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, U.S. 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, 2008, 2009 and 2010:




Year Ended March 312008
                      
                      
                      2009
                      
                      
                      2010GEOGRAPHIC AREAS:Hong
      Kong and China
                      
                      
                      49.6
                      %
                      
                      
                      42.4
                      %
                      
                      
                      34.9
                      %Europe
                      
                      
                      43.5
                      %
                      
                      
                      47.5
                      %
                      
                      
                      54.0
                      %Other
      Asian countries
                      
                      
                      0.7
                      %
                      
                      
                      0.6
                      %
                      
                      
                      4.3
                      %United
      States
                      
                      
                      5.9
                      %
                      
                      
                      8.7
                      %
                      
                      
                      5.3
                      %Others
                      
                      
                      0.3
                      %
                      
                      
                      0.8
                      %
                      
                      
                      1.5
                      %





During
the year ended March 31, 2009, there was a change in the internal financial
reporting of information to the Company’s chief operating decision maker,
leading to a reduction in the Company’s operating segments from four segments
(Metal stamping and mechanical OEM; Electric OEM; Cameras and underwater
products; and Clocks and watches) to two segments.  The two business
and reporting segments of the Company consisting of (i) its metal stamping and
mechanical OEM operations, and (ii) its electric OEM operations (that include
its plastic operations).  Amounts for fiscal year 2008 have been
restated to conform to the current management view.  The sales by
segments for the years ended March 31, 2008, 2009 and 2010 are as
follows:


26




Year Ended March 312008
                    
                    
                    2009
                    
                    
                    2010SEGMENT
      SALES:Metal
      Stamping and Mechanical OEM
                    
                    
                    70.4
                    %
                    
                    
                    66.2
                    %
                    
                    
                    64.0
                    %Electric
      OEM
                    
                    
                    29.6
                    %
                    
                    
                    33.8
                    %
                    
                    
                    36.0
                    %




Most of
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.  The
Company markets its services through existing contacts, word-of-mouth referrals
and references from associated or related companies of the customers, as well as
attendance at some trade shows.  During the past few years, the
Company has gradually increased the number of foreign sales person to complement
the activities of its officers and in-house sales personnel. Due to the
international nature of senior management, the Company believes that it has been
able to bridge the cultural, language and quality perception gaps that concern
certain Japanese and German companies when dealing in China.




Major
Customers




For the
fiscal year ended March 31, 2010, three customers each accounted for more than
10% of the Company’s net revenues (or 50.5% collectively of the Company’s net
sales).  During the past few years, the Company has relied to a large
extent on a few larger customers and has consciously reduced the number of its
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 orders decrease substantially, the Company’s results of operations
and financial position would be materially and adversely affected if the Company
is unable to replace such major customers.


27


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 usually 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.  Certain of the Company’s larger
customers provide the Company with non-binding forecasts of their anticipated
needs for the next year in order to enable the Company to plan for the
anticipated orders.  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 between
45 to 90 days, 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 30-60 days
after an order has been placed unless the Company is required to manufacture new
tools which requires approximately 14-60 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, 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.




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.  As a result of the recent economic crisis, a number of these
smaller competitors, including many located in Shenzhen, have ceased
operations.  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.


28




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, nor does it consider any other issues with
respect to seasonality to be material.




Government
Regulation




As of the
date of this Annual Report, both 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.




The
Chinese government has during the past few years significantly changed and/or
increased the enforcement of a number of laws affecting employees (including
regulations regarding their salaries and benefits, labor unions, working
conditions and overtime restrictions, and contract duration—in particular,
requirements leading to life long employment), and safety regulations for
buildings and workers. In June 2007, the National People’s Congress of the PRC
enacted new labor law legislation called the Labor Contract Law and more
strictly enforced certain existing labor laws.  The new law, which
became effective on January 1, 2008, amended and formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role
of trade unions.  Employers found to be violating these labor rules
are often severely penalized.   As a result of the new law, the
Company has had to reduce the number of hours of overtime its workers can work,
substantially increase salaries of its workers, provide additional benefits to
its workers, and revise certain other of its labor practices.  The
increase in labor costs has increased the Company’s operating costs, which
increase the Company has not always been able to pass through to its customers.
In addition, under the new law, employees who have had two consecutive
fixed-term contracts must be given an “open-ended employment contract” that, in
effect, constitutes a lifetime, permanent contract, which is terminable only in
the event the employee materially breaches the Company’s rules and regulations
or is in serious dereliction of his duty.  Such non-cancelable
employment contracts will substantially increase its employment related risks
and limit the Company’s ability to downsize its workforce in the event of an
economic downturn.  The change in the labor laws directly contributed
to four strikes in the fiscal year ended March 31, 2008 at the Company’s
manufacturing facilities, caused other labor slow-downs, required to the Company
to make significant financial payments and concessions to its worker, and has
resulted in the filing of labor claims by employees against the
Company.


29


In
addition, the Chinese government has also changed or increased the enforcement
of certain environment protection laws, which have restricted some common
practices and/or increased the Company’s cost of operations.  The
Company also has to comply with the environmental laws of its customers, such as
recently adopted regulations of the European Union and Japan known as the
Restriction on Hazardous Substances (“RoHS”).  These rules and
regulations prohibit the importation products and parts that contain certain
levels of toxic materials (such as lead, cadmium and mercury).




While the
Company’s manufacturing facilities are in China, the Company sells its products
to customers in Hong Kong, North America, Europe and Japan. As a result, its
operations are subject to significant regulations related to its activities in
these regions, including changes in international and domestic customs
regulations, changes in tariffs, trade restrictions, and trade agreements and
taxation.




Research
and Development




As a
manufacturer of parts, components and finished products for OEMs and contract
manufacturers, the Company conducts no material research or
development.  The Company does, however, invest minor amounts for
certain research and development activities it conducts in connection with
developing automated machines that the Company uses in its manufacturing
process.




Organizational
Structure




Highway
Holdings Limited is a holding company that operates through its
subsidiaries.  As of March 31, 2010, Highway Holdings Limited owned
ten subsidiaries, nine of which were wholly-owned by Highway Holdings
Limited.  The Company has been consolidating the operations of certain
of these subsidiaries.  As a result of its recent reorganization
efforts, the Company currently conducts its business primarily through five
subsidiaries.  Details of these subsidiaries are as
follows:




Date of
                                        
                                        
                                        
                                        Percentage of ownership
                                          at March 31,Place of incorporation
                                        
                                        Name of entity
                                        
                                        incorporation
                                        
                                        Principal
      activities
                                        
                                        2009
                                        
                                        
                                        2010Hong
      Kong
                                        
                                        Hi-Lite
      Camera Company Limited
                                        
                                        November
      10, 1978
                                        
                                        Manufacturing
      OEM products
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        100
                                        %Hong
      Kong
                                        
                                        Kayser
      Limited (formerly known as Kienzle Time (H.K.)
                                          Limited)
                                        
                                        August
      24, 1997
                                        
                                        Trading
      of OEM products
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        100
                                        %Hong
      Kong
                                        
                                        Nissin
      Precision Metal Manufacturing Limited
                                        
                                        November
      21, 1980
                                        
                                        Metal
      stamping, tooling design and manufacturing and assembling OEM
      products
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        100
                                        %Hong
      Kong
                                        
                                        Golden
      Bright Plastic Manufacturing Company Limited
                                        
                                        May
      19, 1992
                                        
                                        Trading
      company, involved in trading plastic injection products
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        100
                                        %China
                                        
                                        Kayser
      Wuxi Precision Metal Manufacturing Limited
                                        
                                        December
      21, 2005
                                        
                                        Metal
      stamping and
                                          tooling
      design
                                        
                                        
                                        71
                                        %
                                        
                                        
                                        71
                                        %(1)





(1)
            The remaining 29% of the Wuxi
      subsidiary is owned by the factory manager of the Wuxi
      facility.


30





In
addition to the foregoing subsidiaries, the Company also is a 50% joint venture
partner of Xenon Automation Asia Ltd., a new joint venture that was established
to manufacture and provide maintenance services for German-designed automation
equipment to be used in the manufacturing process of industrial companies in
Asia.




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 administrative offices.  These
premises, consisting of approximately 1,912 sq. ft., are leased under a lease
that expires in July 2011 and has a monthly rental cost of $4,558 per
month.




The
Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong at a
rental cost of $2,272 per month under an agreement that expires in December
2010.




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
and electrical manufacturing, OEM product assembly, plastic injection, tooling
workshop and warehouse operations.  There are also offices for
production management, production engineering, and production support
administration on the premises.  The term of the leases expires on
February 28, 2012.  The utilization rate of these facilities at the
end of the fiscal year ended March 31, 2010 was only 40% of its maximum
capacity.  Accordingly, the Company has sufficient manufacturing space
for its current needs, and its current facilities will continue to satisfy the
Company’s space needs in the near future.




The
Company also obtains materials and assets under its two BFDC Agreements which
expire in 2016.  The BFDC is the local government of Long Hua, the
town in which the factory complex is located.  Pursuant to the BFDC
Agreements, the BFDC is the party responsible for providing manufacturing
facilities and supplying workers to the Company.  The Company is
responsible for paying a management fee, and certain other charges to the
BFDC.




As is
common in southern China, the factory complex has dormitory facilities to
accommodate factory workers.  The Company has leased approximately
72,000 square feet of space at Long Hua, Shenzhen, China which is used as
dormitories for approximately 600 factory workers.


31




As part
of its acquisition of Golden Bright Plastic Manufacturing Company Limited in
Pinghu, the Company assumed that company’s obligations under an operating
license agreement with Shenzhen City Longang District Foreign Economic
Development Limited that expires in 2020.  In January 2010, with the
approval of its landlord, the Company vacated the leased space in
Pinghu.  As a result, the Golden Bright facilities in Pinghu are no
longer used by the Company, and the Company’s obligation to make rental payments
under that lease are no longer in effect.




The
Company’s Wuxi subsidiary leased a 46,000 square feet facility in February
2007.  The facilities are leased for $5,650 per month under a lease
that expires in February 2016.




Item
4.A.     Unresolved Staff Comments




Not
applicable.




Item
5.Operating and Financial Review and Prospects




Overview




The
Company’s net sales during the past three years were derived primarily from the
manufacture and sale of metal, plastic and electronic parts and components for
its multi-national clients. Although the Company manufactures metal, plastic and
electronic parts and products for its customers, it treats its metal stamping
and mechanical OEM manufacturing operations and its electric OEM manufacturing
operations as two separate business segments.




During
the three years ended March 31, 2009, the Company’s revenues increased annually
year-over-year.  However, during the Company’s 2009 fiscal year, the
worldwide economy in general, and the manufacturing industry in particular,
began to experience a significant downturn, which directly affected, and
continues to have a material adverse affect on the Company’s business and
financial condition and its results of operations.  The worldwide
credit crisis resulted in a sharp reduction in the demand for the products sold
by the Company’s customers, which has resulted in fewer purchase orders for the
Company’s products from the Company’s customers.  Because there is a
delay between the time that the Company receives orders and the time that the
Company completes the orders and ships the customer’s products, the slowdown in
orders received during the third quarter of fiscal 2009 fiscal year resulted in
a significant decrease in shipments and revenues starting with the fourth
quarter of fiscal March 31, 2009 and continued through the fiscal year ended
March 31, 2010.  In addition to lower demand for the Company’s
products, the economic downturn also resulted in increased pricing pressures and
lower prices.  These factors further reduced the amount of revenues
that the Company generated in fiscal 2010.  Although sales orders have
recently picked up, the Company believes that these factors will continue to
negatively affect its operations for most of the current year.


32


The
economic crisis has, however, also had a positive impact on the Company’s
business and operations.  Because of the sudden and severe downturn,
many of the Company’s financially weaker OEM competitors have gone out of
business or drastically reduced the scope of their operations.  As a
result, competition has in some markets has decreased, which has resulted in
additional purchase orders for those manufacturers, such as the Company, that
are still in business.  Also, because of the industry-wide decrease in
manufacturing activities, the prices of many raw materials temporarily decreased
(the cost of raw materials is again on the rise, and the cost of some raw
materials increased significantly in fiscal 2010).




As
described in this Annual Report, during the past 18 months, the Company has
taken several actions that will, over the longer term, lower certain of the
Company’s cost of operations.  The primary steps that reduced costs
were (i) the closure of the manufacturing facility in He Yuan in April 2009, and
(ii) closing the Golden Bright factory in Pinghu in January 2010.  As
a result of these closures, and the relocation of these operations to the
Company’s main manufacturing facilities in Long Hua, the Company has reduced the
size of its workforce and has reduced its rental expenses.  However,
offsetting these cost reductions has been a significant increase in the cost of
labor.  During the past year, wages have increased significantly (by
as much as 60%), and the Company had to pay sign-up bonuses and retention
bonuses to attract new workers.




The
Company is not taxed in the British Virgin Islands, the state of its
incorporation.  The location of the Company’s administrative offices
for its operating subsidiaries 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.  The statutory tax rate in Hong Kong
currently is 16.5%, 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 16.5%
rate.




Under the
BFDC Agreements that apply to the Company’s principal operations in Shenzhen,
the Company does not pay taxes in China based on the operations of the Shenzhen
facilities because it is not considered to be a tax resident 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 common 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.  However, the Company
is taxed on the operations of its wholly-owned subsidiary in
Wuxi.  Because the Wuxi facilities are operated by a registered
company in China that pays domestic taxes on its operations, it is authorized to
manufacture and sell products for China domestic market.




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


33




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 OEM manufacture of metal, plastic and
electronic products, parts and components.  In addition to the
foregoing, in prior years the Company also derived some revenues from the
manufacture and sale of clocks, clock movements, watches, cameras, camera
accessories and some LED lighting products, although such revenues have
constituted less than 5% of the Company’s annual net sales.




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 31,2008
                                      
                                      
                                      2009
                                      
                                      
                                      2010Net
      Sales
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      100
                                      %Cost
      of sales
                                      
                                      
                                      84.7
                                      
                                      
                                      
                                      80.1
                                      
                                      
                                      
                                      78.4Gross
      profit
                                      
                                      
                                      15.3
                                      
                                      
                                      
                                      19.9
                                      
                                      
                                      
                                      21.6Operating
      (loss) income
                                      
                                      
                                      (6.9
                                      )
                                      
                                      
                                      2.6
                                      
                                      
                                      
                                      1.5Non-operating income
      (loss) (1)
                                      
                                      
                                      1.0
                                      
                                      
                                      
                                      (0.6
                                      )
                                      
                                      
                                      0.4Income
      (loss) before income taxes
                                      
                                      
                                      (5.9
                                      )
                                      
                                      
                                      2.0
                                      
                                      
                                      
                                      1.9Income
      tax (expense) credit
                                      
                                      
                                      (0.1
                                      )
                                      
                                      
                                      0.1
                                      
                                      
                                      
                                      (0.1
                                      )Net
      Income (loss)
                                      
                                      
                                      (6.0
                                      )
                                      
                                      
                                      2.1
                                      
                                      
                                      
                                      1.8Loss
      attributable to non-controlling interest
                                      
                                      
                                      0.2
                                      
                                      
                                      
                                      0.2
                                      
                                      
                                      
                                      0.1Net
      income (loss) attributable to HighwayShareholders
                                      
                                      
                                      (5.8
                                      )
                                      
                                      
                                      2.3
                                      
                                      
                                      
                                      1.9





Note:


(1)
            Non-operating
      income (loss) includes (i) exchange gain (loss) net, (ii) interest income
      (expense), (iii) gain on disposal of partial interest in a subsidiary and
      investment securities, (iv) impairment loss on investment, (v) impairment
      loss on property, plant and equipment, and (vi) other
    income.





Year Ended March 31, 2010
Compared to Year Ended March 31, 2009




Net sales
for the fiscal year ended March 31, 2010 (“fiscal 2010”) decreased by
$11,990,000, or 35.5%, from the year ended March 31, 2009 (“fiscal
2009”).  The decrease was a direct result of the worldwide economic
downturn that caused the Company’s customers to reduce the amount of products
those customers ordered from the Company.  Although the economic
downturn occurred early in fiscal 2009, because of a significant backlog of
unfilled orders that the Company carried in fiscal 2009, the drop off in new
sales was not realized by the Company until the fourth quarter of fiscal
2009.  The decrease in sales that commenced in the fourth quarter of
2009 continued throughout most of fiscal 2010.  Although orders and
new sales increased during the fourth quarter of fiscal 2010, the Company is
unable to determine whether the increased orders represents a trend or merely a
temporary fluctuation.


34




As a
result of the decrease in net sales, the Company’s gross profits decreased in
fiscal 2010 by $2,004,000, or 29.9%, compared to fiscal
2009.  However, because of the cost cutting efforts the Company
implemented when the economic downturn became apparent, and in part due to the
Company’s increased use of automation in its manufacturing systems, the
Company’s gross margins increased from 19.9% in fiscal 2009 to 21.6% in fiscal
2010.




Selling,
general and administrative expenses for fiscal 2010 decreased by $1,456,000, or
25.0%, compared to fiscal 2009, as a result of the significant decrease in net
sales in fiscal 2010 and a reduction in fees paid to
professionals.  However, the Company was not able to reduce its
selling, general and administrative expenses by the same percentage as the
reduction in net sales because of certain fixed costs.  As a result,
during fiscal 2010, selling, general and administrative expenses as a percentage
of net sales increased to 20.1% of net sales, compared to 17.3% of net sales in
fiscal 2009.  Certain selling, general and administrative expenses in
the future may be lower as a result of the closure of the manufacturing facility
in Pinghu (including the reduction in rental expenses) and the consolidation of
the general and administrative functions previously performed at that site into
the Company’s other offices (mostly in Hong Kong), thereby eliminating
duplicative operations.




