United
      States


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




**FORM
      20-F**




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


or


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





**For
      the fiscal year ended March 31, 2006.**




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


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




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




**Commission
      file number 0-28990**




**HIGHWAY
      HOLDINGS LIMITED**


(Exact
      name of Registrant as specified in its charter)




**British
      Virgin Islands**


(Jurisdiction
      of incorporation or organization)




Suite
      810, Level 8, Landmark North


39
      Lung
      Sum Avenue


Sheung
      Shui


New
      Territories, Hong Kong


(Address
      of principal executive offices)




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




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


Title
      of each class


Common
      Shares, $0.01 par value per share




**Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:
      NONE**




**Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual report.
      3,487,758 Common Shares were outstanding as of March 31, 2006.**




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





**Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x** **No
      o**









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


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




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




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




**If
      this is an annual report, indicate by check mark whether the registrant is
      a
      shell company (as defined in Rule 12b-2 of the Exchange
      Act).**  **Yes o** **No
      x**














**TABLE
      OF CONTENTS**




**PART
                I**
            1Item
                1. Identity of Directors, Senior Management and Advisers
            1Item
                2. Offer Statistics and Expected Timetable
            1Item
                3. Key Information
            1Item
                4. Information on the Company
            14Item
                5. Operating and Financial Review and Prospects
            31Item
                6. Directors, Senior Management and Employees
            42Item
                7. Major Shareholders and Related Party Transactions
            48Item
                8. Financial Information.
            49Item
                9. The Listing
            50Item
                10. Additional Information
            51Item
                11. Quantitative and Qualitative Disclosures About Market
                Risk.
            54Item
                12. Description of Securities Other Than Equity Securities
            56**PART
                II**
            56Item
                13. Defaults, Dividend Arrearages and Delinquencies.
            56Item
                14. Material Modification to the Rights of Securities Holders and
                use of
                Proceeds.
            56Item
                15. Controls and Procedures.
            56Item
                16. Not applicable.
            56Item 16A.
                Audit Committee Financial Expert
            59Item
                16B. Code of Ethics
            60Item
                16C. Principal Accountant Fees and Services
            60Item
                16D. Exemptions From the Listing Standards for Audit
                Committees
            61Item
                16E. Purchase of Equity Securities by the Issuer and Affiliated
                Purchasers
            61**PART
                III**
            58Item
                17. Not applicable
            58Item
                18. Financial statements.
            58Item
                19. Exhibits.
            58








-i-




**FORWARD
      - LOOKING STATEMENTS**




Except
      for any historical information contained herein, the matters discussed in this
      Annual Report on Form 20-F contain certain “forward-looking statements” within
      the meaning of the Private Securities Litigation Reform Act of 1995 with respect
      to our financial condition, results of operation and business. Forward-looking
      statements relate to analyses and other information which are based on forecasts
      of future results and estimates of amounts not yet determinable, including
      statements about our future prospects, developments and business strategies.
      These forward-looking statements are identified by their use of terms and
      phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” and “predict” and similar terms and phrases, including
      references to assumptions. These forward-looking statements involve risks and
      uncertainties that may cause our actual future activities and results of
      operations to be materially different from those suggested or described in
      this
      Annual Report on Form 20-F. These risks include: product demand; customer
      satisfaction and quality issues; labor disputes; competition; health and
      economic factors affecting China and Hong Kong; political relations between
      the
      United States and China; changes in policies by the Chinese government; currency
      exchange rate fluctuations; increased price competition; our ability to achieve
      and execute internal business plans; worldwide political instability and
      economic growth; and the impact of any economic downturns and
      inflation.




If
      one or
      more of these risks or uncertainties materializes, or if underlying assumptions
      prove incorrect, our actual results may vary materially from those expected,
      estimated or projected. Given these uncertainties, users of the information
      included in this Annual Report on Form 20-F, including investors and prospective
      investors are cautioned not to place undue reliance on such forward-looking
      statements. We do not intend to update the forward-looking statements
      included in this Annual Report .




CONVENTIONS




Highway
      Holdings Limited operates through various controlled subsidiaries. Unless the
      context indicates otherwise, all references herein to “the Company” refer
      collectively to Highway Holdings Limited and its subsidiaries. Unless otherwise
      stated, all references to “dollars” or $ are to United States
      dollars.




**PART
      I**




**Item
      1.**  **Identity
      of Directors, Senior Management and Advisers**




Not
      Applicable




**Item
      2.**  **Offer
      Statistics and Expected Timetable** ****




Not
      Applicable




**Item
      3.**  **Key
      Information**




Our
      historical Consolidated Financial Statements are prepared in accordance with
      accounting principles generally accepted in the United States (“GAAP”) and
      presented in United States dollars. The following selected statements of
      operations data for each of the three years in the period ended March 31,
      2006 and the balance sheet data as of March 31, 2005 and 2006 are derived
      from our consolidated financial statements and notes thereto included in this
      Annual Report. The selected statements of operations data for each of the two
      year periods ended March 31, 2002 and 2003 and the balance sheet data as of
      March 31, 2002, 2003 and 2004 were derived from our audited financial
      statements, which are not included in this Annual Report. The selected
      information is qualified in its entirety by reference to, and should be read
      in
      conjunction with, such consolidated financial statements, related notes and
      “Operating and Financial Review and Prospects” included as Item 5 in this
      report.




-1-


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




2002
            
            2003
            
            2004
            
            2005
            
            2006Statement
                of OperationsNet
                sales
            
            $
            19,432
            
            $
            20,370
            
            $
            25,356
            
            $
            27,678
            
            $
            25,843Gross
                profit
            
            
            3,384
            
            
            3,882
            
            
            5,094
            
            
            5,130
            
            
            4,243Operating
                income (loss)
            
            
            (241
            )
            
            159
            
            
            875
            
            
            (269
            )
            
            602Net
                income (loss)
            
            
            (231
            )
            
            485
            
            
            982
            
            
            (152
            )
            
            42Dividend
                declared and paid(1)
            
            
            0
            
            
            0
            
            
            237
            
            
            323
            
            
            1,389Per
                share amountsNet
                income (loss)-basic
            
            $
            (0.08
            )
            $
            0.17
            
            $
            0.32
            
            $
            (0.05
            )
            $
            0.01Net
                income (loss)-diluted
            
            $
            (0.08
            )
            $
            0.17
            
            $
            0.30
            
            $
            (0.05
            )
            $
            0.01Dividend
                declared & paid(1)
            
            
            0
            
            
            0
            
            
            0.08
            
            
            0.10
            
            
            0.40Weighted
                average shares:Basic
            
            
            2,904
            
            
            2,902
            
            
            3,030
            
            
            3,260
            
            
            3,465Diluted
            
            
            2,904
            
            
            2,902
            
            
            3,258
            
            
            3,260
            
            
            3,544Balance
                Sheet DataProperty,
                plant and equipment, net
            
            $
            4,243
            
            $
            3,657
            
            $
            3,780
            
            $
            3,473
            
            $
            2,787Working
                capital
            
            
            6,716
            
            
            7,753
            
            
            8,774
            
            
            9,850
            
            
            9,960Total
                assets
            
            
            15,701
            
            
            16,494
            
            
            18,688
            
            
            20,100
            
            
            18,891Long
                term debt
            
            
            112
            
            
            230
            
            
            385
            
            
            967
            
            
            803Shareholders’
                equity
            
            
            11,466
            
            
            11,907
            
            
            12,842
            
            
            13,058
            
            
            12,274


____________


(1)
            Dividends
                declared for all periods were declared as cash
                dividends.





**RISK
      FACTORS**




The
      Company’s business and operations involve numerous risks, some of which are
      beyond the Company’s control, that may affect future results and the market
      price of the Company’s Common Shares. The following discussion highlights some
      of the risks the Company faces.




-2-


*Risks
      Relating to Operating in China*




*Dependence
      on Agreements with Chinese State-Owned Enterprises* .
      All of
      the Company’s operations are currently dependent on its manufacturing operations
      conducted at three facilities in China. The principal facility, at which over
      85% of the Company’s operations were conducted during the fiscal year ended
      March 31, 2006, is located in Long Hua, Shenzhen, China. Pursuant to its six
      leases (the “Premises Leases”), the Company utilizes approximately 450,000
      square feet of space for manufacturing operations and dormitory facilities
      at
      the site of its principal factory complex in Long Hua, Shenzhen. The Company’s
      operations in Long Hua, Shenzhen, are conducted pursuant to agreements entered
      into between certain China companies set up by the local government and the
      Shenzhen City Baoan District Foreign Economic Development Head Company and
      its
      designees (collectively, the “BFDC”) (the agreements, collectively the “BFDC
      Agreements”). The Premises Leases currently expire on February 28, 2009.
      However, the Premises Leases may be terminated at any time prior to 2009 by
      either the Company or the landlord upon six months notice to the other party.
      Should the landlord elect to terminate the Premises Leases before 2009, or
      should the Premises Lease be terminated for any other reason, the entire
      operations of the Company would have to be relocated to other facilities. Any
      such relocation would be costly and would disrupt the Company’s operations. Any
      unplanned termination by the landlord would have a severe adverse affect on
      the
      Company, its operations, its viability and its financial condition. While the
      Company believes that it could find suitable alternative facilities, the terms
      of such alternate facilities could be less favorable to the Company. Any
      contractual dispute under either of the BFDC Agreements or the Premises Leases
      could have a material adverse affect on the Company’s operations and financial
      condition. Although the Company currently is considering relocating its
      principal facilities from Long Hua, Shenzhen, to one or more alternative sites,
      the Company currently is still dependent on its principal facilities, and any
      disruption of its lease arrangements at its Long Hua, Shenzhen, facilities
      would
      materially, and adversely affect the Company.




To
      facilitate the Company’s operations in Long Hua, Shenzhen, the local government
      initially set up three separate China companies that are parties to the BFDC
      Agreements. The term of two of these agreements have been extended with the
      remaining two China companies, and these two agreements now expire in 2016
      (by
      the mutual consent of the parties, the third agreement with the local government
      agency was retired during the past year). The BFDC is owned by the local
      government of Long Hua, the town in which the factory is located. Pursuant
      to
      the BFDC Agreements, the BFDC is the party responsible for providing
      manufacturing facilities and supplying workers to the Company and the Company
      is
      responsible for paying a management fee, and certain other charges to the BFDC.
      As a result of structuring its operations so that they are conducted pursuant
      to
      the BFDC Agreements and the Premises Leases, the Company’s operations in Long
      Hua, Shenzhen, are not subject to certain rules and regulations that would
      be
      imposed on entities which are considered under China law to be doing business
      in
      China by utilizing other business structures such as joint ventures or wholly
      owned subsidiaries organized in China. For example, the Company has not been
      required to apply for permits or licenses in China or to register to do business
      in China. Should there be any adverse change in the Company’s dealings with the
      BFDC, or should the local or federal government change the rules under which
      the
      Company currently operates, all of the Company’s operations and assets could be
      jeopardized.