Despite
the 35.5% decrease in sales, because of the increase in gross margins and the
Company’s ability to drastically reduce its selling, general and administrative
expenses in fiscal 2010, the Company managed to generated operating income of
$333,000 (compared to operating income of $881,000 in fiscal 2009).




The
Company’s interest expenses decreased in fiscal 2010 from $141,000 in fiscal
2009 to $47,000 as a result of lower interest rates.  However, the
lower interest rates also decreased the Company’s interest income in fiscal 2010
despite a slight increase in interest bearing funds carried by the Company
during fiscal 2010.  For fiscal 2010, the Company had an currency
exchange rate gain of $173,000 as the Euro strengthened against the U.S. dollar
during most of fiscal 2010.  The Company incurred a $330,000 of
currency exchange loss in fiscal 2009.  Because sales to European
customers represented over 54% of total net sales in fiscal 2010, the Company
will continue to be more exposed to fluctuations in the exchange rate between
the Euro and the U.S. dollar.  Since the Company does not undertake
any currency hedging transactions, its financial results will continue to be
affected by the future fluctuations of currencies (the Company does, however,
have agreements with certain of its European customers that limit the risk of
currency fluctuations to 5%).  As a result of the decreased interest
expense and the currency exchange gain, the Company had total non-operating
income of $77,000 in fiscal 2010 compared to total non-operating expenses of
$206,000 in fiscal 2009.




The
Company’s net income in fiscal 2010 was $420,000 compared to net income of
$768,000 in fiscal 2009 despite a $11,990,000 decrease in net sales in fiscal
2010.  The Company managed to generate $420,000 net income despite the
worldwide economic downturn because of its ability to manage its expenses
(thereby increasing gross margins and decreasing selling, general and
administrative expense), and the currency exchange gain.


35




Year Ended March 31, 2009
Compared to Year Ended March 31, 2008




Net sales
for fiscal 2009 increased by $565,000, or 1.7%, from the year ended March 31,
2008 (“fiscal 2008”).  The increase in net sales occurred despite a
worldwide economic slowdown and a worldwide financial crisis that affected the
Company and its customers.  The Company’s net sales increased during
the first nine months of fiscal 2009 due in part to a large backlog of orders
that carried over from fiscal 2008.  During fiscal 2008 the Company
was subjected to four labor strikes that stopped and/or slowed down some of its
operations and manufacturing.  As a result, the Company was unable to
fill all of its orders in fiscal 2008, which orders were filled in fiscal 2009
when the Company’s workers returned to full force.  In addition, the
Company also benefited because some of its competitors ceased
operating.




Gross
profits increased in fiscal 2009 over gross profits in fiscal 2008 by $1,630,000
due to the increase in revenues and, in particular, due to a significant
decrease in the cost of raw materials.  During fiscal 2008, the cost
of most of the Company’s raw materials increased very
significantly.  However, due to the economic downturn and other global
factors that occurred in fiscal 2009, the cost of these raw materials decreased
very significantly in fiscal 2009.  As a result, the Company’s cost of
sales decreased by $1,065,000 in fiscal 2009 compared to fiscal 2008 despite an
increase in net sales.  Because of these significant fluctuations in
the cost of raw materials, the Company and certain of its larger customers
agreed to price new orders based on the cost of raw materials and to
periodically adjust the price of the products manufactured by the Company based
on the changes in the cost of raw materials.  Also, the Company has
refused to enter into long term, fixed price manufacturing
agreements.  As a result of the foregoing customer arrangements, the
Company does not expect to experience either large losses or large gains on
customer contracts in the future due to fluctuations in raw material
costs.




Selling,
general and administrative expenses for fiscal 2009 decreased by $1,528,000, or
20.8%, compared to fiscal 2008, despite an increase in net sales in fiscal
2009.  As a result, during fiscal 2009, selling, general and
administrative expenses constituted only 17.3% of net sales, compared to 22.2%
of net sales in fiscal 2008.  Selling, general and administrative
expenses in fiscal 2009 decreased due to the Company moving most of the general
and administrative functions previously performed at its Golden Bright facility
to the Company’s other offices (mostly in Hong Kong), thereby eliminating
duplicative operations, and due to favorable labor court rulings in fiscal 2009
that permitted the Company to reverse an approximately $342,000 reserve that the
Company had established in fiscal 2008 to pay these pending labor
claims.  Selling, general and administrative expenses in fiscal 2008
also reflected some additional one-time expenses that the Company did not have
in fiscal 2009, such as approximately of $412,000 of payments that the Company
made in fiscal 2008 to its workers to resolve/settle certain labor disputes, and
costs incurred in improving the accounting functions at its
subsidiaries.




The
increase in net sales, increase in gross profits and the decrease in selling,
general and administrative expenses resulted in the Company recognizing
operating income of $881,000 in fiscal 2009, compared to an operating loss of
$2,277,000 in fiscal 2008.


36


The
Company’s interest expenses decreased in fiscal 2009 from $225,000 in fiscal
2008 to $141,000 in fiscal 2009 as a result of lower interest rates. The
Company’s interest income in fiscal 2009 also decreased from $100,000 in fiscal
2008 to $35,000 in fiscal 2009 due to the decrease in the interest
rates.  The Company’s income in fiscal 2009 was further reduced by
$330,000 of currency exchange losses.  The Company had a currency
exchange rate gain of $283,000 in fiscal 2008.  The currency exchange
gains and losses in fiscal 2008 and 2009 were the result of fluctuations in the
value of the Euro compared to the U.S. dollar.  During fiscal 2009,
the U.S. dollar strengthened compared to the Euro.  Since sales to
European customers increased from $14,426,000 in fiscal 2008 to $16,031,000 in
fiscal 2009, the Company was more exposed to adverse changes in the value of the
Euro compared to the U.S. dollar.




Due to
increased net sales (mostly in the first nine months of fiscal 2009), lower raw
material prices, and the Company’s effective cost control measures in fiscal
2009, the Company managed to generate net income of $768,000 in fiscal 2009,
compared to net loss of $1,921,000 in fiscal 2008.




Liquidity
and Capital Resources




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




Year
      Ended March 31,2008
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2010(In thousands)Net
      cash provided by operating activities
                                                  
                                                  $
                                                  75
                                                  
                                                  
                                                  $
                                                  2,005
                                                  
                                                  
                                                  $
                                                  1,746Net
      cash (used in) provided by investing activities
                                                  
                                                  
                                                  (5
                                                  )
                                                  
                                                  
                                                  558
                                                  
                                                  
                                                  
                                                  159Net
      cash used in financing activities
                                                  
                                                  
                                                  (1,496
                                                  )
                                                  
                                                  
                                                  (663
                                                  )
                                                  
                                                  
                                                  (1,428
                                                  )Net
      (decrease) increase in cash and cash equivalents
                                                  
                                                  
                                                  (1,426
                                                  )
                                                  
                                                  
                                                  1,900
                                                  
                                                  
                                                  
                                                  477Cash
      and cash equivalents at beginning of period
                                                  
                                                  
                                                  5,299
                                                  
                                                  
                                                  
                                                  3,889
                                                  
                                                  
                                                  
                                                  5,809Effect
      of exchange rate changes
                                                  
                                                  
                                                  16
                                                  
                                                  
                                                  
                                                  20
                                                  
                                                  
                                                  
                                                  (7
                                                  )Cash
      and cash equivalents at end of period
                                                  
                                                  $
                                                  3,889
                                                  
                                                  
                                                  $
                                                  5,809
                                                  
                                                  
                                                  $
                                                  6,279




At March
31, 2010, the Company had working capital of $9,803,000, compared to working
capital of $9,040,000 at March 31, 2009.




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, 2010, the Company
had $1,746,000 of positive cash from its operating activities primarily because
of its $420,000 of net income, $635,000 of depreciation non-cash expenses, and a
$293,000 decrease in inventories.


37


Because
of the Company’s international operations, the Company’s banking arrangements
provide the Company with credit facilities for letters of credit and import
loans.  The Company also uses these credit facilities to fund certain
of its capital requirements, to post the stand-by letters of credit required for
the governmentally imposed import deposits, and to finance some of its machinery
and equipment purchases.  During fiscal 2010, the foregoing banking
facilities were provided to the Company by DBS Bank (Hong Kong)
Limited.  During fiscal 2010, the Company also had a second credit
facility that was provided by Overseas-Chinese Banking Corporation Limited
(OCBC), under which the Company had a maximum of $1,221,000 (subject to various
sub-limits) of available credit.  However, the Company has decided not
to renew the OCBC facility.  Accordingly, the Company currently only
has the DBS Bank facility available.




The DBS
facility provides for a maximum letter or credit/trust receipt facility of
$3,342,000 and for an aggregate of $295,000 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 8 months to 24 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.




As of
March 31, 2010, the Company had borrowings of $793,000 and a standby letter of
credit of $33,000 outstanding under its credit facility, and had a total of
$2,142,000 of available credit remaining under the DBS credit
facility.  The Company’s long-term debt (including the current
portion) was $295,000 as of March 31, 2010.  Because of the Company
has significant working capital reserves and a significant amount of cash and
cash equivalents, the Company believes that the DBS credit facility currently is
sufficient for its projected needs.  However, should the Company be
required to incur significant unanticipated expenses (such as relocating its
Long Hua facilities, posting additional deposits/bonds with governmental
agencies, or funding certain operating expenses as a result of the worldwide
economic slowdown), the current facilities may not be sufficient.




Although
the Company’s rent at its largest facility increased effective February 2009,
the Company’s overall rental payments for all of its facilities in the current
fiscal year are expected to decrease slightly compared to fiscal 2010 due to the
closure of the Pinghu facility in January 2010.  Effective February
2009, the Company entered into a new three-year lease for the Long Hua,
Shenzhen, facility.  The new lease at the Company’s largest facility
increased the Company’s rent at this facility by approximately
one-third.




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 credit
facilities.




Impact
of Inflation




The rapid
growth of China’s economy in general, and the growth in Shenzhen in particular,
has in the past few years resulted in increased rent, energy prices, fuel and
labor expenses.  These increased costs have adversely affected the
Company’s cost of operations.  As a result of the worldwide economic
slowdown, price inflation has moderated, and the Company does not currently
anticipate any additional inflation that will lead price increases in the near
future.  However, if inflation does continue, 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.




38




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 Shenzhen 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 few years as the value of the RMB
compared to the U.S. dollar has increased during that
period.  Accordingly, the Company’s operating costs (expressed in U.S.
dollars) have increased.




For the
fiscal years ended March 31, 2008, 2009 and 2010, 18%, 22% and 29%,
respectively, of the Company’s net sales were paid in Euros.  The
fluctuation of the Euro/U.S. dollar exchange rates have resulted in currency
exchange gains and losses.  For example, as a result of the decrease
in the value of the Euro compared to the U.S. dollar the Company recognized a
currency exchange loss in fiscal 2009.  However, the Company in fiscal
2010 realized a currency exchange gain as the Euro strengthened compared to the
U.S. dollar.  The Company’s currency exchange exposure is expected to
increase in the future as more of its transactions are expected to be
denominated in Euros.  In addition, now that the exchange rate of the
RMB has been permitted to adjust, the Company’s operations and financial
statements will be further exposed to changes in currency exchange
rate.




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 results.  In order to
mitigate the effects of significant fluctuations in the value of the Euro, the
Company has, however, entered into agreements with most of its European
customers that either limits the exposure to currency fluctuations to
approximately 5% or provides that the price charged by the Company will be
re-negotiated every three months to account for currency
fluctuations.




Trend
Information




As
discussed in greater detail elsewhere, there have been several significant
trends effecting the production and sales of the Company.  Most
notably, commencing at the end of fiscal 2009 and continuing through fiscal
2010, there has been a worldwide economic slowdown and a worldwide financial
crisis that has affected the Company and its customers.  Commencing in
fiscal 2009, new customer orders slowed significantly, reaching its lowest point
in the first quarter of fiscal 2010.  Since the first quarter of
fiscal 2010, customer orders have gradually increased as the recession seemed to
ease.  Although the recession in the U.S. and some other parts of the
world seem to be easing, the economic outlook for Europe is uncertain, as is the
value of the Euro.  Since the Company obtains a significant portion of
its orders from Europe (54% of its sales in fiscal 2010 were to European
customers), the uncertain economy in Europe, and the decreasing value of the
Euro, are likely to have a negative effect on the Company’s short-term
outlook.


39




Also, due
to the economic downturn and other global factors that occurred in fiscal 2009
and 2010, the cost of many of the raw materials used by the Company
decreased.  The cost of raw materials has recently, however,
significantly increased.  As a result of these significant
fluctuations, the Company is unable to estimate the future trend of its raw
material prices.




Other
than as disclosed elsewhere in this Annual Report on Form 20-F, the Company is
not aware of any trends, uncertainties, demands, commitments or events for the
period from April 1, 2009 to March 31, 2010 that are reasonably likely to have a
material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial
conditions.




Off-Balance
Sheet Arrangements




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.




Contractual
Obligations




The
following is a summary of the Company’s contractual obligations as of March 31,
2010 is as follows:




Payment due by Year Ending March 31,Contractual Obligations
                      
                      Total
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      2014
                      
                      
                      2015 and
                        thereafter$’000
                      
                      
                      $’000
                      
                      
                      $’000
                      
                      
                      $’000
                      
                      
                      $’000
                      
                      
                      $’000Facility
      Leases
                      
                      
                      2,665
                      
                      
                      
                      1,235
                      
                      
                      
                      1,086
                      
                      
                      
                      85
                      
                      
                      
                      86
                      
                      
                      
                      173Finance
      Leases
                      
                      
                      295
                      
                      
                      
                      251
                      
                      
                      
                      41
                      
                      
                      
                      3
                      
                      
                      
                      -
                      
                      
                      
                      -Capital
      commitment on purchase of property, plant and equipment
                      
                      
                      55
                      
                      
                      
                      55
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Purchase
      obligations
                      
                      
                      3,797
                      
                      
                      
                      3,797
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Short
      term borrowing
                      
                      
                      793
                      
                      
                      
                      793
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Interest
      commitments
                      
                      
                      10
                      
                      
                      
                      9
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      7,615
                      
                      
                      
                      6,140
                      
                      
                      
                      1,128
                      
                      
                      
                      88
                      
                      
                      
                      86
                      
                      
                      
                      173


40




Critical
Accounting Policies and Estimates




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




The
following critical accounting policies affect the more significant judgments and
estimates used in the preparation of the Company’s consolidated financial
statements. For further discussion of our significant accounting policies, refer
to Note 2 “Summary of Significant Accounting Policies” of our consolidated
financial statements in Item 18.




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.


41




Item
6.Directors, Senior Management and Employees




Directors
and Executive Officers




The
Directors and executive officers of the Company as of June 28, 2010 are listed
below.  The Directors hold office until the next annual meeting of
shareholders, which currently is scheduled to be held on August 17,
2010.




Name
                      
                      Age
                      
                      PositionsRoland
      W. Kohl
                      
                      61
                      
                      Chief
      Executive Officer, Director, Chairman of the BoardHolger
      Will
                      
                      44
                      
                      Chief
      Operating OfficerSatoru
      Saito (1)
                      
                      61
                      
                      Sales
      Director, Metal Stamping Operations, DirectorFong
      Po Shan
                      
                      44
                      
                      Chief
      Financial Officer, SecretaryMay
      Tsang Shu Mui (1)
                      
                      50
                      
                      Chief
      Administrative Officer, DirectorTiko
      Aharonov (2)
      (3)
                      
                      63
                      
                      DirectorDirk
      Hermann (1)
                      
                      46
                      
                      DirectorUri
      Bernhard Oppenheimer (2)
      (3)
                      
                      74
                      
                      DirectorShlomo
      Tamir (2)
      (3)
                      
                      63
                      
                      DirectorKevin
      Yang Kuang Yu(2)
                      
                      53
                      
                      DirectorIrene
      Wong Ping Yim(2)
                      
                      44
                      
                      DirectorBrian
      Geary (2)
      (3)
                      
                      53
                      
                      DirectorGeorge
      Leung Wing Chan (2)
                      
                      57
                      
                      Director





(1)
            Satoru
      Saito, May Tsang Shu Mui, and Dirk Hermann will not stand for re-election
      at the annual meeting of shareholders currently scheduled to be held on
      August 17, 2010.


(2)
            Current
      member of Audit Committee.


(3)
            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.




Holger Will.  Mr.
Will has been employed with the Company since 1996 and was appointed as the
Company’s Chief Operating Officer effective May 1, 2010.  Mr. Will
started with the Company as a Production consultant to one of the Company’s
subsidiaries and eventually became the Production Manager of that
subsidiary.  In  2000 Mr. Will became the General Manager of
Kayser Technik Ltd., the Company’s marketing arm to German
customers.  As Chief Operating Officer, Mr. Will now is involved in
all of the Company’s operations.


42




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 the 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.




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. Aharonov 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.




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. Previously, 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 (now owned by Chesta Co.,
Inc.) 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. (now owned by Chesta Co.,
Inc.) 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, Ms. 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 of 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, 2010 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
$834,000.  Because of the Company’s financial difficulties, Mr. Kohl,
the Company’s Chief Executive Officer, voluntarily accepted a 40% reduction in
his salary in fiscal 2009 and 2010.  Mr. Kohl’s employment agreement
was recently extended through March 2014.  Since the current worldwide
economic uncertainties are continuing, until further notice Mr. Kohl has agreed
to voluntarily reduce the amount of his current monthly salary by approximately
15%.