-3-


To
      date,
      the Company and the BFDC have been dealing with each other on terms different
      in
      certain respects than those contained in the BFDC Agreements. There can be
      no
      assurance that the BFDC will not insist upon a change in the current practices
      so as to require adherence to the terms of the BFDC Agreements, which the
      Company considers less favorable to it than the practices currently in effect,
      or that the Company or BFDC may not be required to do so by the Ministry of
      Foreign Trade and Economic Co-operation of China and other relevant authorities.
      There can also be no assurances that the Company will be able to negotiate
      extensions and further supplements to any of the BFDC Agreements or that the
      Company will be able to continue its operations in China. If the Company were
      required to adhere to the terms of the BFDC Agreements, the Company’s business
      and results of operations could be materially and adversely affected.




The
      BFDC
      Agreements and the Premises Leases are dependent on the Company’s continuing
      good relationship with the designees of the local government. In the event
      of a
      dispute involving the BFDC Agreements or the Premises Leases, the current
      arrangement under which the Company conducts its business may be difficult
      to
      enforce in China. The Company’s operations and prospects will be materially and
      adversely affected by the failure of the BFDC or Land & Sun Company to honor
      or extend the current arrangement or renew the BFDC Agreements or the Premises
      Leases, respectively.




In
      connection with its recent establishment of its second facility in China, in
      2005 the Company entered into an agreement with the He Yuan Foreign Trade &
Economy Cooperation Bureau that is similar to the BFDC Agreements. Accordingly,
      the Company is subject to risks at its new He Yuan facility that are similar
      to
      those it faces in Long Hua, Shenzhen.




*Internal
      Political and Other Risks* .
      As of
      the date of this Annual Report, all of the Company’s manufacturing facilities
      are located in China. As a result, the Company’s operations and assets are
      subject to significant political, economic, legal and other uncertainties
      associated with doing business in China. Changes in policies by the Chinese
      government resulting in changes in laws, regulations, or the interpretation
      thereof, confiscatory taxation, restrictions on imports and sources of supply,
      currency re-valuations or the expropriation of private enterprise could
      materially adversely affect the Company. An example of such uncertainty and
      rapid changes was China’s sudden imposition in 2000 on the metals industry of
      the Customs License Deposit, which resulted in the Company being forced to
      pay a
      20% deposit on all imported steel metals. The Customs License Deposit rules
      have
      since been modified and partially repealed.




The
      Chinese government has been pursuing economic reform policies, including the
      encouragement of private economic activity and greater economic
      decentralization. There can be no assurance, however, that the Chinese
      government will continue to pursue such policies, that such policies will be
      successfully pursued, that such policies will not be significantly altered
      from
      time to time, or that business operations in China would not become subject
      to
      the risk of nationalization, which could result in the total loss of investments
      in that country. Economic development may be limited as well by other factors,
      such as the imposition of austerity measures intended to reduce inflation,
      the
      inadequate development of an infrastructure, and the potential unavailability
      of
      adequate transportation, adequate power, adequate water supplies, satisfactory
      roads and communications and raw materials and parts. Certain parts of China,
      including the Company’s facilities in Long Hua, Shenzhen, have in the past and
      recently experienced severe shortages of electricity and water, which could
      negatively affect the Company. During the past fiscal year, the Company has
      experienced both water and electricity shortages, which have caused the Company
      to supplement its electricity needs through its diesel electricity generators.
      If for any reason the Company were required to move its manufacturing operations
      outside of China, the Company’s favorable cost structure could be eliminated,
      its competitiveness and market position would be materially jeopardized, and
      there would be substantial doubt as to whether the Company could continue its
      operations.




-4-


*Further
      Revaluation of Renminbi Yuan.* As a
      company whose operations are entirely based in China, it is exposed to
      fluctuations in the value of the renminbi yuan, or RMB, the local currency
      of
      China. The United States and certain European countries have recently been
      calling for the re-valuation of the RMB, which revaluation would result in
      the
      appreciation of the RMB. In response to the demand for a revaluation of the
      renminbi, in 2005 the Chinese government permitted the RMB to slightly
      appreciate in value. Since a portion of the Company’s costs are also paid in
      RMB, the increase in the value of the RMB resulted in an increase of the
      Company’s operating costs in China. Should the Chinese government allow a
      significant RMB appreciation, the Company’s cost structure and pricing could
      change and have a material negative effect on its operations, sales and
      financial results.




*Possible
      Reoccurrence of SARS.* During
      2002/2003, Severe Acute Respiratory Syndrome (SARS) became a major world-wide
      health concern. SARS is believed to have originated in China and most SARS
      infections and deaths occurred in China. Because SARS is a highly contagious
      disease, a number of countries and health organizations, including the World
      Health Organization, strongly advised people to avoid traveling to Hong Kong
      or
      the Guangdong province in mainland China. The Company’s principal offices and
      facilities are located in both Hong Kong and in the Guangdong province. While
      SARS did not affect the Company’s workers, the disease did materially and
      adversely affect business in China. Should SARS reoccur in China in the future,
      the Company’s employees and operations could be affected. In addition, the
      Company’s international customers may reduce their contacts and business with
      the Company by shifting their manufacturing needs to manufacturers located
      outside of China or by purchasing products manufactured outside of China. Any
      such future shift of work orders or product purchases from the Company to
      companies based in countries that are not so affected by SARS would have a
      material affect on the Company, its operations, and on its financial condition.