44


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 $10,000, 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 $1,660 per year for each committee on which they
serve.    On November 9, 2009, the Company granted to each
independent director a five-year option to purchase 3,000 shares at an exercise
price of $1.65 (the trading price of the stock at the time of the option
grant).  The options become vested and are exercisable only after the
first anniversary (November 9, 2011) of the option grant date.




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 28,
2010, 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
                                                                            
                                                                            
                                                                            10,000
                                                                            
                                                                            
                                                                            June
      30, 2010
                                                                            
                                                                            $
                                                                            3.505,000
                                                                            
                                                                            
                                                                            June
      23, 2011
                                                                            
                                                                            $
                                                                            3.425,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.033,000
                                                                            
                                                                            
                                                                            November
      9, 2014
                                                                            
                                                                            $
                                                                            1.65May
      Tsang Shu Mui
                                                                            
                                                                            
                                                                            10,000
                                                                            
                                                                            
                                                                            June
      30, 2010
                                                                            
                                                                            $
                                                                            3.505,000
                                                                            
                                                                            
                                                                            June
      23, 2011
                                                                            
                                                                            $
                                                                            3.425,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.033,000
                                                                            
                                                                            
                                                                            November
      9, 2014
                                                                            
                                                                            $
                                                                            1.65Satoru
      Saito
                                                                            
                                                                            
                                                                            10,000
                                                                            
                                                                            
                                                                            June
      30, 2010
                                                                            
                                                                            $
                                                                            3.505,000
                                                                            
                                                                            
                                                                            June
      23, 2011
                                                                            
                                                                            $
                                                                            3.425,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.033,000
                                                                            
                                                                            
                                                                            November
      9, 2014
                                                                            
                                                                            $
                                                                            1.65Dirk
      Hermann
                                                                            
                                                                            
                                                                            8,500
                                                                            
                                                                            
                                                                            June
      30, 2010
                                                                            
                                                                            $
                                                                            3.505,000
                                                                            
                                                                            
                                                                            June
      23, 2011
                                                                            
                                                                            $
                                                                            3.425,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.03Fong
      Po Shan
                                                                            
                                                                            
                                                                            10,000
                                                                            
                                                                            
                                                                            June
      30, 2010
                                                                            
                                                                            $
                                                                            3.505,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.033,000
                                                                            
                                                                            
                                                                            November
      9, 2014
                                                                            
                                                                            $
                                                                            1.65Kevin
      Yang Kuang Yu
                                                                            
                                                                            
                                                                            5,000
                                                                            
                                                                            
                                                                            June
      23, 2011
                                                                            
                                                                            $
                                                                            3.425,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.033,000
                                                                            
                                                                            
                                                                            November
      9, 2014
                                                                            
                                                                            $
                                                                            1.65Irene
      Wong Ping Yim
                                                                            
                                                                            
                                                                            5,000
                                                                            
                                                                            
                                                                            June
      23, 2011
                                                                            
                                                                            $
                                                                            3.425,000
                                                                            
                                                                            
                                                                            July
      2, 2012
                                                                            
                                                                            $
                                                                            4.033,000
                                                                            
                                                                            
                                                                            November
      9, 2014
                                                                            
                                                                            $
                                                                            1.65
  45
  Shlomo
      Tamir
                                                                        
                                                                        
                                                                        5,000
                                                                        
                                                                        
                                                                        June
      23, 2011
                                                                        
                                                                        $
                                                                        3.425,000
                                                                        
                                                                        
                                                                        July
      2, 2012
                                                                        
                                                                        $
                                                                        4.033,000
                                                                        
                                                                        
                                                                        November
      9, 2014
                                                                        
                                                                        $
                                                                        1.65Brian
      Geary
                                                                        
                                                                        
                                                                        5,000
                                                                        
                                                                        
                                                                        June
      23, 2011
                                                                        
                                                                        $
                                                                        3.425,000
                                                                        
                                                                        
                                                                        July
      2, 2012
                                                                        
                                                                        $
                                                                        4.033,000
                                                                        
                                                                        
                                                                        November
      9, 2014
                                                                        
                                                                        $
                                                                        1.65George
      Leung Wing Chan
                                                                        
                                                                        
                                                                        5,000
                                                                        
                                                                        
                                                                        June
      23, 2011
                                                                        
                                                                        $
                                                                        3.425,000
                                                                        
                                                                        
                                                                        July
      2, 2012
                                                                        
                                                                        $
                                                                        4.033,000
                                                                        
                                                                        
                                                                        November
      9, 2014
                                                                        
                                                                        $
                                                                        1.65Uri
      Bernhard Oppenheimer
                                                                        
                                                                        
                                                                        5,000
                                                                        
                                                                        
                                                                        July
      2, 2012
                                                                        
                                                                        $
                                                                        4.033,000
                                                                        
                                                                        
                                                                        November
      9, 2014
                                                                        
                                                                        $
                                                                        1.65Holger
      Will
                                                                        
                                                                        
                                                                        1,000
                                                                        
                                                                        
                                                                        November
      9, 2014
                                                                        
                                                                        $
                                                                        1.65







For
additional information regarding the share ownership in the Company by the
Company’s directors, executive officers, and principal shareholders is set forth
in Item 7, “Major Shareholders and Related Party Transactions,”
below.




The
Company has adopted the 1996 Stock Option Plan (the “1996 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, 2010, options granted under the
Option Plan to purchase a total of 197,500 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, 2010 was $3.32 per share.  As of
March 31, 2010,  no additional shares were available for grant under
the 1996 Option Plan.




Because
the Company had granted options for the purchase of all authorized shares under
the 1996 Option Plan, on June 26, 2010, the Company adopted the “2010 Stock
Option And Restricted Stock Plan” (the “2010 Option Plan”).  The 2010
Option Plan will replace the 1996 Option Plan.  Under the new option
plan, the Company is authorized to grant options, and to issue restricted
shares, for a total of 600,000 shares.  To date, no options have been
granted under the 2010 Option Plan.  The adoption of the 2010 Stock
Option Plan is subject to the approval of the Company’s
shareholders.  Accordingly, the new option plan will be submitted to
the shareholders for their approval at the annual meeting of shareholders
currently scheduled for August 17, 2010.


46




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  During fiscal 2010, the members of the Audit
Committee of the Board of Directors were Uri Bernhard Oppenheimer, Shlomo Tamir,
Kevin Yang Kuang Yu, Irene Wong Ping Yim, Brian Geary, George Leung Wing Chan
and Tiko Aharonov.  During the current fiscal year, the Audit
Committee now consists of Irene Wong Ping Yim, Uri Bernhard Oppenheimer, Shlomo
Tamir, 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 four times during fiscal
2010.  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 establishes the
salaries and incentive compensation of the executive officers of the
Company.  The Compensation Committee also will administer the new 2010
Stock Option And Restricted Stock Plan.




All of
the Company’s directors (there currently are eleven directors, seven of whom are
independent) participate in the selection of 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.


47




Employees




As of
March 31, 2010, the Company had a total of 786 persons were working on a
full-time basis for the Company.  Of these, 505 workers in China were
employed by the Company under the BFDC Agreements in Long Hua, and 19 employees
are employed at the Wuxi facility.  The employees in Long Hua 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.  As of March 31, 2010, the Company also had
37 employees in Hong Kong, all of whom were employees of the Company’s
subsidiaries.  Of the foregoing workers and employees, 37 were engaged
in the administration of the Company, 750 were engaged in manufacturing
(including research and development, design, engineering, quality control, and
shipping), 13 were engaged in marketing, and the balance (23 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 time to time, the availability of
workers has been adversely affected because of the high demand for such workers
in the Company’s location, due to transportation difficulties in bringing
workers to Shenzhen, and due to 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.




Since the
enactment of the new Labor Contract Law that became effective on January 1,
2008, Chinese workers are allowed to join an official trade union. However, to
the Company’s knowledge, none of the Company’s employees have joined labor
unions or become a party to a collective bargaining agreement.  In
June 2007, the National People’s Congress of the PRC enacted new labor law
legislation called the Labor Contract Law, which became effective on January 1,
2008.  The new law formalizes workers’ rights concerning overtime
hours, pensions, layoffs, employment contracts and the role of trade
unions.  In addition to changing future compensation rules, certain
provisions of the new law may have provided workers with the right to demand
payment for services previously provided, which resulted in the four strikes
against the Company in fiscal 2008 demanding back pay.




The
Company believes that its relations with its employees in Hong Kong and with its
managers in China are good.  However, because most employees engaged
in manufacturing, packaging and shipping are seasonal workers, and most workers
change jobs at least once a year, the Company relationship with these workers
depends on the labor market in general.  During any operating year,
because of the transient nature of its workers (most workers resign during the
year and new workers have to be hired), the Company will normally have a
turnover rate of over 100% for its workers (excluding managers, technicians and
Hong Kong employees).  As a result, the Company cannot guarantee that
its workers will not strike in the future or otherwise leave and accept
employment elsewhere.


48




Share
Ownership




The share ownership of the Company’s
officers and directors is listed under Item 7 of this Annual
Report.




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 28, 2009, 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
                            
                            
                            614,067
                            
                            
                            
                            15.57
                            %Tiko
      Aharonov
                            
                            
                            266,000
                            (2)
                            
                            
                            6.74
                            %Dirk
      Hermann
                            
                            
                            119,500
                            (3)
                            
                            
                            3.03
                            %Satoru
      Saito
                            
                            
                            369,980
                            (2)
                            
                            
                            9.38
                            %May
      Tsang Shu Mui
                            
                            
                            89,171
                            (2)
                            
                            
                            2.26
                            %George
      Leung Wing Chan
                            
                            
                            10,000
                            (4)
                            
                            
                            *Brian
      Geary
                            
                            
                            15,000
                            (5)
                            
                            
                            *Irene
      Wong Ping Yim
                            
                            
                            10,000
                            (4)
                            
                            
                            *Kevin
      Yang Kung Yu
                            
                            
                            18,244
                            (4)
                            
                            
                            *Shlomo
      Tamir
                            
                            
                            10,000
                            (4)
                            
                            
                            *Uri
      Bernhard Oppenheimer
                            
                            
                            10,000
                            (4)
                            
                            
                            *Cartwright
      Investments Limited
                            
                            
                            346,830
                            
                            
                            
                            8.79
                            %Fong
      Po Shan
                            
                            
                            16,283
                            (7)
                            
                            
                            *Holger
      Will
                            
                            
                            1,000
                            (4)
                            
                            
                            *





*
            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.





(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 20,000 Common Shares which are currently
      exercisable, or within 60 days.


(3)
            Includes
      stock options to purchase 18,500 Common Shares which are currently
      exercisable, or within 60 days.


(4)
            Consists
      stock options to purchase Common Shares which are currently exercisable,
      or within 60 days.


(5)
            Includes
      stock options to purchase 10,000 Common Shares which are currently
      exercisable, or within 60 days.


(6)
            Includes
      stock options to purchase 5,000 Common Shares which are currently
      exercisable, or within 60 days.


(7)
            Includes
      stock options to purchase 15,000 Common Shares which are currently
      exercisable, or within 60 days.


49


Of our 45
record holders, 29 are residents of the United States.  Excluding
shares held in street name, the known U.S. resident stockholders own
approximately 47,000 Common Shares.  The foreign record holders own
approximately 1,087,000 Common Shares.  Based on the Company's records
of shares owned by record holders and in street name, the Company believes that
over 50% of the Company's outstanding shares are owned by foreign
shareholders.There have been no significant changes in the percentage ownership held
by any major shareholders during the past three years, and 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, 2010.




Item 8.Financial Information.




A.           Consolidated Statements and
Other Financial Information




We have
included consolidated financial statements as part of this annual
report.




B.           Significant
Changes




We have
not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.




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.  In fiscal years ended March 31, 2007 and March 31, 2008,
the Company made dividend payments to its shareholders of $0.36 and $0.035 per
share, respectively.  Because of the financial uncertainty concerning
the global economy and the effect that the slowdown in the global economy could
have on the Company, the Board did not declare or pay any dividends during the
fiscal years ended March 31, 2009.  However, because of the Company’s
cash position, despite the economic downturn, the Company did pay a dividend in
fiscal 2010 (a dividend of $0.03 per share was paid in August
2009).  Dividends are declared and paid at the discretion of the Board
of Directors and 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 occasionally becomes subject to legal proceedings and claims that arise
in the ordinary course of its business.  It is impossible to predict
with any certainty the outcome of any pending disputes, and the Company cannot
predict whether any liability arising from pending claims and litigation will be
material in relation to the Company’s consolidated financial position or results
of operations.  However, the Company does not believe that it
currently is subject to any pending legal proceedings that involve amounts that
are material to the Company’s financial condition even if  the outcome
is adverse to the Company.


50




Item
9.The Listing




A.           Offer and Listing
Details




The
Company’s Common Shares are currently traded on the Nasdaq Capital Market under
the symbol “HIHO” and are not listed for trading in any trading market outside
the United States.  On June 25, 2010, the last reported sale price of
our Common Shares on the Nasdaq Capital Market was $1,80 per
share.  As of June 28, 2010, there were 45 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, 2010:




Year Ended
                  
                  High
                  
                  
                  LowMarch
      31, 2010
                  
                  $
                  2.88
                  
                  
                  $
                  0.60March
      31, 2009
                  
                  $
                  2.01
                  
                  
                  $
                  0.55March
      31, 2008
                  
                  $
                  6.30
                  
                  
                  $
                  1.60March
      31, 2007
                  
                  $
                  6.46
                  
                  
                  $
                  2.80March
      31, 2006
                  
                  $
                  5.48
                  
                  
                  $
                  2.77





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, 2010
                  
                  $
                  2.88
                  
                  
                  $
                  1.75December
      31, 2009
                  
                  $
                  2.25
                  
                  
                  $
                  1.54September
      30, 2009
                  
                  $
                  2.06
                  
                  
                  $
                  1.32June
      30, 2009
                  
                  $
                  1.59
                  
                  
                  $
                  0.60March
      31, 2009
                  
                  $
                  1.00
                  
                  
                  $
                  0.55December
      31, 2008
                  
                  $
                  1.65
                  
                  
                  $
                  0.59September
      30, 2008
                  
                  $
                  2.01
                  
                  
                  $
                  1.48June
      30, 2008
                  
                  $
                  2.00
                  
                  
                  $
                  1.60





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.


51




Month Ended
                  
                  High
                  
                  
                  LowMay
      31, 2010
                  
                  $
                  2.51
                  
                  
                  $
                  2.20April
      30, 2010
                  
                  $
                  3.26
                  
                  
                  $
                  2.39March
      31, 2010
                  
                  $
                  2.69
                  
                  
                  $
                  2.16February
      28, 2010
                  
                  $
                  2.88
                  
                  
                  $
                  1.82January
      31, 2010
                  
                  $
                  2.30
                  
                  
                  $
                  1.75December
      31, 2009
                  
                  $
                  2.25
                  
                  
                  $
                  1.70





B.           Plan of
Distribution




No
disclosure is required in response to this Item.




C.           Markets




Our
Common Shares have been listed on the Nasdaq Capital Market during the past five
years, under the symbol “HIHO.”




D.           Selling
Shareholders




No
disclosure is required in response to this Item.




E.           Dilution




No
disclosure is required in response to this Item.




F.           Expenses of the
Issue




No
disclosure is required in response to this Item.




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, 2010 and June 28, 2009, there were
3,779,674 and 3,741,874 Common Shares outstanding, respectively.  The
number of shares outstanding could increase in the future by the shares issued
upon the exercise of currently issued and outstanding options (see, “Item 6,
Share Ownership,” above).  As of March 31, 2010, no warrants to
purchase Common Shares were outstanding.   There have been no
events in the last three years which have changed the amount, the number of
classes, or voting rights, of our issued capital.




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.


52




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.




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.


53




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.




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.


54




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”.




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 100 F Street, N.E.,
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 administrative offices are located, or the British Virgin Islands,
where the Company is incorporated.  Other jurisdictions in which the
Company conducts operations may have various exchange
controls.  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.




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.


55


On
January 1, 2008, a new tax law went into effect in the PRC that will subject the
Company’s Kayser (Wuxi) Metal Precision Manufacturing Limited subsidiary to a 5%
withholding tax on that subsidiary’s profits, if any, earned after January 1,
2008. This withholding tax will have to be paid to the PRC tax authority once
Wuxi Kayser distributes dividends to the Company that is incorporated in Hong
Kong since Hong Kong is the region with tax treaty agreement with
PRC.




Dividends
and Paying Agents




The
Company has, from time to time in prior years, paid dividends to its
shareholders.  Dividends are declared and paid at the discretion of
the Board of Directors and 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, in fact, pay any dividends in the
future even if it has a profitable year or is otherwise capable of doing
so.  The Company has not set a date on which annual, or other,
dividends are paid.  To date, the Company has used its transfer agent,
Computershare, in Glendale, California, U.S.A. as its dividend paying
agent.




Statement
by Experts




No
disclosure is required in response to this Item.




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.




Subsidiary
Information




No
disclosure is required in response to this Item.




Item
11.Quantitative and Qualitative Disclosures About Market
Risk.




The
Company sells most of its 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.


56




To the
extent that the Company has to convert U.S. dollars into renminbi for its
operations, an appreciation in the value of the renminbi compared to the U.S.
dollar reduces the amount of renminbi the Company receives upon
conversion.  Accordingly, an appreciation of the renminbi’s value
requires the Company to pay more U.S. dollars to fund its renminbi operating
expenses, thereby making its operations in China more
expensive.  During the past few years, the exchange rate between the
renminbi and the U.S. dollar changed as the renminbi has appreciated in value
compared to the U.S. dollar (the renminbi has appreciate by 18.6% since
2006).  In addition, the U.S. and other countries have been urging
China to allow the renminbi to appreciate further.  The amount of
payments made by the Company in renminbi is continuing to increase, thereby
increasing the Company’s costs of operations that are paid in
RMB.  During the fiscal year ended March 31, 2010, the Company made
payments of approximately 39,039,000 in RMB (or approximately U.S. $5,710,000
based on the exchange rate as of March 31, 2010).  If the renminbi had
been 1% and 5% more valuable against the U.S. dollars as of March 31, 2010, the
amount of such RMB payments would have increased the Company’s expenses by
$57,000 and $301,000, respectively.  Should the Chinese government
allow the renminbi to continue to appreciate, 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.




The
Company believes that its most significant foreign exchange risk results from
material sales made in Euro. Approximately 29% of the Company’s net sales were
made in Euros in fiscal year ended March 31, 2010.  In the fiscal year
ended March 31, 2010, the value of the Euro increased during most of fiscal 2010
compared to the U.S. dollar (the exchange rate increased from approximately one
Euro to 1.31 U.S. dollars in March 2009 to over one Euro to 1.51 U.S. dollars in
December 2009).  Accordingly, the payments that the Company received
in fiscal 2010 in Euros were exchanged into slightly more dollars, resulting in
a slight sales.  To illustrate the effect of the exchange rate
fluctuation on the Company’s net sales, if the Euro had been 10% and 5% less
valuable against the U.S. dollars than the actual rate as of March 31,
2010, the Company’s net sales, as presented in U.S. dollars, would have been
approximately reduced by $631,000 and $316,000, respectively. Conversely, if the
Euro had been 10% and 5% more valuable against the U.S. dollars as of that date,
then the Company’s net sales would have increased by $631,000 and $316,000,
respectively.




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.  The Company does not hedge its
currency exchange risks and, therefore, will continue to experience certain
gains or losses due to changes in foreign currency exchange
rates.  The Company does, however, attempt to limit its currency
exchange rate exposure in certain of its OEM contracts through contractual
provisions, which may limit, though not eliminate, these currency
risks.




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 $793,000 of short-term borrowings that are subject to interest rate
changes and $295,000 of long-term borrowings outstanding as of March 31,
2010.  However, taking into consideration that the Company had cash
and cash equivalents of $6,279,000 available as of March 31, 2010, the Company
believes that its interest rate risk on these borrowing was
acceptable.


57




Item
12.Description of Securities Other Than Equity
Securities




Not
applicable.




PART
II




Item
13.Defaults, Dividend Arrearages and
Delinquencies.




Not
applicable.




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




Not
applicable.




Item
15.Controls and Procedures.




Disclosure
Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, has performed an evaluation of the effectiveness of our
disclosure controls and procedures within the meaning of Rules 13a-15(e) and
15d-15(e) of the Exchange Act as of the end of the period covered by this
report.  Based on such evaluation, our management has concluded that,
as of the end of the period covered by this annual report, our disclosure
controls and procedures were effective.




Management’s
Annual Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined under Rule 13a-15(f) and 15d-15(f)
of the Securities Exchange Act of 1934. Management, under the supervision and
with the participation of our chief executive officer and chief financial
officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee on Sponsoring Organizations of the Treadway
Commission ("COSO"), as supplemented by the related guidance provided in
Internal Control Over Financial Reporting – Guidance for Smaller Public
Companies, also issued by COSO.  Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of March 31, 2010.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.


58




Changes
in Internal Control Over Financial Reporting




Except as
set forth above, there were no changes in the Company’s internal control 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 control over financial reporting.




Item
16. Not applicable.




Item 16A.       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 is an “independent” director, as defined under the
Nasdaq Stock Market’s listing standards.  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 16B.       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 11.1.  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 16C.       Principal
Accountant Fees and Services




AGCA,
Inc. has served as our independent registered public accounting firm for the
year ended March 31, 2010, for which audited consolidated financial statements
appeared in this annual report on Form 20-F.  Deloitte Touche Tohmatsu
served as our independent registered public accounting firm as of and for each
of the two fiscal years ended March 31, 2008 and 2009, for which audited
consolidated financial statements appear in this annual report on Form
20-F.


59




The
following table presents the aggregate fees for professional services and other
services rendered by Deloitte Touche Tohmatsu to us in the fiscal year ended
March 31, 2009, and aggregate fees paid to AGCA, Inc. for the fiscal year ended
2010.




2009
                  
                  
                  2010Audit
      Fees (1)
                  
                  $
                  299,500
                  
                  
                  $
                  99,500Audit-Related
      Fees (2)
                  
                  
                  -
                  
                  
                  
                  -Tax
      Fees (3)
                  
                  $
                  32,100
                  
                  
                  
                  -All
      Other Fees
                  
                  $
                  8,900
                  
                  
                  
                  200Total
                  
                  $
                  340,500
                  
                  
                  $
                  99,700





(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 Deloitte Touche Tohmatsu or AGCA, Inc. were
pre-approved by the Audit Committee.




Item 16D.       Exemptions
from the Listing Standards for Audit Committees




Not
applicable




Item
16E.        Purchases of Equity
Securities by the Issuer and Affiliated Purchasers




Not
applicable




Item
16F. Change in Registrant’s Certifying Accountant




Effective
December 3, 2009, the Company engaged AGCA, Inc. (“AGCA”) as its
independent accountant to audit its financial statements for its fiscal year
ending March 31, 2010.  Prior to such engagement, the Company did not
consult with AGCA regarding either (i) the application of accounting principles
to a specific, completed or proposed transaction, or the type of audit opinion
that might be rendered on the Company’s financial statements, and neither a
written report nor advice was provided to the Company that AGCA concluded was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue, or (ii) any matter that was
either the subject of a disagreement.




By letter
dated December 16, 2009, Deloitte Touche Tohmatsu resigned as the Company’s
independent registered public accounting firm.




During
the Company’s two fiscal years ended March 31, 2009, the Company had no
disagreements with Deloitte Touche Tohmatsu, whether or not resolved, on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
Deloitte Touche Tohmatsu, would have caused it to make reference to the subject
matter of the disagreement in connection with its report.  No report
of Deloitte Touche Tohmatsu on the financial statements of the Company for
either of the past two years contained an adverse opinion or disclaimer of
opinion or was modified as to audit scope or accounting principles, except that
the consolidated financial statements have been retrospectively adjusted for the
adoption of the new accounting standards related to the presentation and
disclosure requirements for non-controlling interests.


60




The
decision to change accounting firms was adopted by the audit committee and
ratified by the Board of Directors of the Company.




Item
16G. Corporate Governance




The rules
of the Nasdaq Capital Market provide that foreign private issuers may follow
home country practices in lieu of the Nasdaq corporate governance requirements,
subject to certain exceptions and requirements and except to the extent that
such exemptions would be contrary to U.S. federal securities laws and
regulations. The Company has chosen to comply with the Nasdaq corporate
governance rules as though it was a U.S. company.  Accordingly, there
are no significant differences between the Company’s corporate governance
practices and those followed by U.S. companies under the rules of the Nasdaq
Capital Market.




PART
III




Item
17.Financial statements.




We have
elected to provide financial statements pursuant to Item 18.




Item
18.Financial statements.




See the
Index to Consolidated Financial Statements accompanying this report beginning
page F-1.




Item
19.  Exhibits.




The
following exhibits are filed as part of this annual report:




1.1
            Memorandum
      and Articles of Association, as amended, of Highway Holdings Limited
      (incorporated by reference to Exhibit 1.1 of registrant’s Form 20-F for
      the year ended March 31, 2001.)




1.2
            Amendment
      to Memorandum and Articles of Association, as filed on January 20, 2003
      (incorporated by reference to Exhibit 1.2 of registrant’s Form 20-F for
      the year ended March 31, 2002.)




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.)


61




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).




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)


62




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.
      (incorporated by reference to the registrant’s Annual Report on Form 20-F
      for the fiscal year ended March 31,
2007)




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.
      (incorporated by reference to the registrant’s Annual Report on Form 20-F
      for the fiscal year ended March 31,
2007)




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. (incorporated by
      reference to the registrant’s Annual Report on Form 20-F for the fiscal
      year ended March 31, 2007)




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. (incorporated by reference to the registrant’s
      Annual Report on Form 20-F for the fiscal year ended March 31,
      2007)




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. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2007)




4.19
            Supplementary
      Agreement on Imported Material for Processing, dated February 28, 2008,
      between Golden Bright Plastic Manufacturing Co. Ltd. and the Shenzhen Long
      Gong City Ping Hu Golden Bright Factory. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2008)




4.20
            Rental
      Contract between Ping Hu City Xin Nan Li Yuan Xia Economic Corporation and
      Mr. Wong Wai Chung regarding the Ping Hu Golden Bright Plastic
      Manufacturing Ltd. factory, dated February 23, 2004. (incorporated by
      reference to the registrant’s Annual Report on Form 20-F for the fiscal
      year ended March 31, 2008)


63




4.21
            Tenancy
      Renewal, dated June 13, 2008, between Nissin Precision Metal Manufacturing
      Limited and SHK Sheung Shui Landmark Investment Limited regarding Unit
      810, Level 8, Landmark North, New Territories. (incorporated by reference
      to the registrant’s Annual Report on Form 20-F for the fiscal year ended
      March 31, 2008)




4.22
            City
      Gao Xin District Dormitory Facilities Lease Contract between He Yuan
      Advanced Technological Development District Co. Ltd. and Hi-Lite Camera Co
      Ltd., dated June 18, 2008 regarding the He Yuan facilities. (incorporated
      by reference to the registrant’s Annual Report on Form 20-F for the fiscal
      year ended March 31, 2008)




4.23
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No. WJ-002,
      dated July 4, 2008, 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, 2009)




4.24
            2010
      Stock Option And Restricted Stock
Plan*




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
            Certification
      pursuant to Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 *




15.1
            Consent
      of Independent Registered Public Accounting Firm - AGCA,
  Inc.*




15.2
            Consent
      of Independent Registered Public Accounting Firm - Deloitte Touche
      Tohmatsu*




15.3
              Letter
      of Deloitte Touche Tohmatsu, registrant's former independent registered
      public accounting firm, dated June 29, 2010 filed pursuant to Item
      16F(a)(3) of Form 20-F.







*
              Filed
      herewith


64


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. FongChief
      Financial Officer andSecretaryDate:  June
      29,
2010







HIGHWAY
HOLDINGS LIMITED





INDEX





PageCONSOLIDATED
      FINANCIAL STATEMENTSReport
      of Independent Registered Public Accounting Firm - AGCA,
    Inc.
                
                
                F –
      2Report
      of Independent Registered Public Accounting Firm - Deloitte Touche
      Tohmatsu
                
                
                F –
      3Consolidated
      Statements of Operations and Comprehensive Income (Loss) for each of the
      three years in the period ended March 31, 2010
                
                
                F –
      4Consolidated
      Balance Sheets as of March 31, 2009 and 2010
                
                
                F –
      5Consolidated
      Statements of Shareholders' Equity for each of the three years in the
      period ended March 31, 2010
                
                
                F –
      6Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      March 31, 2010
                
                
                F –
      7Notes
      to Consolidated Financial Statements
                
                
                F –
      8




F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the
Board of Directors and Shareholders of Highway Holdings Limited:





We have
audited the accompanying consolidated balance sheet of Highway Holdings Limited
and its subsidiaries (the "Company") as of March 31, 2010, and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for the year then ended.  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 audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our 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 present fairly, in all material
respects, the financial position of the Company as of March 31, 2010, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.





AGCA,
Inc.


Arcadia,
California


June 29,
2010





F-2





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders 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, 2009, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for each of the two years in the period
ended March 31, 2009.  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 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 present fairly, in all material
respects, the financial position of the Company as of March 31, 2009, and the
results of their operations and their cash flows for each of the two years in
the period ended March 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.





As
discussed in Note 2(q) to the consolidated financial statements, the
accompanying 2008 and 2009 consolidated financial statements have been
retrospectively adjusted for the adoption of the new accounting standards
related to the presentation and disclosure requirements for non-controlling
interests.





Deloitte
Touche Tohmatsu


Hong
Kong


June 20,
2009 (June 29, 2010 as to Note 2(q))





F-3





HIGHWAY HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


(In
thousands of U.S. dollars, except for shares and per share data)





Year ended March 31,2008
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2010Net
      sales
                                                  
                                                  $
                                                  33,164
                                                  
                                                  
                                                  $
                                                  33,729
                                                  
                                                  
                                                  $
                                                  21,739Cost
      of sales
                                                  
                                                  
                                                  (28,090
                                                  )
                                                  
                                                  
                                                  (27,025
                                                  )
                                                  
                                                  
                                                  (17,039
                                                  )Gross
      profit
                                                  
                                                  
                                                  5,074
                                                  
                                                  
                                                  
                                                  6,704
                                                  
                                                  
                                                  
                                                  4,700Selling,
      general and administrative expenses
                                                  
                                                  
                                                  (7,351
                                                  )
                                                  
                                                  
                                                  (5,823
                                                  )
                                                  
                                                  
                                                  (4,367
                                                  )Operating
      (loss) income
                                                  
                                                  
                                                  (2,277
                                                  )
                                                  
                                                  
                                                  881
                                                  
                                                  
                                                  
                                                  333Non-operating
      income (expense):Exchange
      gain (loss), net
                                                  
                                                  
                                                  283
                                                  
                                                  
                                                  
                                                  (330
                                                  )
                                                  
                                                  
                                                  173Interest
      expense
                                                  
                                                  
                                                  (225
                                                  )
                                                  
                                                  
                                                  (141
                                                  )
                                                  
                                                  
                                                  (47
                                                  )Interest
      income
                                                  
                                                  
                                                  100
                                                  
                                                  
                                                  
                                                  35
                                                  
                                                  
                                                  
                                                  6Other
      income
                                                  
                                                  
                                                  60
                                                  
                                                  
                                                  
                                                  230
                                                  
                                                  
                                                  
                                                  46Gain
      on disposal of partial interest in a subsidiary (note 1)
                                                  
                                                  
                                                  111
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Gain
      on disposal of investment securities
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Share
      of losses of unconsolidated affiliates
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2
                                                  )Impairment
      loss on property, plant and equipment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (97
                                                  )Impairment
      loss on investment in unconsolidated affiliates
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2
                                                  )Total
      non-operating income (expense)
                                                  
                                                  
                                                  331
                                                  
                                                  
                                                  
                                                  (206
                                                  )
                                                  
                                                  
                                                  77(Loss)
      income before income taxes
                                                  
                                                  
                                                  (1,946
                                                  )
                                                  
                                                  
                                                  675
                                                  
                                                  
                                                  
                                                  410Income
      taxes (note 4)
                                                  
                                                  
                                                  (28
                                                  )
                                                  
                                                  
                                                  35
                                                  
                                                  
                                                  
                                                  (10
                                                  )Net
      (loss) income
                                                  
                                                  
                                                  (1,974
                                                  )
                                                  
                                                  
                                                  710
                                                  
                                                  
                                                  
                                                  400Loss
      attributable to noncontrolling interests
                                                  
                                                  
                                                  53
                                                  
                                                  
                                                  
                                                  58
                                                  
                                                  
                                                  
                                                  20Net
      income (loss) attributable to Highway Holdings
shareholders
                                                  
                                                  
                                                  (1,921
                                                  )
                                                  
                                                  
                                                  768
                                                  
                                                  
                                                  
                                                  420Other
      comprehensive income (loss) attributable to Highway Holdings
      shareholders(1):Foreign
      currency translation adjustment
                                                  
                                                  
                                                  16
                                                  
                                                  
                                                  
                                                  20
                                                  
                                                  
                                                  
                                                  (7)Comprehensive
      (loss) income
                                                  
                                                  
                                                  (1,905
                                                  )
                                                  
                                                  
                                                  788
                                                  
                                                  
                                                  
                                                  413Comprehensive
      loss attributable to noncontrolling interests
                                                  
                                                  
                                                  53
                                                  
                                                  
                                                  
                                                  58
                                                  
                                                  
                                                  
                                                  20Comprehensive
      (loss) income attributable to Highway Holdings
shareholders
                                                  
                                                  $
                                                  (1,958
                                                  )
                                                  
                                                  $
                                                  730
                                                  
                                                  
                                                  $
                                                  393Net
      (loss) income per share – basic
                                                  
                                                  $
                                                  (0.50
                                                  )
                                                  
                                                  $
                                                  0.21
                                                  
                                                  
                                                  $
                                                  0.11Net
      (loss) income per share – diluted
                                                  
                                                  $
                                                  (0.50
                                                  )
                                                  
                                                  $
                                                  0.20
                                                  
                                                  
                                                  $
                                                  0.11Weighted
      average number of shares outstanding-
      basic
                                                  
                                                  
                                                  3,809,888
                                                  
                                                  
                                                  
                                                  3,744,423
                                                  
                                                  
                                                  
                                                  3,754,988Weighted
      average number of shares outstanding-
      diluted
                                                  
                                                  
                                                  3,809,888
                                                  
                                                  
                                                  
                                                  3,773,677
                                                  
                                                  
                                                  
                                                  3,757,896





See
accompanying notes to consolidated financial statements.





(1) The
Company has changed the presentation of comprehensive income (loss) from the
consolidated statement of shareholders' equity to the consolidated statement of
operations and comprehensive income (loss).