*Uncertain
      Legal System and Application of Laws* .
      The
      legal system of China is often unclear and is continually evolving, and
      currently there can be no certainty as to the application of its laws and
      regulations in particular instances. China does not have a comprehensive system
      of laws, and the existing regional and local laws are often in conflict and
      subject to inconsistent interpretation, implementation and enforcement. New
      laws
      and changes to existing laws occur quickly and sometimes unpredictably. As
      is
      the case with all businesses operating in China, the Company often is also
      required to comply with informal laws and trade practices imposed by local
      and
      regional administrators. Local taxes and other charges are levied depending
      on
      the local needs for tax revenues and may not be predictable or evenly applied.
      These local and regional taxes/charges and governmentally imposed business
      practices often affect the Company’s cost of doing business and require the
      Company to constantly modify its business methods to both comply with these
      local rules and to lessen the financial impact and operational interference
      of
      such policies. For example, the Company and other companies have periodically
      been taxed on foreign currency bank transfers, which taxes can be substantial.
      In addition, it is often extremely burdensome for businesses to comply with
      some
      of the local and regional laws and regulations. As a result, with the general
      knowledge and tacit approval of the local and regional agencies, most businesses
      fail to fully comply with certain of these more burdensome laws and regulations.
      Recently, however, the local and regional agencies have increasingly enforced
      rules that previously were not enforced, thereby increasing the burden on the
      Company and the other businesses operating in the region. While the Company
      has,
      to date, been able to operate with the newly enforced rules and within these
      changing administratively imposed business practices, no assurance can be given
      that it will continue to be able to do so in the future. Should the local or
      regional governments or administrators impose new practices or levies that
      the
      Company cannot effectively respond to, or should the administrators continue
      to
      enforce more of those rules that they have not previously enforced, the
      Company’s operations and financial condition could be materially and adversely
      impacted. The Company’s ability to appeal many of the local and regionally
      imposed law and regulations is limited, and the Company may not be able to
      seek
      adequate redress for laws that materially damage its business. The Chinese
      judiciary is relatively inexperienced in enforcing the laws that exist, leading
      to a higher than usual degree of uncertainty as to the outcome of any
      litigation. Even where adequate laws do exist in China, it may not be possible
      to obtain swift and equitable enforcement of that law.




-5-


*Current
      Favorable Tax Policy Could Change* .
      Under
      the BFDC Agreements, the Company is not considered by local tax authorities
      to
      be doing business in China; therefore, the Company’s activities in China have
      not been subject to local taxes on its operations. The BFDC is responsible
      for
      paying its own taxes incurred as a result of its operations under the BFDC
      Agreements. Since the Company reimburses the BFDC for its expenses related
      to
      the Company’s activities in China, the Company indirectly pays some taxes on its
      operations. There can be no assurances, however, that the Company will not
      be
      subject to direct taxation on its operations in the future. If China did impose
      a direct tax upon the Company, the tax could materially adversely affect the
      Company’s business and results of operations. See Note 3 of Consolidated
      Financial Statements for additional information on taxation.




*Recent
      Turbulent Relations with the United States* .
      Relations between the U.S. and China have during the past few years been
      strained as a result of numerous events, including the demands by the United
      States that China permit the RMB exchange rate to fluctuate, China’s opposition
      to the U.S. war in Iraq in 2003, the strained relations between the U.S. and
      North Korea (a neighbor of China), the continuous support by the U.S. of Taiwan,
      and the continuous allegations by the U.S. of human rights abuses in China.
      In
      addition, the U.S. and China have recently been involved in controversies over
      the protection in China of intellectual property rights that threatened a trade
      war between the countries. These strains on U.S./China relations could affect
      the ability of companies operating in China, such as the Company, from engaging
      in business with, or selling to the U.S. or U.S. companies. Any disruption
      of
      the current trade relations with the U.S. could have a material adverse effect
      on the Company’s business. No assurance can be given that these and any other
      future controversies will not change the status quo involving peaceful trade
      relations between the U.S. and China, or that the Company’s business and
      operations in China will not be materially and adversely affected. Even if
      trade
      relations between the U.S. and China are not affected by political difficulties
      between the two countries, such political friction could adversely affect the
      prevailing market price for the Company’s Common Shares.




-6-


*Labor
      Shortages* .
      One of
      the principal economic advantages of locating the Company’s operations in China
      has been the availability of low cost labor. Due to the enormous growth in
      manufacturing in China and the effects of China’s one-child policy, the Company
      has recently experienced some difficulty in filling its labor needs. In addition
      to making labor more difficult to obtain, the shortage of low-cost labor could
      also force the Company to increase its wages, thereby negatively affecting
      its
      cost advantage. In order to address the increase in labor costs in Long Hua,
      Shenzhen, the Company has been exploring opening one or more alternative
      locations for its manufacturing facilities in areas that have lower labor costs.
      In 2005 the Company established a new, smaller facility in He Yuan, a nearby
      county. In addition to the recently developing tight labor market, the Company
      has also been affected by cyclical trends and other shortages in labor supply.
      For approximately two months each year, there are labor shortages in China
      as a
      result of the Chinese New Year during which time the Company follows the
      customary practice at its factory complex of temporarily discontinuing
      operations. In addition, the availability of labor is also restricted during
      the
      harvest periods of the year. There is also a large turnover of employees in
      China each year, particularly following the Chinese New Year holiday. The
      Company has experienced labor shortages in the past as a result of road and
      weather conditions and natural disasters. Any material or prolonged shortage
      of
      labor would have a material adverse effect on the Company’s results of
      operations.