F-4





HIGHWAY HOLDINGS LIMITED





CONSOLIDATED
BALANCE SHEETS


(In
thousands of U.S. dollars, except for shares and per share data)





As of March 31,2009
                                        
                                        
                                        2010ASSETSCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        5,809
                                        
                                        
                                        $
                                        6,279Restricted
      cash (note 9)
                                        
                                        
                                        1,028
                                        
                                        
                                        
                                        771Accounts
      receivable, net of allowances for doubtful accounts of $Nil and $101 at
      March 31, 2010 and 2009 respectively
                                        
                                        
                                        3,426
                                        
                                        
                                        
                                        3,240Inventories
      (note 5)
                                        
                                        
                                        4,010
                                        
                                        
                                        
                                        3,495Prepaid
      expenses and other current assets
                                        
                                        
                                        672
                                        
                                        
                                        
                                        507Total
      current assets
                                        
                                        
                                        14,945
                                        
                                        
                                        
                                        14,292Property,
      plant and equipment, net (note 6)
                                        
                                        
                                        2,840
                                        
                                        
                                        
                                        2,051Intangible
      assets, net (note 7)
                                        
                                        
                                        24
                                        
                                        
                                        
                                        8Investments
      in unconsolidated affiliates (note 8)
                                        
                                        
                                        2
                                        
                                        
                                        
                                        1Total
      assets
                                        
                                        $
                                        17,811
                                        
                                        
                                        $
                                        16,352LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                        
                                        $
                                        2,166
                                        
                                        
                                        $
                                        2,389Short-term
      borrowings (note 9)
                                        
                                        
                                        1,850
                                        
                                        
                                        
                                        793Obligations
      under capital leases - current portion (note 10)
                                        
                                        
                                        259
                                        
                                        
                                        
                                        251Accrued
      expenses and other liabilities (note 11)
                                        
                                        
                                        1,630
                                        
                                        
                                        
                                        1,056Total
      current liabilities
                                        
                                        
                                        5,905
                                        
                                        
                                        
                                        4,489Obligations
      under capital leases - net of current portion (note 10)
                                        
                                        
                                        294
                                        
                                        
                                        
                                        44Deferred
      income taxes (note 4)
                                        
                                        
                                        163
                                        
                                        
                                        
                                        147Total
      liabilities
                                        
                                        
                                        6,362
                                        
                                        
                                        
                                        4,680Commitments
      and contingencies (note 12)
                                        
                                        
                                        
                                        
                                        
                                        
                                        -Shareholders'
      equity:Common
      shares, $0.01 par value (Authorized: 20,000,000 shares; 3,720,520 shares
      and 3,779,674 shares issued and outstanding as of March 31, 2009 and 2010,
      respectively)
                                        
                                        
                                        37
                                        
                                        
                                        
                                        38Additional
      paid-in capital
                                        
                                        
                                        11,224
                                        
                                        
                                        
                                        11,289Retained
      profits
                                        
                                        
                                        154
                                        
                                        
                                        
                                        461Accumulated
      other comprehensive loss
                                        
                                        
                                        (6
                                        )
                                        
                                        
                                        (13
                                        )Treasury
      shares, at cost - 37,800 shares as of March 31, 2009 and 2010,
      respectively (note 13)
                                        
                                        
                                        (53
                                        )
                                        
                                        
                                        (53
                                        )Total
      Highway Holdings shareholders' equity
                                        
                                        
                                        11,356
                                        
                                        
                                        
                                        11,722Noncontrolling
      interests
                                        
                                        
                                        93
                                        
                                        
                                        
                                        (50
                                        )Total
      Equity
                                        
                                        
                                        11,449
                                        
                                        
                                        
                                        11,672Total
      liabilities and shareholders' equity
                                        
                                        $
                                        17,811
                                        
                                        
                                        $
                                        16,352





See
accompanying notes to consolidated financial statements.





F-5





HIGHWAY HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


(In
thousands of U.S. dollars, except for shares and per share data)





Highway
      Holdings shareholdersCommon
      shares,
                                    
                                    
                                    
                                    
                                    
                                    Retained
                                    
                                    
                                    Accumulatedissued
      and
                                    
                                    
                                    Additional
                                    
                                    
                                    profits
                                    
                                    
                                    Other
                                    
                                    
                                    
                                    
                                    
                                    Treasury
                                    
                                    
                                    Non-Outstanding
                                    
                                    
                                    paid-in
                                    
                                    
                                    (Accumulated
                                    
                                    
                                    Comprehensive
                                    
                                    
                                    Subscription
                                    
                                    
                                    shares,
                                    
                                    
                                    controlling
                                    
                                    
                                    TotalNumber
                                    
                                    
                                    Amount
                                    
                                    
                                    capital
                                    
                                    
                                    deficit)
                                    
                                    
                                    Loss
                                    
                                    
                                    receivable
                                    
                                    
                                    at
      cost
                                    
                                    
                                    interest
                                    
                                    
                                    Equity(in
      thousands)Balance
      at March 31, 2007
                                    
                                    
                                    3,779
                                    
                                    
                                    $
                                    38
                                    
                                    
                                    $
                                    11,304
                                    
                                    
                                    $
                                    1,439
                                    
                                    
                                    $
                                    (48
                                    )
                                    
                                    $
                                    (513
                                    )
                                    
                                    $
                                    (53
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    12,167Issued
      during the year
                                    
                                    
                                    11
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    38Disposal
      of partial interest in a subsidiary
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    204
                                    
                                    
                                    
                                    204Net
      loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,921
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (53
                                    )
                                    
                                    
                                    (1,974
                                    )Director's
      stock compensation
                                    
                                    
                                    29
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    160
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    160Employee's
      share-based compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    60
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    60Escrow
      shares returned to treasury (note 13)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    513
                                    
                                    
                                    
                                    (513
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Reversal
      of unrealized holding gain on investment securities sold
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6Translation
      adjustments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    16Cash
      dividends ($0.035 per share)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (132
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (132
                                    )Balance
      at March 31, 2008
                                    
                                    
                                    3,819
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    11,562
                                    
                                    
                                    
                                    (614
                                    )
                                    
                                    
                                    (26
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (566
                                    )
                                    
                                    
                                    151
                                    
                                    
                                    
                                    10,545Net
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    768
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (58
                                    )
                                    
                                    
                                    710Director's
      stock compensation
                                    
                                    
                                    29
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    160
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    160Employee's
      share-based compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    14
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    14Translation
      adjustments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    20
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    20Escrow
      shares cancelled (note 13)
                                    
                                    
                                    (128
                                    )
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (512
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    513
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Balance
      at March 31, 2009
                                    
                                    
                                    3,720
                                    
                                    
                                    
                                    37
                                    
                                    
                                    
                                    11,224
                                    
                                    
                                    
                                    154
                                    
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (53
                                    )
                                    
                                    
                                    93
                                    
                                    
                                    
                                    11,449Issued
      during the year
                                    
                                    
                                    30
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    53
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    54Net
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    420
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (20
                                    )
                                    
                                    
                                    400Employee's
      share-based compensation
                                    
                                    
                                    29
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    12Translation
      adjustments
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (7
                                    )Acquisition
      of non-controlling interest
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (48
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (75
                                    )
                                    
                                    
                                    (123
                                    )Disposal
      of non-controlling interest
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    48
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (48
                                    )
                                    
                                    
                                    -Cash
      Dividends ($0.03 per share)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (113
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (113
                                    )Balance
      at March 31, 2010
                                    
                                    
                                    3,779
                                    
                                    
                                    $
                                    38
                                    
                                    
                                    $
                                    11,289
                                    
                                    
                                    $
                                    461
                                    
                                    
                                    $
                                    (13
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (53
                                    )
                                    
                                    $
                                    (50
                                    )
                                    
                                    $
                                    11,672





See
accompanying notes to consolidated financial statements.





F-6





HIGHWAY HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands of U.S. dollars, except for shares and per share data)





Year ended March 31,2008
                                              
                                              
                                              2009
                                              
                                              
                                              2010Cash
      flows from operating activities:Net
      (loss) income
                                              
                                              $
                                              (1,974
                                              )
                                              
                                              $
                                              710
                                              
                                              
                                              $
                                              400Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Impairment
      loss on investment in unconsolidated affiliate
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2Share
      of losses of unconsolidated affiliates
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2Impairment
      loss on property, plant and equipment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              97Loss
      on disposal of property, plant and equipment
                                              
                                              
                                              51
                                              
                                              
                                              
                                              156
                                              
                                              
                                              
                                              45Gain
      on disposal of investment securities
                                              
                                              
                                              (2
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Gain
      on disposal of partial interest in a subsidiary
                                              
                                              
                                              (111
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Write
      down of inventories
                                              
                                              
                                              145
                                              
                                              
                                              
                                              144
                                              
                                              
                                              
                                              222Allowances
      for doubtful accounts
                                              
                                              
                                              102
                                              
                                              
                                              
                                              96
                                              
                                              
                                              
                                              -Depreciation
      of property, plant and equipment
                                              
                                              
                                              812
                                              
                                              
                                              
                                              754
                                              
                                              
                                              
                                              619Amortization
      of intangible assets
                                              
                                              
                                              18
                                              
                                              
                                              
                                              28
                                              
                                              
                                              
                                              16Directors'
      stock compensation
                                              
                                              
                                              160
                                              
                                              
                                              
                                              160
                                              
                                              
                                              
                                              -Deferred
      income taxes
                                              
                                              
                                              15
                                              
                                              
                                              
                                              (26
                                              )
                                              
                                              
                                              (16
                                              )Shares
      issued to consultant
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              27Employee's
      share-based compensation
                                              
                                              
                                              60
                                              
                                              
                                              
                                              14
                                              
                                              
                                              
                                              12Changes
      in operating assets and liabilities:Accounts
      receivable
                                              
                                              
                                              (126
                                              )
                                              
                                              
                                              1,244
                                              
                                              
                                              
                                              186Inventories
                                              
                                              
                                              184
                                              
                                              
                                              
                                              1,621
                                              
                                              
                                              
                                              293Prepaid
      expenses and other current assets
                                              
                                              
                                              (125
                                              )
                                              
                                              
                                              17
                                              
                                              
                                              
                                              192Accounts
      payable
                                              
                                              
                                              (233
                                              )
                                              
                                              
                                              (1,591
                                              )
                                              
                                              
                                              223Accrued
      expenses and other liabilities
                                              
                                              
                                              1,099
                                              
                                              
                                              
                                              (1,322
                                              )
                                              
                                              
                                              (574
                                              )Net
      cash provided by operating activities
                                              
                                              
                                              75
                                              
                                              
                                              
                                              2,005
                                              
                                              
                                              
                                              1,746Investing
      activities:Investment
      in affiliate
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (3
                                              )Purchase
      of property, plant and equipment
                                              
                                              
                                              (211
                                              )
                                              
                                              
                                              (85
                                              )
                                              
                                              
                                              (116
                                              )Proceeds
      from disposal of partial interest in a subsidiary
                                              
                                              
                                              315
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Proceeds
      from disposal of property, plant and equipment
                                              
                                              
                                              17
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              21Proceeds
      from disposal of investment securities
                                              
                                              
                                              324
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -(Increase)
      decrease in restricted cash
                                              
                                              
                                              (450
                                              )
                                              
                                              
                                              643
                                              
                                              
                                              
                                              257Net
      (used in) cash (used in) provided by investing activities
                                              
                                              
                                              (5
                                              )
                                              
                                              
                                              558
                                              
                                              
                                              
                                              159Financing
      activities:Cash
      dividends paid
                                              
                                              
                                              (132
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (113
                                              )Repayment
      of long-term debt
                                              
                                              
                                              (519
                                              )
                                              
                                              
                                              (299
                                              )
                                              
                                              
                                              (1,057
                                              )Decrease
      in short-term borrowings
                                              
                                              
                                              (883
                                              )
                                              
                                              
                                              (364
                                              )
                                              
                                              
                                              (258
                                              )Proceeds
      from shares issued on exercise of options
                                              
                                              
                                              38
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Net
      cash used in financing activities
                                              
                                              
                                              (1,496
                                              )
                                              
                                              
                                              (663
                                              )
                                              
                                              
                                              (1,428
                                              )Net
      (decrease) increase in cash and cash equivalents
                                              
                                              
                                              (1,426
                                              )
                                              
                                              
                                              1,900
                                              
                                              
                                              
                                              477Cash
      and cash equivalents, beginning of year
                                              
                                              
                                              5,299
                                              
                                              
                                              
                                              3,889
                                              
                                              
                                              
                                              5,809Effect
      of exchange rate changes
                                              
                                              
                                              16
                                              
                                              
                                              
                                              20
                                              
                                              
                                              
                                              (7)Cash
      and cash equivalents, end of year
                                              
                                              $
                                              3,889
                                              
                                              
                                              $
                                              5,809
                                              
                                              
                                              $
                                              6,279Supplemental
      disclosure of cash flow information:Interest
      paid
                                              
                                              $
                                              225
                                              
                                              
                                              $
                                              141
                                              
                                              
                                              $
                                              47Income
      taxes (paid) refunded
                                              
                                              $
                                              11
                                              
                                              
                                              $
                                              18
                                              
                                              
                                              $
                                              10Noncash
      investing and financing transactions:Acquisition
      of noncontrolling interest in exchange for plant and machineries (note
      3)
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              123Disposal
      of noncontrolling interest at zero consideration
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -Property,
      plant and equipment acquired under capital leases
                                              
                                              $
                                              219
                                              
                                              
                                              $
                                              19
                                              
                                              
                                              $
                                              -





See
accompanying notes to consolidated financial statements.




F-7





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(In
thousands of U.S. dollars, except for shares and per share data)





1.
            ORGANIZATION AND BASIS OF
      FINANCIAL STATEMENTS





Highway
Holdings Limited (the "Company") was incorporated in the British Virgin Islands
on July 20, 1990.  It operates through its subsidiaries operating in
the Hong Kong Special Administrative Region ("Hong Kong"), Shenzhen and Wuxi of
the People's Republic of China ("China").





The
Company operates in two principal business segments - metal stamping and
mechanical original equipment manufacturing ("OEM") and electric
OEM.  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 manufacturing operation in He Yuan has been
de-registrated in April 2010.





The
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP").





On
September 19, 2006 the Company acquired 100% equity interest in Golden Bright
Plastic Manufacturing Company Limited ("Golden Bright") for a cash consideration
of $514.  Golden Bright, a company incorporated in Hong Kong, is
engaged in the manufacturing and trading of plastic injection
products.  In accordance with the purchase agreement, additional
consideration of $1,028 was 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.





The
purchase agreement provided that the $514 purchase price would vest on a
straight-line basis over the requisite service period and as a result
approximately $171 would become payable for each completed year of
service.  The remaining $514 would 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 for as a subsidiary using the purchase
method.  The contingent payments represented compensation for post
combination services and accordingly $171 and $171 and $85 have been accrued as
compensation expense included in selling, general and administrative expenses in
the years ended March 31, 2008, 2009 and 2010, respectively. The Company also
issued 128,534 of its common shares under escrow to the seller as a security of
the contingent payment as more fully described in note 13. Golden Bright did not
meet the revenue and earning targets to earn the contingent payment of the final
$514. Accordingly, the shares were cancelled before March 31, 2009 and the
acquisition payable was fully settled in December 2009.





On April
1, 2007, the Company received $315 for the sale of its 29% financial interest in
a subsidiary, Kayser (Wuxi) Metal Precision Manufacturing Limited ("Kayser
Wuxi") and recognized a gain of $111 on disposal of partial interest in Kayser
Wuxi during the year ended March 31, 2008.





On June
2, 2009, the Company entered into an agreement with a minority shareholder of
Kayser Wuxi to acquire an additional 19% financial interest in Kayser Wuxi in
exchange for plant and machineries with aggregate value of $123 (note 3).
Pursuant to an agreement dated November 18, 2009, the Company transferred 19%
financial interest in Kayser Wuxi to Mr. You Ming for no consideration. Mr. You
Ming held 10% financial interest in Kayser Wuxi immediately prior to such
agreement, and is the legal representative and a key employee of Kayser Wuxi. As
a result of such transfer, the Company holds 71% financial interest in Kayser
Wuxi whilst Mr. You Ming holds the remaining 29%.





On
September 21, 2009, Kienzle Uhrenfabriken G.m.b.h. ("Kienzle Germany"), an
inactive subsidiary of the Company was liquidated.





F-8





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES





(a) Principles of
consolidation - The consolidated financial statements include the
financial statements of Highway Holdings Limited and all its majority-owned
subsidiaries.  Highway Holdings Limited does not have variable
interests in any variable interest entity during the periods
presented.  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.





(b) 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.





(c) Inventories - Inventories
are stated at the lower of cost determined by the first in first out method, or
market value.  Work-in-progress and finished goods consist of raw
materials, direct labor and overheads associated with the manufacturing
process.  Write-off of inventory is based on management's specific
analysis of future sales and demand forecasts.





(d) 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, unless the ownership
of these assets transfers to the Company by the end of the lease term over the
estimated useful lives.





(e) Intangible assets -
Identifiable intangibles acquired in a business combination are determined
separately from goodwill based on their fair values, as determined with
assistance of a 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 "reparability"
criterion.  The intangible assets are carried at cost less accumulated
amortization and are reviewed for impairment if indicators of impairment
arise.  Amortization is computed using the straight line method over
the intangible assets' estimated useful lives.





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





F-9





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES – continued





(f) Impairment or disposal of
long-lived assets - Long-lived assets are included in impairment
evaluations when events and circumstances exist that indicate the carrying
amount of these assets may not be recoverable. An impairment is considered to
exist if the total estimated future cash flows on an undiscounted basis are less
than the carrying amount of the assets, including goodwill, if any. An
impairment loss is measured and recorded based on discounted estimated future
cash flows. In estimating future cash flows, assets are grouped at the lowest
level for which there is identifiable cash flows that are largely independent of
future cash flows from other asset groups.





Long-lived
assets to be disposed of are stated at the lower of fair value or carrying
amount. Expected future operating losses from discontinued operations are
recorded in the periods in which the losses are incurred.





The
Company concluded in fiscal 2008, 2009 and 2010 that there were no events or
changes in circumstances that would indicate that the carrying amounts of
long-lived assets were impaired.





(g) 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.





(h) 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 reasonably assured. The Company does 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.





(i) Staff retirement plan
costs - The Company's costs related to the staff retirement plans (see
note 16) are charged to the consolidated statement of income as
incurred.





(j) Foreign currency - The
Company uses the United States dollar as its reporting
currency.  Assets and liabilities of subsidiaries whose functional
currencies are other than 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).





F-10





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.           SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – continued





(k) 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.  Changes in net deferred tax asset or liability are 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.





The
Company assesses potentially unfavorable outcomes of such examinations based on
the criteria of FASB ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13
(formerly FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes”) which the Company adopted on January 1, 2007.  The
interpretation prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken (or expected to be
taken) in a tax return. This Interpretation also provides guidance on
derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.





(l) 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 the useful lives of property, plant and
equipment; valuation allowances for doubtful receivables; impairment of
long-lived assets; write down of inventories; provision for income tax expenses;
valuation allowances of deferred tax assets; 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.





(m) Stock-based compensation -
The Company has a stock-based employee compensation plan, as more fully
described in note 18.  The Company measures the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award.  That cost is recognized over the
period during which an employee is required to provide service, the requisite
service period (usually the vesting period), in exchange for the
award.  The grant-date fair value of employee stock options and
similar instruments are estimated using Black-Scholes option-pricing
model.





(n) Net income (loss) per
share - Basic net income (loss) per share is computed by dividing net
income (loss) attributable to Highway Holdings 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.





(o) 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, and net income (loss), has been disclosed within the consolidated
statements of operations and comprehensive income (loss).




F-11





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.           SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – continued





(p) Fair value measurement and
financial instruments - ASC Topic 820, Fair Value Measurement and
Disclosures, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also
establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. The fair value
hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy
consists of three levels:





Level
      one — Quoted market prices in active markets for identical assets or
      liabilities;Level
      two — Inputs other than level one inputs that are either directly or
      indirectly observable; andLevel
      three — Unobservable inputs developed using estimates and assumptions,
      which are developed by the reporting entity and reflect those assumptions
      that a market participant would
use.




Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.





Effective
April 1, 2009, the Company adopted the provisions of ASC Topic 820 to all
nonfinancial assets and nonfinancial liabilities, which did not have an impact
on the Company’s results of operations or financial position.





As of
March 31, 2009 and 2010, the Company did not have any nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements, at least annually, on a recurring basis, nor did the Company have
any assets or liabilities measured at fair value on a non-recurring
basis.





The
carrying amounts of cash and cash equivalents, restricted cash, accounts
receivable, short-term borrowings, accounts payable and other liabilities
approximate their fair values due to the short term nature of these
instruments.  The carrying amount of obligations under capital leases
also approximates fair value due to the variable nature of the interest
calculations.





(q) Noncontrolling
Interest-Effective April 1, 2009, the Company adopted ASC 810-10-65 (formerly SFAS
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” or SFAS160), which amends previously issued guidance to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as equity. Among other requirements, this Statement requires
that the consolidated net income (loss) attributable to the parent and the
noncontrolling interest be clearly identified and presented on the face of the
consolidated income statement.  The presentation and disclosure
requirements of the ASC Topics have been applied retrospectively for all
periods presented in the accompanying consolidated balance sheets, statements of
income (loss) and comprehensive income (loss), and statements of shareholders'
equity and statements of cash flows, to conform to the provisions of ASC810
(SFAS160).





Recent accounting pronouncements– In June 2009, the FASB established the FASB Accounting Standards
CodificationTM (ASC)
as the single source of authoritative U.S generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC superseded all previously
existing non-SEC accounting and reporting standards, and any prior sources of
U.S. GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). The ASC did no change current
U.S. GAAP but changes the approach by referencing authoritative literature by
topic (each a “Topic”) rather than by type of standard. The ASC has been
effective for the Company effective July 1, 2009. Adoption of the ASC did not
have a material impact on the Company’s Consolidated Financial Statements, but
references in the Company’s Notes to Consolidated Financial Statements to former
FASB positions, statements, interpretations, opinions, bulletins or other
pronouncements are now presented as references to the corresponding Topic
in the ASC.





F-12





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES – continued





Effective
April 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, Business Combinations), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired.  In addition, the provisions in this ASC require that any
additional reversal of deferred tax asset valuation allowance established in
connection with fresh start reporting on January 7, 1998 be recorded as a
component of income tax expense rather than as a reduction to the goodwill
established in connection with the fresh start reporting. The Company will
apply ASC 805-10 to any business combinations subsequent to
adoption.





Effective
April 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”), which amends ASC 805-10 to require
that an acquirer recognize at fair value, at the acquisition date, an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If the acquisition-date fair value of
such an asset acquired or liability assumed cannot be determined, the acquirer
should apply the provisions of ASC Topic 450, Contingences, to determine whether
the contingency should be recognized at the acquisition date or after such
date. FSP The adoption of ASC 805-20 did not have a material impact on the
Company’s Consolidated Financial Statements.





Effective
April 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities”), which amends
and expands previously existing guidance on derivative instruments to require
tabular disclosure of the fair value of derivative instruments and their gains
and losses., This ASC also requires disclosure regarding the credit-risk related
contingent features in derivative agreements, counterparty credit risk, and
strategies and objectives for using derivative instruments. The adoption of this
ASC did not have a material impact on the Company’s Consolidated Financial
Statements.





Upon
initial adoption of SFAS 157 in fiscal year 2009, the Company adopted FASB ASC
820-10 (formerly FSP FAS 157-2, “Effective Date of FASB Statement 157”), which
deferred the provisions of previously issued fair value guidance for
nonfinancial assets and liabilities to the first fiscal period beginning after
November 15, 2008. Deferred nonfinancial assets and liabilities include items
such as goodwill and other nonamortizable intangibles. Effective April 1, 2009,
the Company adopted the fair value guidance for nonfinancial assets and
liabilities. The adoption of FASB ASC 820-10 did not have a material impact on
the Company’s Consolidated Financial Statements.





Effective
April 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1
and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”),
which amends previous guidance to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. The adoption of FASB ASC 825-10-65
did not have a material impact on the Company’s Consolidated Financial
Statements.





Effective
April 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2
and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”). Under ASC 320-10-65, an other-than-temporary impairment must be
recognized if the Company has the intent to sell the debt security or the
Company is more likely than not will be required to sell the debt security
before its anticipated recovery. In addition, ASC 320-10-65 requires impairments
related to credit loss, which is the difference between the present value of the
cash flows expected to be collected and the amortized cost basis for each
security, to be recognized in earnings while impairments related to all other
factors to be recognized in other comprehensive income. The adoption of ASC
320-10-65 did not have a material impact on the Company’s Consolidated Financial
Statements.




Effective
April 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”), which provides guidance on how to determine the fair value of assets
and liabilities when the volume and level of activity for the asset or liability
has significantly decreased when compared with normal market activity for the
asset or liability as well as guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.





F-13





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES – continued





Effective
April 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”), which
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” The
Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible
assets acquired subsequent to the adoption date.  The adoption of
these revised provisions had no impact on the Company’s Consolidated Financial
Statements.





Effective
April 1, 2009, the Company adopted FASB ASC 470-20 (formerly FAS APB 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)”), which clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14 and specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. The adoption of these revised provisions did not have a
material impact on the Company’s Consolidated Financial Statements.





Effective
April 1, 2009, the Company adopted FASB ASC 260-10-45 (formerly FSP EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities), which addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method described in FASB ASC 260-10-45
(formerly paragraphs 60 and 61 of SFAS 128).





Effective
April 1, 2009, the Company adopted the provisions in FASB ASC 815-40-15-5
through 815-40-15-8 (formerly EITF 07-5, "Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock”), which provides guidance
for determining whether an equity-linked financial instrument (or embedded
feature) is indexed to an entity’s own stock.  The adoption of the
provisions in ASC 815-40-15-5 through 815-40-15-8 did not have a material impact
on the Company’s Consolidated Financial Statements





New accounting
pronouncement to be adopted –In June 2009, the FASB issued SFAS
No. 166, “Accounting for Transfers of Financial Assets – an amendment of
FASB Statement No. 140”, (codified by ASU No. 2009-16 issued in December
2009). SFAS No. 166 limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred
the entire financial asset by taking into consideration the transferor’s
continuing involvement. The standard requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s
beneficial interest) and liabilities incurred as a result of a transfer of
financial assets accounted for as a sale. The concept of a qualifying
special-purpose entity is removed from SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
along with the exception from applying FIN 46(R), Consolidation of Variable Interest
Entities. The standard is effective for the first annual reporting period
that begins after November 15, 2009 (i.e. the Company’s fiscal 2011).
Earlier application is prohibited. It is expected the adoption of this Statement
will have no material effect on the Company’s Consolidated Financial
Statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)”, (codified by ASU No. 2009-17 issued in December 2009). The
standard amends FIN No. 46(R) to require a company to analyze whether its
interest in a variable interest entity (“VIE”) gives it a controlling financial
interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This Statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009 (i.e. the Company’s fiscal
2011). Earlier application is prohibited. Comparative disclosures will be
required for periods after the effective date. It is expected the adoption of
this Statement will have no material effect on the Company’s Consolidated
Financial Statements.





In August
2009, the FASB issued ASC Update No. 2009-05 (“Update 2009-05”) to provide
guidance on measuring the fair value of liabilities under FASB ASC 820 (formerly
SFAS 157, “Fair Value Measurements”).  The Company will adopt Update
2009-05 effective 1 April 2010. It is expected the adoption of this Update will
not have a material impact on the Company’s Consolidated Financial
Statements.




F-14





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





2.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES – continued





In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):




·       ASU
No. 2009-13—Revenue
Recognition (ASC Topic 605): Multiple-Deliverable Revenue Arrangements(formerly EITF Issue No. 08-1).  ASU No. 2009-13 modifies the
revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction.  This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the individual
deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.




·       ASU
No. 2009-14—Software (ASC
Topic 985): Certain
Revenue Arrangements That Include Software Elements(formerly EITF Issue
No. 09-3).ASU No.
2009-14 removes tangible products from the scope of software revenue recognition
guidance and also provides guidance on determining whether software deliverables
in an arrangement that includes a tangible product, such as embedded software,
are within the scope of the software revenue guidance.





ASU No.
2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same
transition method. The Company expects to apply these ASU Updates on a
prospective basis for revenue arrangements entered into or materially modified
beginning April 1, 2011. The Company is currently evaluating the potential
impact these ASC Updates may have on its financial position and results of
operations.





In
January 2010, the FASB issued the following ASC Updates:





·       ASU
No. 2010-01—Equity (Topic
505): Accounting for Distributions to Shareholders with Components of Stock andCash. This
Update clarifies that the stock portion of a distribution to shareholders that
allows them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected in EPS prospectively and is not
a stock dividend for purposes of applying Topics 505 and 260 (Equity and
Earnings Per Share). The amendments in this Update are effective for interim and
annual periods ending on or after December 15, 2009 with retrospective
application.




·       ASU
No. 2010-02—Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This Update amends Subtopic 810-10 and related guidance to
clarify that the scope of the decrease in ownership provisions of the Subtopic
and related guidance applies to (i) a subsidiary or group of assets that is a
business or nonprofit activity; (ii) a subsidiary that is a business or
nonprofit activity that is transferred to an equity method investee or
joint venture; and (iii) an exchange of a group of assets that constitutes a
business or nonprofit activity for a noncontrolling interest in an entity, but
does not apply to: (i) sales of in substance real estate; and (ii) conveyances
of oil and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in Subtopic
810-10).




·       ASU
No. 2010-06—Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.  This Update amends Subtopic 820-10 that requires
new disclosures about transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. This Update also amends Subtopic 820-10 to
clarify certain existing disclosures. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements, which are effective for fiscal years beginning after
December 15, 2010.




The
Company expects that the adoption of the above Updates issued in January 2010
will not have any significant impact on its financial position and results of
operations.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.





F-15





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





3.
            CHANGES OF NON-CONTROLLING
      INTEREST





For
period through June 2009, the Company had held 71% of Kayser Wuxi. In June 2009,
the Company acquired an additional 19% financial interest in Kayser
Wuxi in exchange for certain plant and machineries with aggregate value of
$123.





According
to the requirements in ASC 810-45-23 (formerly paragraphs 32 to 34 of
SFAS 160, “Non-controlling Interests in Consolidated Financial Statements –
an amendment of ARB No. 51”), the Company’s change in the financial
interest in Kayser Wuxi was accounted for as equity transactions and no gain or
loss was recognized in the Company’s consolidated income statement for the year
ended March 31, 2010. The carrying amount of the non-controlling interest in
Kayser Wuxi was adjusted to reflect the change in the Company’s ownership
interest in Kayser Wuxi. The difference of $39 between the fair value of the
consideration paid and the amount by which the non-controlling interest was
adjusted was recognized as changes in additional paid-in capital of
attributable to the Company.





Pursuant
to an agreement dated November 18, 2009, the Company transferred 19% financial
interest in Kayser Wuxi to Mr. You Ming for no consideration. Mr. You Ming held
10% financial interest in Kayser Wuxi immediately prior to such agreement, and
is the legal representative and a key employee of Kayser Wuxi. As a result of
such transfer, the Company holds 71% financial interest in Kayser Wuxi whilst
Mr. You Ming holds the remaining 29%.


.


According
to the requirements in ASC 810-45-23 (formerly paragraphs 32 to 34 of
SFAS 160, “Non-controlling Interests in Consolidated Financial Statements –
an amendment of ARB No. 51”), the Company’s change in the financial
interest in Kayser Wuxi was accounted for as equity transactions and no gain or
loss was recognized in the Company’s consolidated income statement for the year
ended March 31, 2010. The carrying amount of the non-controlling interest in
Kayser Wuxi was adjusted to reflect the change in the Company’s ownership
interest in Kayser Wuxi. The difference of $48 between the fair value of the
consideration paid and the amount by which the non-controlling interest was
adjusted was recognized as changes in additional paid-in capital of attributable
to the Company.





4.
            INCOME
    TAXES





Income is
subject to tax in the various countries in which the Company
operates.





The
components of income (loss) before income taxes are as follows:





No income
tax arose in the United States of America in any of the periods
presented.





The
Company is not taxed in the British Virgin Islands.





The
Company's operating subsidiaries, other than Kayser Wuxi, are all incorporated
in Hong Kong and are subject to Hong Kong taxation on income derived from their
activities conducted in Hong Kong.  Hong Kong Profits Tax has been
calculated at 16.5% of the estimated assessable profit for the years ended March
31, 2010 and 2009, and at 17.5% for the year ended March 31, 2008.





The
Company's manufacturing operations are currently conducted solely in
China.  The manufacturing operations in Long Hua, Shenzhen are
conducted pursuant to agreements entered into between certain China companies
set up by the local government and the Shenzhen City Baoan District Foreign
Economic Development Head Group and its designees (collectively, the "BFDC")
(the agreements, collectively the "BFDC Agreements").





The
manufacturing operation in Pinghu, Shenzhen was conducted pursuant to an
agreement entered into between a China company set up by the local government
and the Shenzhen City Longgang District Foreign Economic Development Limited
("LFDL") (together with the BFDC Agreements, collectively referred as the
"Operating Agreements"). The operations in Pinghu were closed in January
2010.





In
connection with the establishment of its new facility in China during fiscal
year 2006, the Company entered into an agreement with the He Yuan Foreign Trade
& Economy Cooperation Bureau that is similar to the Operating Agreements. As
of March 31, 2010, the manufacturing operation in He Yuan had been
de-registered.





F-16





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





4.
            INCOME TAXES –
      continued





Under the
Operating Agreements, the Company is not considered by local tax authorities to
be doing business in China; accordingly, the Company's activities in China have
not been subject to local taxes.  The BFDC and LFDL are responsible
for paying taxes they incur as a result of their operations under the Operating
Agreements.