*Risks
      Related to Operations*




*Significant
      Financial and Operational Risks Related To The Current Restructuring of the
      Company’s Business Segments.* During
      the fiscal year ended March 31, 2006, the Company completed a major
      restructuring of its operations. As a result of the restructuring, the Company
      has exited its low-margin single-use camera operations, has stopped making
      clocks and watches for its own account, has sold its “Kienzle” trademark, and
      has ceased its “Kienzle” brandname product sales operations. As a result, the
      Company currently is focused on exploiting its manufacturing and design
      capabilities by primarily becoming an original equipment manufacturer (an
“OEM”). The foregoing restructuring significantly, and negatively, impacted the
      Company’s revenues and net income for the fiscal year ended March 31, 2006.
      Although the Company believes that the restructuring of its operations (and
      the
      exiting of unprofitable operations) will, in the long-term, improve the
      Company’s overall operations, profitability and financial condition, in the
      short-term these actions could continue to have a negative affect on its
      operations and financial condition. No assurance can be given that the recent
      changes in its business will improve the Company’s future
      profitability.




In
      addition to the restructuring and change in operations that the Company recently
      completed, it will, in the future, also have to react to the continuously
      changing manufacturing market. The failure to anticipate, detect or react to
      market changes can have severe adverse affects on the Company’s operations. No
      assurance can be given that the Company will be able to detect and correctly
      react to other future changes in its principal markets, or that its investments
      in anticipation of such changes will result in the anticipated return. Should
      the Company incorrectly react to market changes, its business, operations and
      financial condition could be adversely affected.




-7-


*The
      Company is Increasingly Financially Dependent Upon a Few Major Customer.* Historically,
      a substantial percentage of the Company’s sales has been to small number of
      customers. The Company’s current business plan calls for reducing the number of
      smaller clients and shifting the Company’s sales and operations to a fewer,
      large customers. During the years ended March 31, 2004, 2005 and 2006, the
      Company’s sales to its three largest customers for such periods accounted for
      approximately 46.1%, 43.9% and 51.3% of net sales respectively. See
“Business — Major
      Customers.” The Company’s success will depend to a significant extent on
      maintaining its major customers and on the success achieved by its major
      customers. The Company could be materially adversely affected if it loses any
      major customers or if the business and operations of its major customers
      decreases. While the Company has in the past been able to replace major
      customers, no assurance can be given that the Company will be able to do so
      in
      the future. Since most of the Company’s sales transactions with its customers
      are based on purchase orders received by the Company from time to time, the
      Company is to a large extent dependent upon continuously receiving new purchase
      orders for its future sales. As a result, most of the Company’s revenues are
      dependent upon periodic orders and the amount of sales to its customers
      fluctuate from time to time. In addition, with fewer, larger customers, the
      Company’s operations have become more dependent upon fewer customers and would
      be more significantly impacted by a delay or reduction of any anticipated
      purchase orders or by the loss of any one or more of its major customers.




In
      addition to its increasing dependence on generating revenues from fewer, larger
      customers, the Company’s risk exposure to the collection of its accounts
      receivable likewise is increasing as the size of receivables from individual
      clients increases. A substantial portion of the Company’s sales to its major
      customers are made on credit, which exposes the Company to the risk of
      significant revenue loss if a major customer is unable to honor its credit
      obligations to the Company. Any material delay in being paid by its larger
      customers, or any default by a major customer on its obligations to the Company
      would significantly and adversely affect the Company’s liquidity. During the
      fiscal years ended March 31, 2004, 2005 and 2006, accounts receivable from
      the
      five customers with the largest receivable balances at year-end represented
      61.5%, 67.4% and 76.6% of the total outstanding receivables, and the largest
      customer’s accounts receivable represented 32.1% of the Company’s total
      receivables as of March 31, 2006.




*The
      Company Faces Significant Competition From Numerous Larger, Better Capitalized,
      and International Competitors* The
      Company competes against numerous manufacturers for all of its current products.
      Such competition arises from both third party manufacturers (such as the
      Company) and from the in – house
      manufacturing capabilities of existing customers. To a large extent, the Company
      competes in its OEM business on the basis of quality, price, service, and the
      ability to deliver products on a reliable basis. Due to intense price
      competition, the Company has at times during the past few years had to reduce
      its price and its operating margins. In addition, because of significant
      competition and the availability of alternate OEM suppliers for the Company’s
      customers, the Company has, at times, been unable to pass through significant
      materials cost increases. This has led to lower sales for some products, lower
      gross margins, and even to net losses in some product lines. During the past
      few
      years, the Company has at times refused certain purchase orders of manufacturing
      contracts because of pricing pressures, which has lowered the Company’s net
      sales and lowered its market share. The Company will continue to operate at
      very
      narrow profit margins, which could jeopardize the Company’s financial position.




-8-


Since
      locating its facilities in Shenzhen, China, in 1991, the Company has been able
      to compete with other manufacturers based its cost of operations in Shenzhen,
      the availability of a large labor pool, its favorable tax status, and its
      convenient access to Hong Kong’s shipping port and business/banking facilities.
      Since the Company first moved to Shenzhen as one of the first manufacturers
      in
      that locality, however, many other manufacturers have re-located or established
      new facilities in Shenzhen, and the Company’s competitive advantage has been
      significantly diminished. In addition, many of the larger, international
      companies that have established competing facilities in Shenzhen have also
      established manufacturing facilities in other low-cost manufacturing locations,
      many located sites outside of China, which have given those competitors the
      ability to shift their manufacturing to those locations whenever costs at those
      other locations was cheaper than in Shenzhen. Accordingly, the Company has
      indirectly been competing against both the competitors in Shenzhen as well
      as
      the other facilities outside of China. No assurance can be given that the
      Company will continue to be able to compete effectively in its principal
      businesses.