As the
Company's manufacturing operations are carried out in China under the Operating
Agreements, in accordance with the Hong Kong Inland Revenue Departmental
Interpretation and Practice Note No. 21, 50% of the related 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 31,2008
                            
                            
                            2009
                            
                            
                            2010Hong
      Kong:Current
      tax
                            
                            $
                            13
                            
                            
                            $
                            (9
                            )
                            
                            
                            26Deferred
      tax
                            
                            
                            15
                            
                            
                            
                            (26
                            )
                            
                            
                            (16
                            )$
                            28
                            
                            
                            
                            (35
                            )
                            
                            
                            10





A
reconciliation between the provision for income taxes computed by applying the
Hong Kong Profits Tax rate to income (loss) before income taxes and minority
interests and the actual provision for income taxes is as follows:




Year ended March 31,2008
                                        
                                        
                                        2009
                                        
                                        
                                        2010%
                                        
                                        
                                        %
                                        
                                        
                                        %Statutory
      income tax rate in Hong Kong
                                        
                                        
                                        17.5
                                        
                                        
                                        
                                        16.5
                                        
                                        
                                        
                                        16.5Non-deductible
      items/non-taxable income
                                        
                                        
                                        (14.0
                                        )
                                        
                                        
                                        36.3
                                        
                                        
                                        
                                        (8.1
                                        )Changes
      in valuation allowances
                                        
                                        
                                        (4.6
                                        )
                                        
                                        
                                        (42.7
                                        )
                                        
                                        
                                        (2.4
                                        )Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                                        
                                        
                                        0.4
                                        
                                        
                                        
                                        (2.1
                                        )
                                        
                                        
                                        (4.9
                                        )Effect
      of change in tax rate
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12.2
                                        )
                                        
                                        
                                        -Under/Overprovision
      of income in previous years
                                        
                                        
                                        (0.2
                                        )
                                        
                                        
                                        (1.2
                                        )
                                        
                                        
                                        -Other
                                        
                                        
                                        (0.5
                                        )
                                        
                                        
                                        0.2
                                        
                                        
                                        
                                        1.3Effective
      tax rate
                                        
                                        
                                        (1.4
                                        )
                                        
                                        
                                        (5.2
                                        )
                                        
                                        
                                        2.4




Deferred
income tax (assets) liabilities are as follows:




March 31,2009
                                  
                                  
                                  2010Deferred
      tax liability:Property,
      plant and equipment
                                  
                                  $
                                  200
                                  
                                  
                                  $
                                  208Deferred
      tax asset:Tax
      loss carryforwards
                                  
                                  
                                  (1,329
                                  )
                                  
                                  
                                  (1,029
                                  )Valuation
      allowance
                                  
                                  
                                  1,292
                                  
                                  
                                  
                                  968Total
      net deferred tax asset
                                  
                                  
                                  (37
                                  )
                                  
                                  
                                  (61
                                  )Net
      deferred tax liability
                                  
                                  $
                                  163
                                  
                                  
                                  $
                                  147




F-17





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





4.
            INCOME TAXES –
      continued




Movement
of valuation allowances are as follows:




Year ended March 31,2008
                              
                              
                              2009
                              
                              
                              2010At
      the beginning of the year
                              
                              $
                              1,587
                              
                              
                              $
                              1,677
                              
                              
                              $
                              1,292Current
      year (reduction) addition
                              
                              
                              90
                              
                              
                              
                              (288
                              )
                              
                              
                              30Change
      in tax rate
                              
                              
                              -
                              
                              
                              
                              (72
                              )
                              
                              
                              -De-registration
      of a subsidiary
                              
                              
                              -
                              
                              
                              
                              (25
                              )
                              
                              
                              (354)At
      the end of the year
                              
                              $
                              1,677
                              
                              
                              $
                              1,292
                              
                              
                              $
                              968




A
valuation allowance has been provided on the deferred tax asset because the
Company believes that it is not more likely than not that the asset will be
utilized.  As of March 31, 2008 and 2009, a valuation allowance
was provided for the deferred tax asset relating to the future benefit of net
operating loss carryforwards as the management determined that the utilization
of those net operating loss carryforwards is not more likely than
not.  If events occur in the future that allow the Company to realize
more of its deferred tax assets than the presently recorded amount, an
adjustment to the valuation allowance will be made when those events
occur.





At March
31, 2009 and 2010, tax losses amounting to approximately $5,522 and $6,183,
respectively may be carried forward indefinitely, subject to the agreement of
the Hong Kong Inland Revenue Department.





At March
31, 2009, tax losses of a subsidiary in Germany amounted to approximately $
1,131 which may be carried forward indefinitely. On September 21, 2009,
Kienzle Germany was deregistered.





At March
31, 2009 and 2010, the Company's China subsidiary had tax losses of
approximately of $447 and $107, respectively that will expire five years from
respective financial years incurring the losses.





As at
March 31, 2010, the tax losses will expire in following years:





2012
                      
                      $
                      792013
                      
                      
                      28$
                      107





On March
16, 2007, China promulgated the Law of China on Enterprise Income Tax (the “New
Law”) by Order No. 63 of the President of China. On December 6, 2007, the State
Council of China issued Implementation Regulation of the New Law. Under the New
Law and Implementation Regulation, the Enterprise Income Tax rate of the
Company's subsidiaries in China was increased to 25% effective from January 1,
2008.





Uncertainties
exist with respect to how the China's current income tax law applies to the
Company's overall operations, and more specifically, with regard to tax
residency status. The New Law includes a provision specifying that legal
entities organized outside of the PRC will be considered residents for China
income tax purposes if their place of effective management or control is within
China. The Implementation Rules to the New Law provide that non-resident legal
entities will be considered China residents if substantial and overall
management and control over the manufacturing and business operations,
personnel, accounting, properties, etc. occurs within the
China.  Despite the uncertainties on the issue, the Company does not
believe that its legal entities organized outside of the China should be treated
as residents of China for the New Law's purposes. If one or more of the
Company's legal entities organized outside of the China were characterized as
China tax residents, the impact would adversely affect the Company's results of
operation.





The
Company has made its assessment of the level of tax authority for each tax
position (including the potential application of interest and penalties) based
on the technical merits, and has measured the unrecognized tax benefits
associated with the tax positions. Based on the evaluation by the Company, it
was concluded that there are no significant uncertain tax positions requiring
recognition in the consolidated financial statements.




F-18





HIGHWAY HOLDINGS
LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





4.
            INCOME TAXES –
      continued





The
Company classifies interest and/or penalties
related to unrecognized tax benefits as a component of income tax provisions;
however, as of March 31, 2009 and 2010, there is no interest and penalties
related to uncertain tax positions, and the Company has no material unrecognized
tax benefit which would favourably affect the effectiveincome tax rate in future
periods.  The Company does not anticipate any significant increases or
decreases to its liability for unrecognized tax benefit within the next twelve
months. The fiscal years 2004 to 2010 remain subject to examination by the Hong
Kong tax authority.





5.
            INVENTORIES





Inventories
by major categories are summarized as follows:





March 31,2009
                              
                              
                              2010Raw
      materials
                              
                              $
                              2,449
                              
                              
                              $
                              2,134Work
      in progress
                              
                              
                              669
                              
                              
                              
                              529Finished
      goods
                              
                              
                              892
                              
                              
                              
                              832$
                              4,010
                              
                              
                              $
                              3,495





Inventories
amounting to $145, $144 and $222 were written off during the years ended March
31, 2008, 2009 and 2010, respectively.





6.
            PROPERTY, PLANT AND EQUIPMENT,
      NET





Property,
plant and equipment, net consist of the following:





March 31,2009
                                
                                
                                2010At
      cost:Machinery
      and equipment
                                
                                
                                11,301
                                
                                
                                
                                11,122Furniture
      and fixtures
                                
                                
                                48
                                
                                
                                
                                486Leasehold
      improvements
                                
                                
                                620
                                
                                
                                
                                496Motor
      vehicles
                                
                                
                                103
                                
                                
                                
                                96Total
                                
                                
                                12,072
                                
                                
                                
                                12,200Less:
      Accumulated depreciation and impairment
                                
                                
                                (9,232
                                )
                                
                                
                                (10,149
                                )Net
      book value
                                
                                
                                2,840
                                
                                
                                
                                2,051





Depreciation
expense incurred for the years ended March 31, 2008, 2009 and 2010 were $812,
$754 and $619, respectively.





Net book
value of machinery and equipment held under capital leases were as
follows:





March 31,2009
                                
                                
                                2010Machinery
      and equipment, at cost
                                
                                $
                                1,157
                                
                                
                                $
                                1,157Less:
      Accumulated depreciation
                                
                                
                                (287
                                )
                                
                                
                                (403
                                )Net
      book value
                                
                                $
                                870
                                
                                
                                $
                                754





Depreciation
of machinery and equipment held under capital leases, which is included in
depreciation expense were $149, $116 and $107 for the years ended March 31,
2008, 2009 and 2010, respectively.




F-19





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





7.
            INTANGIBLE ASSETS,
      NET





March 31,2009
                                
                                
                                2010At
      cost:Customer
      relationship
                                
                                $
                                14
                                
                                
                                $
                                14Contract
      backlog
                                
                                
                                4
                                
                                
                                
                                4Non-compete
      agreement
                                
                                
                                65
                                
                                
                                
                                65Total
                                
                                
                                83
                                
                                
                                
                                83Less:
      Accumulated amortization
                                
                                
                                (59
                                )
                                
                                
                                (75
                                )Net
      book value
                                
                                
                                24
                                
                                
                                
                                8





Amortization
expense incurred for the years ended March 31, 2008, 2009 and 2010 were $18, $28
and $16, respectively.





The
Company expects to record amortization expense over the next five years as
follows:





Year
      ending March 31,
                  
                  $2011
                  
                  
                  82012
      and thereafter
                  
                  
                  -$
                  8





8.
            INVESTMENTS IN UNCONSOLIDATED
      AFFILIATES





On August
5, 2003, the Company acquired 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.)), a company incorporated in the Republic of Panama,
for cash consideration of $5.  Kayser Technik (Overseas) is engaged in
the trading of camera batteries, films and disposable cameras.





On April
30, 2009, the Company acquired a 50% equity interest in Xenon Automation Asia
Limited (“Xenon Automation”), a company incorporated in Hong Kong, for cash
consideration of $3.  Xenon Automation was formed to design,
manufacture and provide maintenance services for German-designed automation
equipment to be used in the manufacturing process of industrial companies in
Asia. As of March 31, 2010, Xenon Automation had not conducted any
substantive business operations.





The
following table provides a reconciliation of the investment in unconsolidated
affiliates in the Company’s consolidated balance sheet as of March 31, 2010 and
the amount of underlying equity in net assets of the affiliates:





The
      Company’s proportionate share of equity in the net assets of
      affiliates
                      
                      $
                      37Less:
      Accumulated impairment losses recognized
                      
                      
                      36Investments
      in unconsolidated affiliates reported in the consolidated balance sheet as
      of March 31, 2010
                      
                      $
                      1





The
Company reviews investments in unconsolidated affiliates for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
investment may not be recovered. In assessing the recoverability of equity
method investments, the Company follows the applicable accounting guidance in
determining the fair value of the investments. In most cases, this involves the
use of discounted cash flow models (Level 3 of the fair value hierarchy under
the accounting guidance). If the fair value of an equity method investee is
determined to be lower than its carrying value, an impairment loss is
recognized. The determination of fair value using discounted cash flow models is
normally not based on observable market data from independent sources and
therefore requires significant management judgment with respect to estimates of
future operating earnings and the selection of an appropriate discount
rate. The use of different assumptions could increase or decrease estimated
future operating cash flows, and the discounted value of those cash flows, and
therefore could increase or decrease any impairment charge related to these
investments.




F-20





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





9.
            SHORT-TERM
      BORROWINGS





Short-term
borrowings include import loans obtained from various banks in Hong Kong
amounting to $1,850 and $793 as of March 31, 2009 and 2010,
respectively.





March 31,2009
                            
                            
                            2010Maximum
      credit facilities available to the Company
                            
                            
                            4,563
                            
                            
                            
                            3,342Weighted
      average interest rate on borrowings at end of year
                            
                            
                            5.1%
                            
                            
                            
                            5.0%





The
maturity of the import loans is generally up to 120 days.  Interest
rates are generally based on the banks' best lending rate in Hong Kong plus 1%
per annum, subject to fluctuations at the banks' discretion.  The
credit facilities are subject to annual review by the banks.





The
banking facilities are secured by certain bank deposits and guarantees given by
the Company and certain subsidiaries. At March 31, 2009 and 2010, the Company
pledged bank deposits of $1,028 and $771 respectively, to banks to secure
banking facilities granted.  There are no restrictive financial
covenants associated with these bank facilities.





10.
            OBLIGATIONS UNDER CAPITAL
      LEASES





Long-term
debt consists of obligations under capital leases on certain property, plant and
equipment for the Company's operations with lease terms expiring in the next 3
years.





Future
minimum lease payments as at March 31, 2010 are as follows:





Year
      ending March 31,2011
                      
                      $
                      2512012
                      
                      
                      412013
                      
                      
                      32014
                      
                      
                      -2015
                      
                      
                      -Thereafter
                      
                      
                      -$
                      295





The
capital lease commitment amounts above exclude implicit interest of $9, $1 and
$Nil payable in the years ending March 31, 2011, 2012, 2013
respectively.




F-21





HIGHWAY HOLDINGS
LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





11.
            ACCRUED EXPENSES AND OTHER
      CURRENT LIABILITIES





Accrued
expenses and other current liabilities consisted of the following:





March 31,2009
                            
                            
                            2010Accrued
      mould charges
                            
                            
                            17
                            
                            
                            
                            48Accrued
      payroll and employee benefits
                            
                            
                            373
                            
                            
                            
                            542Deposits
      received from customers
                            
                            
                            112
                            
                            
                            
                            164Accrued
      audit fee
                            
                            
                            299
                            
                            
                            
                            94Accrued
      contingent payments on acquisition of Golden Bright
                            
                            
                            376
                            
                            
                            
                            -Accrued
      commission expense
                            
                            
                            39
                            
                            
                            
                            21Accrual
      rental expense
                            
                            
                            20
                            
                            
                            
                            -Other
      taxes payable
                            
                            
                            119
                            
                            
                            
                            -Others
                            
                            
                            275
                            
                            
                            
                            1871,630
                            
                            
                            
                            1,056





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 $1,199,
      $1,373 and $1,356 in fiscal years 2008, 2009 and 2010,
      respectively.





At
      March 31, 2010, the Company is committed under operating leases requiring
      minimum lease payments as follows:





Year ending March 31,2011
                        
                        $
                        1,2352012
                        
                        
                        1,0862013
                        
                        
                        852014
                        
                        
                        862015
                        
                        
                        86Thereafter
                        
                        
                        87$
                        2,665





(b)
            The Company had a total capital
      commitment of $45 and $55 for the purchase of property, plant and
      equipment as of March 31, 2009 and 2010, respectively. The capital
      commitment at March 31, 2010 is expected to be disbursed during the year
      ending March 31, 2011.




F-22





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





12.
            COMMITMENTS AND CONTINGENCIES –
      continued





(c)
            The Operating Agreements in Long
      Hua and Pinghu have all been extended to March 31, 2016 and March 31,
      2020, respectively, in fiscal year 2008 while one agreement with a China
      company was retired by mutual consent of both the Company and the China
      company.  Pursuant to the Operating Agreements, the Company is
      not subject to certain rules and regulations that would be imposed on
      entities which are considered under China law to be doing business in
      China by utilizing other business structures such as joint ventures or
      wholly owned subsidiaries organized in China.  Should there be
      any adverse change in the Company's dealings with the BFDC and LFDL 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. The manaufacturing operation in Pinghu was closed in
      January 2010.





In addition, transactions between
      the Company and the BFDC and LFDL are on terms different in certain
      respects from those contained in the Operating
      Agreements.  There can be no assurance that the BFDC and LFDL
      will not insist upon a change in the current practices so as to require
      adherence to the terms of the Operating Agreements, which the Company
      considers less favorable to it than the practices currently in effect, or
      that the Company or BFDC and LFDL 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 Operating 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 Operating Agreements, the Company's business
      and results of operations could be materially and adversely
      affected.





In
connection with its recent establishment of its new facility in China in 2006,
the Company entered into an agreement with the He Yuan Foreign Trade &
Economy Cooperation Bureau that is similar to the Operating Agreements. The
operation was closed in May 2009, and the business license was deregistered in
April 2010.





(d)
            In fiscal year 2008, several of
      the employees of Golden Bright and other subsidiaries made claims for
      additional compensation against the Company to the labor tribunal in China
      (the "Labor Claims"). The Company made payments of $330 and $187 to settle
      the Labor Claims in fiscal years 2008 and 2009,
      respectively.  In fiscal year 2009, several of the employees
      appealed against the labor tribunal decision, which has been dismissed by
      the court subsequently as of the date of the fiscal 2009 report. As at
      March 31, 2010, the Company did not have any claims made by employees of
      subsidiaries.





$30
      of the $187 and none were paid to settle labor claims related to Golden
      Bright during the years ended March 31, 2009 and 2010,
      respectively.





(e)
            As
      of March 31, 2010, the Company issued letter of credit to totaled to $
      374.




F-23





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





13.
            CAPITAL
    STOCK





In August
1998, the Board of Directors authorized the Company to repurchase some of its
shares.  As of March 31, 2009 and 2010, 37,800 shares were purchased
for a total cash consideration of $53.  These shares were held in
treasury and are not eligible to vote or receive dividends. In April 2010, all
of the treasury shares were retired.





In
September 2006, the Company issued 128,534 shares of common shares and delivered
such shares into escrow to be held as security for the Company’s obligation to
pay the second contingent purchase payment of $513 (equivalent to HK$4 million)
relating to the acquisition of Golden Bright.  During the year ended
March 31, 2008, as described in note 1 and 12(d), the former shareholder of
Golden Bright breached certain conditions as set out in the purchase
agreement.  In accordance with the purchase and the escrow agreements,
the Company requested the escrow agent to return all the escrow shares to the
Company for cancellation.  As of March 31, 2008, all the escrow shares
were returned to the Company and classified as treasury shares.  As of
March 31, 2009, all of these 128,534 escrow shares have been
cancelled.





In
February 2010, the Board of Directors authorized the Company to repurchase
shares up to the value of $1 million.  As of March 31, 2010, no stock was
purchased pursuant to this authorization.