*Dependence
      on Single China Factory Complex* .
      Until
      the recent establishment of a new manufacturing facility in July 2005 in He
      Yuan, China, and the formation of a small manufacturing facility in Wuxi, China,
      in December, 2005, all of the Company’s products were manufactured at a single
      factory complex located in Long Hua, Shenzhen in southern China. However,
      despite the new He Yuan and Wuxi sites, over 85% of the Company’s estimated
      operations for the current fiscal year ending March 31, 2007 are expected to
      be
      generated from the Shenzhen facility (the new Wuxi facility did not impact
      the
      financial results for the fiscal year ended March 31, 2006 because its
      operations had not commenced, but operations at that new facility are expected
      to commence during in the current fiscal year ending March 31, 2007).
      Accordingly, the Company is still dependent upon its principal Shenzhen facility
      and will remain so despite the two new facilities. The Company currently
      maintains fire, casualty and theft insurance aggregating approximately
      $20,000,000 covering various of its stock in trade goods and merchandize,
      furniture and equipment in China. The proceeds of this insurance may not be
      sufficient to cover material damage to, or, the loss of, all or material
      portions of the factory complex due to fire, severe weather, flood, or other
      act
      of God or cause, and such damage or loss would have a material adverse effect
      on
      the Company’s financial condition, business and prospects. Although the Company
      has diversified its operations with the new He Yuan and Wuxi facilities, the
      Company will continue to be principally dependent upon the Long Hua in the
      near
      future.




*The
      Company’s Operations May be Significantly Disrupted and Negatively Affected if
      The Company Relocates its Manufacturing Facilities.* The
      Company regularly evaluates the desirability of relocating its facilities to
      a
      new facility, either elsewhere in, or outside of Long Hua, Shenzhen. In
      addition, under its current leases, the Company’s landlord has the right to
      force the Company to depart from its current facilities on six month’s notice.
      If the Company does relocate its facilities (voluntarily or otherwise), its
      entire operations, including its business, its manufacturing operations, and
      its
      relationships with clients and local government offices and landlords, could
      be
      adversely affected by while the Company disassembles, moves and reinstalls
      its
      equipment and manufacturing capabilities. Any such disruption could affect
      the
      Company’s relationship with its vendors and customers. In addition, the Company
      would incur significant expenses in relocating its entire facilities. All of
      the
      foregoing factors related to any relocation are expected to negatively impact
      the Company’s revenues and financial position during the fiscal year(s) in which
      the relocation occurs.




-9-


*Fluctuation
      in Foreign Currency Exchange Rates* Because
      the Company engages in international trade, the Company is subject to the risks
      of foreign currency exchange rate fluctuations. In prior years, the Company’s
      exposure to currency fluctuations was limited because most of its sales were
      denominated in either U.S. or Hong Kong dollars. However, as a result of its
      increasing sales to European customers, which sales are paid in euros, the
      Company is exposed to the risks associated with possible foreign currency
      controls, currency exchange rate fluctuations or devaluations. The Company’s
      financial results have, from time to time, been affected by currency
      fluctuations. For example, during the fiscal years ended March 31, 2004 and
      2005, the Company recognized net foreign currency exchange gains of $278,000
      and
      $249,000, respectively. However, foreign currency exchange rates can also result
      in material losses. For example, for the fiscal year ended March 31, 2006,
      the
      Company recognized a net foreign currency exchange loss for $614,000.
      Notwithstanding these currency conversion rate fluctuations, the Company does
      not attempt to hedge its currency exchange risks and, therefore, will continue
      to experience gains or losses due to changes in foreign currency exchange rates.
      However, even if the Company were to engage in currency hedging transactions,
      no
      assurance can be given that the Company will not suffer future losses as a
      result of either currency fluctuations or as a result of such hedging
      transactions.




*Significant
      Worldwide Political, Economic, Legal And Other Risks Related To International
      Operations.* The
      Company is incorporated in the British Virgin Islands and has subsidiaries
      incorporated in Hong Kong and Germany. The Company’s executive and
      administrative offices are located in Hong Kong. All of the Company’s products
      are manufactured in China, and almost all of its net book value of its total
      fixed assets is located in China. The Company sells its products to customers
      in
      Hong Kong, North America, Europe, and Japan. As a result, its international
      operations are subject to significant political and economic risks and legal
      uncertainties, including changes in international and domestic customs
      regulations, changes in tariffs, trade restrictions, trade agreements and
      taxation, changes in economic and political conditions and in governmental
      policies, difficulties in managing or overseeing foreign operations, and wars,
      civil unrest, acts of terrorism and other conflicts. The occurrence or
      consequences of any of these factors may restrict the Company’s ability to
      operate in the affected region and decrease the profitability of our operations
      in that region.




*The
      New ROHS Regulations May Affect Our Operations And Expose Us To
      Liability* .




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




-10-


*Risks
      Relating to Hong Kong*




*Political
      and Economic Developments Affecting Hong Kong* .
      The
      Company’s registered offices and sales offices and several of its principal
      customers and suppliers are located in Hong Kong. Accordingly, the Company
      may
      be materially adversely affected by factors affecting Hong Kong’s political
      situation and its economy or its international, political and economic
      relations. Pursuant to a Joint Declaration (the “Joint Declaration”) signed
      between the governments of China and Britain on December 19, 1984, China
      recovered sovereignty over Hong Kong on July 1, 1997. The Joint Declaration
      provides Hong Kong with a high degree of legislative, judicial and economic
      autonomy (except in foreign and defense affairs) and the laws currently in
      force
      in Hong Kong have remained basically unchanged (the Joint Declaration
      contemplates that the policies expressed therein will remain in effect for
      a
      period of at least fifty (50) years from July 1, 1997), there can be no
      assurance as to the continued stability of political, economic or commercial
      conditions in Hong Kong and that the Company’s financial conditions and results
      of operations will not be adversely affected as a consequence of these
      events.