F-24





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





14.
            CONCENTRATIONS OF CREDIT RISK AND
      MAJOR CUSTOMERS





The
Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of its cash and cash equivalents and trade
receivable.





The
Company's cash and cash equivalents are high-quality deposits placed with
banking institutions with high credit ratings.  This investment policy
limits the Company's exposure to concentrations of credit risk.





The trade
receivable balances largely represent amounts due from the Company's principal
customers who are generally international organizations with high credit
ratings.  Letters of credit are the principal security obtained to
support lines of credit or negotiated contracts from a customer.  As a
consequence, concentrations of credit risk are limited.





Accounts
receivable from the three customers with the largest receivable balances at
March 31, 2009 and 2010 are as follows:





Percentage of accounts
      receivable2009
                            
                            
                            2010Customer
      A
                            
                            
                            11.0
                            %
                            
                            
                            N/A
                            %Customer
      B
                            
                            
                            23.0
                            %
                            
                            
                            17.9
                            %Customer
      C
                            
                            
                            15.3
                            %
                            
                            
                            29.8
                            %Customer
      D
                            
                            
                            N/A
                            %
                            
                            
                            7.6
                            %Three
      largest receivable balances
                            
                            
                            49.3
                            %
                            
                            
                            55.3
                            %





Details
of the movements of the allowances for doubtful account are as
follows:





Year ended March 31,2008
                          
                          
                          2009
                          
                          
                          2010At
      beginning of year
                          
                          $
                          13
                          
                          
                          $
                          108
                          
                          
                          $
                          101Allowances
      for the year
                          
                          
                          102
                          
                          
                          
                          96
                          
                          
                          
                          -Amounts
      recovered
                          
                          
                          -
                          
                          
                          
                          (20
                          )
                          
                          
                          -Amounts
      written off
                          
                          
                          (7
                          )
                          
                          
                          (83
                          )
                          
                          
                          (101
                          )At
      end of year
                          
                          $
                          108
                          
                          
                          $
                          101
                          
                          
                          $
                          -





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, 2008, 2009 and
2010 are as follows:





Year ended March 31,2008
                          
                          
                          2009
                          
                          
                          2010Customer
      A (note a)
                          
                          
                          22.4
                          %
                          
                          
                          24.2
                          %
                          
                          
                          18.1
                          %Customer
      B (note b)
                          
                          
                          13.2
                          %
                          
                          
                          10.7
                          %
                          
                          
                          11.9
                          %Customer
      C (note b)
                          
                          
                          10.5
                          %
                          
                          
                          13.3
                          %
                          
                          
                          20.5
                          %





(a) Sales
to this customer were reported in the Metal Stamping and Mechanical OEM
operating segment.





(b) Sales
to these customers were reported in the Metal Stamping and Mechanical OEM and
Electric OEM operating segments.




F-25





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





15.
            NET INCOME (LOSS) 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 31,2008
                                    
                                    
                                    2009
                                    
                                    
                                    2010Net
      (loss) income attributable to Highway Holdings shareholders, basic and
      diluted
                                    
                                    
                                    (1,921
                                    )
                                    
                                    
                                    768
                                    
                                    
                                    
                                    420Shares:Weighted
      average common shares used in computing basic net income (loss) per
      share
                                    
                                    
                                    3,809,888
                                    
                                    
                                    
                                    3,744,423
                                    
                                    
                                    
                                    3,754,988Effect
      of dilutive securities:Weighted
      average shares from assumed exercise of stock options and issuance of
      common shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    29,254
                                    
                                    
                                    
                                    2,908Weighted
      average common shares used in computing diluted net income (loss) per
      share
                                    
                                    
                                    3,809,888
                                    
                                    
                                    
                                    3,773,677
                                    
                                    
                                    
                                    3,757,896Net
      (loss) income per share, basic
                                    
                                    
                                    (0.50
                                    )
                                    
                                    
                                    0.21
                                    
                                    
                                    
                                    0.11Net
      (loss) income per share, diluted
                                    
                                    
                                    (0.50
                                    )
                                    
                                    
                                    0.20
                                    
                                    
                                    
                                    0.11





The
calculation of the diluted loss per share for the year ended March 31, 2008
excluded options to purchase 184,250 common shares and 29,154 non-vest common
shares granted to a director (note 18), because their effects were
anti-dilutive.





The
calculation of the diluted income per share for the year ended March 31,
2009 excluded options to purchase 181,250 common shares because their effects
were anti-dilutive.





The
calculation of the diluted income per share for the year ended March 31,
2010 excluded options to purchase 164,500 common shares because their effects
were anti-dilutive.





16.
            STAFF RETIREMENT
      PLANS




The
Company operates a Mandatory Provident Fund ("MPF") scheme for all qualifying
employees in Hong Kong. The MPF are defined contribution schemes and the assets
of the schemes are managed by a trustee independent to the Company.





The MPF
are available to all employees aged 18 to 64 with at least 60 days of service
under the employment of the Company in Hong Kong.  Contributions are
made by the Company at 5% based on the staff's relevant income.





The
Company's full time employees in China participate in a government-mandated
multiemployer defined contribution plan pursuant to which certain medical care
unemployment insurance, employee housing fund and other welfare benefits are
provided to employees.  The China labor regulations require the
Company to accrue for these benefits based on certain percentages of the
employees' salaries.   No forfeited contributions may be used by the
employer to reduce the existing level of contributions.





The cost
of the Company's contribution to the staff retirement plans in Hong Kong and
China amounted to $87, $117 and $160 for the years ended March 31, 2008, 2009
and 2010, respectively.




F-26





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





17.
            STOCK
    OPTIONS





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.





No
options were granted by the Company in fiscal year 2009. 33,000 options were
granted by the Company in fiscal year 2010. The fair value of options granted to
employees and directors in fiscal year 2010 was $0.95 per stock option,
determined using the Black-Scholes option-pricing model based on the following
assumptions:





Fiscal year in which the options were
      granted:
                  
                  2010Stock
      price:
                  
                  $
                  1.65Risk-free
      interest rate:
                  
                  
                  1.39%Expected
      life (years):
                  
                  3Expected
      volatility:
                  
                  
                  99.8%Expected
      dividend yield:
                  
                  
                  1.80%





The
Company estimated the expected volatility based on volatility of historical
weekly stock prices for the three years prior to the date of grant. 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.





The
options granted under the Option Plan resulted in a compensation expense of $60,
$14 and $12 for the years ended March 31, 2008, 2009 and 2010, respectively,
which is included in selling, general and administrative
expenses.  Options awards granted in 2008 are generally with an
exercise price equal to the market price of the Company's stock at the date of
grant; those option awards generally have a vesting period of 1
year.





As of
March 31, 2009, there was no unrecognized compensation cost related to
non-vested stock options granted under the Option Plan.  There were no
non-vested stock options as at March 31, 2009.





As of
March 31, 2010, there was $19 of unrecognized compensation cost related to
non-vested stock options granted under the Option Plan. The cost was expected to
be recognized over a weighted-average period of 219 days.




F-27





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





17.
            STOCK OPTIONS –
      continued





A summary
of stock option activity during the three years ended March 31, 2010 is as
follows:





Weighted
                                    
                                    
                                    WeightedWeighted
                                    
                                    
                                    Average
                                    
                                    
                                    averageNumber of
                                    
                                    
                                    average
                                    
                                    
                                    fair
      value
                                    
                                    
                                    remaining
                                    
                                    
                                    Aggregateunderlying
                                    
                                    
                                    exercise
                                    
                                    
                                    per
      stock
                                    
                                    
                                    contractual
                                    
                                    
                                    intrinsiccommon shares
                                    
                                    
                                    price
                                    
                                    
                                    Option
                                    
                                    
                                    life (years)
                                    
                                    
                                    valueOutstanding
      at March 31, 2007
                                    
                                    
                                    140,250
                                    
                                    
                                    $
                                    3.61
                                    
                                    
                                    $
                                    1.11
                                    
                                    
                                    
                                    3.61Granted
                                    
                                    
                                    55,000
                                    
                                    
                                    
                                    4.03
                                    
                                    
                                    
                                    1.12Exercised
                                    
                                    
                                    (11,000
                                    )
                                    
                                    
                                    3.43
                                    
                                    
                                    
                                    1.09Outstanding
      at March 31, 2008
                                    
                                    
                                    184,250
                                    
                                    
                                    
                                    3.58
                                    
                                    
                                    
                                    1.11
                                    
                                    
                                    
                                    2.93Lapsed
                                    
                                    
                                    (16,750
                                    )
                                    
                                    
                                    2.87
                                    
                                    
                                    
                                    1.21Outstanding
      at March 31, 2009
                                    
                                    
                                    167,500
                                    
                                    
                                    
                                    3.65
                                    
                                    
                                    
                                    1.10
                                    
                                    
                                    
                                    2.14Granted
                                    
                                    
                                    33,000
                                    
                                    
                                    
                                    1.65
                                    
                                    
                                    
                                    0.95Lapsed
      / cancelled
                                    
                                    
                                    (3,000
                                    )
                                    
                                    
                                    (3.5
                                    )
                                    
                                    
                                    1.09Outstanding
      at March 31, 2010
                                    
                                    
                                    197,500
                                    
                                    
                                    $
                                    3.32
                                    
                                    
                                    $
                                    1.67
                                    
                                    
                                    
                                    2.75
                                    
                                    
                                    $
                                    29Exercisable
      at March 31, 2010
                                    
                                    
                                    164,500
                                    
                                    
                                    $
                                    3.99
                                    
                                    
                                    $
                                    1.10
                                    
                                    
                                    
                                    1.63
                                    
                                    
                                    $
                                    −





No
stock options were exercised during the year ended March 31, 2009 and March 31,
2010.





18.
            STOCK
      COMPENSATION





The
Company entered into an employment contract with the Company's Chief Executive
Officer 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 officer in 2008 and 2009, and the Company recorded a
compensation expense of $160 for each of the years ended March 31, 2008 and
2009, based on the fair value of the shares granted as of April 1, 2004, which
is included in selling, general and administrative expenses. No such shares were
issued, nor was such compensation expense recorded for the year ended March 31,
2010.




19.
            RELATED PARTY
      TRANSACTION





Pursuant
to an agreement dated November 18, 2009, the Company transferred 19% financial
interest in Kayser Wuxi to Mr. You Ming for no consideration. Mr. You Ming held
10% financial interest in Kayser Wuxi immediately prior to such agreement, and
is the legal representative and a key employee of Kayser Wuxi. The Company has
assessed and concluded that any fair value attributable to the 19% financial
interest transferred to Mr. You Ming would be insignificant. As a result of such
transfer, the Company holds 71% financial interest in Kayser Wuxi whilst Mr. You
Ming holds the remaining 29%.




F-28





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





20.
            SEGMENT
      INFORMATION





The
Company's chief operating decision maker evaluates segment performance and
allocates resources based on several factors, of which the primary financial
measure is operating income.





During
the year ended March 31, 2009, there was a change to the internal financial
reporting information to the Company’s chief operating decision maker leading to
a change in the Company's operating segments from four segments (Metal
stamping and mechanical OEM; Electric OEM; Cameras and underwater products; and
Clocks and watches) to two segments (Metal stamping and mechanical OEM; and
Electric OEM).  Amounts for fiscal year 2008 have been restated to
conform to current management view.  Intersegment sales arise from
transfer of goods between subsidiaries.  These sales are generally at
price consistent with what the Company would charge third parties for similar
goods.  A summary of the net sales, profitability information and
asset information by segment and geographical areas is shown below:





Year ended March 31,2008
                                      
                                      
                                      2009
                                      
                                      
                                      2010Net
      sales:Metal
      stamping and Mechanical OEM:Unaffiliated
      customers
                                      
                                      $
                                      23,363
                                      
                                      
                                      $
                                      22,332
                                      
                                      
                                      $
                                      13,922Intersegment
      sales
                                      
                                      
                                      3,278
                                      
                                      
                                      
                                      5,199
                                      
                                      
                                      
                                      6,22026,641
                                      
                                      
                                      
                                      27,531
                                      
                                      
                                      
                                      20,142Electric
      OEM:Unaffiliated
      customers
                                      
                                      
                                      9,801
                                      
                                      
                                      
                                      11,397
                                      
                                      
                                      
                                      7,817Intersegment
      sales
                                      
                                      
                                      1,382
                                      
                                      
                                      
                                      9,380
                                      
                                      
                                      
                                      3,75611,183
                                      
                                      
                                      
                                      20,777
                                      
                                      
                                      
                                      11,573Corporate:Intersegment
      sales
                                      
                                      
                                      344
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Intersegment
      eliminations
                                      
                                      
                                      (5,004
                                      )
                                      
                                      
                                      (14,579
                                      )
                                      
                                      
                                      (9,976
                                      )Total
      net sales
                                      
                                      $
                                      33,164
                                      
                                      
                                      $
                                      33,729
                                      
                                      
                                      $
                                      21,739





F-29





HIGHWAY
HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





20.
            SEGMENT INFORMATION –
      continued





Year ended March 31,2008
                                      
                                      
                                      2009
                                      
                                      
                                      2010Operating
      income (loss):Metal
      stamping and Mechanical OEM
                                      
                                      $
                                      (932
                                      )
                                      
                                      $
                                      889
                                      
                                      
                                      $
                                      448Electric
      OEM
                                      
                                      
                                      (902
                                      )
                                      
                                      
                                      234
                                      
                                      
                                      
                                      20Corporate
                                      
                                      
                                      (443
                                      )
                                      
                                      
                                      (242
                                      )
                                      
                                      
                                      (135
                                      )Total
      operating (loss) income
                                      
                                      $
                                      (2,277
                                      )
                                      
                                      $
                                      881
                                      
                                      
                                      $
                                      333Interest
      expense:Metal
      stamping and Mechanical OEM
                                      
                                      $
                                      210
                                      
                                      
                                      $
                                      126
                                      
                                      
                                      $
                                      35Electric
      OEM
                                      
                                      
                                      15
                                      
                                      
                                      
                                      15
                                      
                                      
                                      
                                      12Total
      interest expense
                                      
                                      $
                                      225
                                      
                                      
                                      $
                                      141
                                      
                                      
                                      $
                                      47Depreciation
      and amortization expense:Metal
      stamping and Mechanical OEM
                                      
                                      $
                                      553
                                      
                                      
                                      $
                                      529
                                      
                                      
                                      $
                                      359Electric
      OEM
                                      
                                      
                                      249
                                      
                                      
                                      
                                      225
                                      
                                      
                                      
                                      260Corporate
                                      
                                      
                                      28
                                      
                                      
                                      
                                      28
                                      
                                      
                                      
                                      16Total
      depreciation and amortization
                                      
                                      $
                                      830
                                      
                                      
                                      $
                                      782
                                      
                                      
                                      $
                                      635Capital
      expenditure:Metal
      stamping and Mechanical OEM
                                      
                                      $
                                      472
                                      
                                      
                                      $
                                      84
                                      
                                      
                                      $
                                      47Electric
      OEM
                                      
                                      
                                      71
                                      
                                      
                                      
                                      20
                                      
                                      
                                      
                                      69Corporate
                                      
                                      
                                      3
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Total
      capital expenditure
                                      
                                      $
                                      546
                                      
                                      
                                      $
                                      104
                                      
                                      
                                      $
                                      116




As of March 31,2009
                            
                            
                            2010Total
      assets:Metal
      stamping and Mechanical OEM
                            
                            $
                            11,157
                            
                            
                            $
                            11,359Electric
      OEM
                            
                            
                            6,628
                            
                            
                            
                            4,949Corporate
                            
                            
                            26
                            
                            
                            
                            44Total
      assets
                            
                            $
                            17,811
                            
                            
                            $
                            16,352





As of March 31,2009
                            
                            
                            2010Long-lived
      assets:Metal
      stamping and Mechanical OEM
                            
                            $
                            1,591
                            
                            
                            $
                            1,292Electric
      OEM
                            
                            
                            1,249
                            
                            
                            
                            759Corporate
                            
                            
                            -
                            
                            
                            
                            -Total
      long-lived assets
                            
                            $
                            2,840
                            
                            
                            $
                            2,051




F-30





HIGHWAY HOLDINGS LIMITED





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
thousands of U.S. dollars, except for shares and per share data)





20.
            SEGMENT INFORMATION –
      continued





All of
the Company’s sales are coordinated through its head office in Hong Kong. The
Company’s sales by geographic destination are analyzed as follows:





Year ended March 31,2008
                              
                              
                              2009
                              
                              
                              2010Net
      sales:Hong
      Kong and China
                              
                              $
                              16,457
                              
                              
                              $
                              14,290
                              
                              
                              $
                              7,584Other
      Asian countries
                              
                              
                              238
                              
                              
                              
                              194
                              
                              
                              
                              943Europe
                              
                              
                              14,426
                              
                              
                              
                              16,031
                              
                              
                              
                              11,738United
      States of America
                              
                              
                              1,960
                              
                              
                              
                              2,949
                              
                              
                              
                              1,152Others
                              
                              
                              83
                              
                              
                              
                              265
                              
                              
                              
                              322$
                              33,164
                              
                              
                              $
                              33,729
                              
                              
                              $
                              21,739





The
locations of the Company's long-lived assets are as follows:





March 31,2009
                              
                              
                              2010Hong
      Kong and China
                              
                              $
                              2,840
                              
                              
                              $
                              2,051$
                              2,840
                              
                              
                              $
                              2,051




21.
            SUBSEQUENT
      EVENT




In April
2010, all of the 37,800 treasury shares of common stock, which had been
outstanding as of March 31, 2010, were retired and cancelled.




F-31