A
      substantial portion of the Company’s net sales and expenses are denominated in
      the Hong Kong monetary unit, the Hong Kong dollar. Since 1983, the exchange
      rate
      between Hong Kong dollar and the U.S. dollar has been fixed at approximately
      HK$7.78 to $1.00. However, due to the currency turmoil that has affected many
      countries in Southeast Asia, there has been pressure to devalue the Hong Kong
      dollar. All dollar amounts (“$”) set forth in this Annual Report are in U.S.
      dollars. The peg of the Hong Kong dollar to the U.S. dollar has remained and
      been defended by the Hong Kong Special Administrative Region Government. While
      the Hong Kong Government has indicated that it has no plans to break the peg
      with the U.S. dollars, no assurances can be given that this will remain so
      in
      the future. The Company incurs its major expenses in Hong Kong dollars and
      in
      China’s renminbi and generates its revenue’s primarily in U.S. dollars and would
      therefore benefit from depreciation of the Hong Kong dollar or renminbi.
      However, an appreciation of the renminbi (as occurred in 2005) or Hong Kong
      dollar against the U.S. dollar would increase the expenses of the Company when
      translated into U.S. dollars and could adversely affect profit margins. There
      can be no assurance that the exchange rate of the Hong Kong dollar will not
      fluctuate in the future and that such fluctuations will not have a materially
      adverse effect on the Company’s business and results of operations.




-11-


*Certain
      Legal Consequences of Incorporation in the British Virgin
      Islands*




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




Further,
      pursuant to the Company’s Memorandum and Articles of Association and pursuant to
      the laws of the British Virgin Islands, the Company Memorandum and Articles
      of
      Association may be amended by the board of directors without shareholder
      approval (provided that a majority of the Company’s independent directors do not
      vote against such amendment). Amendments which may be made by the board of
      directors without shareholder approval include amendments increasing or reducing
      the authorized capital stock of the Company and increasing or reducing the
      par
      value of its securities.




*Risks
      Associated With An Investment in the Company’s Securities*




*Volatility
      Of Market Price Of the Company’s Shares.* The
      markets for equity securities have been volatile and the price of the Company’s
      Common Shares has been and could continue to be subject to material fluctuations
      in response to quarter to quarter variations in operating results, news
      announcements, trading volume, sales of Common Shares by officers, directors
      and
      principal shareholders of the Company, news issued from competing companies,
      customers, suppliers or other publicly traded companies, general market trends
      both domestically and internationally, currency movements and interest rate
      fluctuations. Certain events, such as the issuance of Common Shares upon the
      exercise of outstanding stock options of the Company could also adversely affect
      the prevailing market prices of the Company’s securities.




*Exemptions
      Under The Exchange Act As A Foreign Private Issuer* .
      The
      Company is a foreign private issuer within the meaning of rules promulgated
      under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). As such,
      and though its Common Shares are registered under Section 12(g) of the Exchange
      Act, it is exempt from certain provisions of the Exchange Act applicable to
      United States public companies including: the rules under the Exchange Act
      requiring the filing with the Commission of quarterly reports on Form 10-Q
      or
      current reports on Form 8-K; the sections of the Exchange Act regulating the
      solicitation of proxies, consents or authorizations with respect to a security
      registered under the Exchange Act; the sections of the Exchange Act requiring
      insiders to file public reports of their stock ownership and trading activities
      and establishing insider liability for profits realized from any “short-swing”
trading transaction (i.e., a purchase and sale, or sale and purchase, of the
      issuer’s equity securities within six months or less), and the provisions of
      Regulation FD aimed at preventing issuers from making selective disclosures
      of material information. In addition, certain provisions of the Sarbanes-Oxley
      Act of 2002 either do not apply to the Company or the implementation of the
      provisions has been deferred. Because of the exemptions under the Exchange
      Act
      and Sarbanes-Oxley Act applicable to foreign private issuers, shareholders
      of
      the Company are not afforded the same protections or information generally
      available to investors in public companies organized in the United
      States.




-12-


*Failure
      to establish and maintain effective internal controls over financial reporting
      could have a material and adverse effect on the accuracy in reporting our
      financial results or preventing fraud.*  We
      are
      subject to the reporting obligations under the U.S. securities laws. The SEC,
      as
      required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules
      requiring public companies to include a report of management on the
      effectiveness of such companies’ internal control over financial reporting in
      its annual report.  In
      addition, an independent registered public accounting firm for a public company
      must attest to and report on management’s assessment of the effectiveness of our
      company’s internal control over financial reporting.  These
      requirements will first apply to our annual report on Form 20-F for the fiscal
      year ending March 31,
      200 7 .
      Management may not conclude that our internal control over financial reporting
      is effective. Moreover, even if our management concludes that our internal
      control over financial reporting is effective, our independent registered public
      accounting firm may still decline to attest to our management’s assessment or
      may issue a report that is qualified if such firm is not satisfied with our
      internal control over financial reporting or the level at which our controls
      are
      documented, designed, operated or reviewed, or if such firm interprets the
      relevant requirements differently from us. In addition, during the course of
      such evaluation, documentation and testing, we may identify deficiencies which
      we 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 our business and negatively impact the trading price
      of
      the company’s common shares.




*The
      Financial Costs and Administrative Burdens of Implementing The Sarbanes-Oxley
      Act of 2002 Could Materially and Adversely Affect Our Financial Results and
      Financial Condition.* To date,
      the Company has been exempted from some of the regulations under the
      Sarbanes-Oxley Act of 2002 that are applicable to U.S. public companies. Except
      for the provisions of Section 404 of the Sarbanes-Oxley Act, all of the
      provisions of that act that will apply to the Company must now be implemented.
      These rules require the Company to make a number of changes in some of its
      corporate governance, securities disclosure and compliance practices. In
      addition, in response to the requirements of the Sarbanes-Oxley Act, the Nasdaq
      Stock Market has also promulgated new rules on a variety of subjects. Compliance
      with all of these new rules imposed by the SEC and by the Nasdaq Stock Market
      as
      well as the Sarbanes-Oxley Act of 2002 will significantly increase the Company’s
      legal, financial and accounting costs, and the Company expects these increased
      costs to continue in the future.




-13-


**Item
      4.**  **Information
      on the Company**




**History
      and Development of the Company.**




Highway
      Holdings Limited is a holding corporation that was incorporated on July 20,
      1990
      as a limited liability International Business Company under the laws of the
      British Virgin Islands. The Company’s corporate administrative matters are
      conducted in the British Virgin Islands through its registered agent: HWR
      Services Limited, P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British
      Virgin Islands. The Company’s principal executive offices are located in Hong
      Kong at Suite No. 810, Level 8, Landmark North, Sheung Shui, New Territories,
      Hong Kong. Highway Holdings Limited currently operates through six active
      controlled subsidiaries.




The
      Company began its operations in 1990 in Hong Kong as a metal stamping company.
      In 1991, the Company transferred the metal stamping operations to a factory
      in
      Long Hua, Shenzhen, China, where the metal stamping and the Company’s other
      operations have been conducted pursuant to agreements entered into between
      certain China companies set up by the local government and the Shenzhen City
      Baoan District Foreign Economic Development Head Company and its designees
      (collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”).
      As a result of the BFDC Agreements, the Company is provided with manufacturing
      facilities and labor by affiliates of local government instrumentalities, for
      which the Company pays management fees, based on a negotiated sum per factory
      worker, and other charges, as well as rent for the factory complex.




Since
      its
      organization in 1990, the Company has primarily been a manufacturer of high
      quality metal parts for major Japanese and German OEMs. The Company’s metal
      stamping capabilities have, however, over the years been supplemented with
      additional manufacturing and assembly capabilities, such as the ability to
      manufacture and assemble plastic, electronic and electrical parts and products.
      As a result, the Company has evolved from a company that was only engaged in
      manufacturing simple metal parts to a company that has the capabilities to
      manufacture and assemble larger complex components, subsystems, subassemblies
      and even entire products for its OEM clients. The metal manufacturing operations
      have, since the formation of the Company, always been the largest segment of
      the
      Company’s business and have generated most of the revenues for the
      Company.




After
      establishing its metal manufacturing operations, the Company in 1991 began
      its
      camera manufacturing business by acquiring the Hi-Lite Camera Company, a Hong
      Kong camera company. The Company’s camera operations consisted primarily of
      manufacturing 35mm cameras and recycling single-use cameras. The Company mainly
      manufactured cameras for distribution in Europe, the United States and Hong
      Kong. As a result of the advent and massive proliferation during the past few
      years of digital cameras and mobile telephones with photographic capabilities,
      demand for the Company’s film-based cameras dramatically decreased. Camera sales
      during the three years ended March 31, 2004, 2005, and 2006 accounted for 23.6%,
      13.8%, 5.7% of net sales, respectively. Accordingly, as discussed below, during
      the past 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), but revenues from
      such
      products are no longer expected to contribute significantly to the Company’s
      overall operations.




-14-


In
      1997,
      the Company purchased substantially all the assets of Kienzle Uhrenfabrik GmbH
      ( “ Kienzle
      Uhren ” ),
      a
      clock and watch manufacturer that traces its origin back to 1822 in Germany,
      that was at the time in receivership. The purchase included the trademark to
      the
“Kienzle” name and the equipment, machinery, tools, patents and furniture and
      office equipment of Kienzle Uhren. Subsequent to purchasing the equipment,
      the
      assets of Kienzle Uhren were dismantled, packed and shipped from Germany to
      the
      Company ’ s
      facilities in Hong Kong and China. Thereafter, the Company commenced
      manufacturing clocks for third parties for sale under various brand names (such
      as Braun, Swatch, and Casio), as well as clocks for the Company’s own account
      (which clocks were sold under the Company’s own “Kienzle” brand name). During
      the fiscal years ended March 31, 2003 and 2004, the Company has also licensed
      the “Kienzle” mark for use with various other products in Europe, which products
      were manufactured by others. The Company also has been manufacturing and selling
      watches, both under its “Kienzle” brand name and for sale under other labels.
      However, as with the camera operations, the market for clocks and watches has,
      during the past few years, decreased and become extremely price competitive.
      (Revenues from its clock/watch division, excluding revenues derived by the
      clock/watch division for OEM manufacturing of electric and electronic products
      for the Company’s other divisions, decreased annually during the past three
      fiscal years from 16.5% of net sales for the fiscal year ended March 31, 2004,
      to 15.5% for the fiscal year ended March 31, 2005, to 10.2% for the fiscal
      year
      ended March 31, 2006.) 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. As a result of this reorganization, the Company now only
      manufactures clocks and watches on a limited basis as an OEM manufacturer for
      third party clock/watch companies.




**Recent
      Reorganization and Revised Business Strategy**




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




Focus
      on Becoming a Premiere OEM Company .
      The
      principal goal and outcome of the reorganization was to terminate the Company’s
      unprofitable camera and clock/watch manufacturing and marketing operations,
      and
      to shift the Company’s resources and focus primarily to the its profitable
      manufacturing and design operations. Since its organization, the Company’s
      principal and most profitable business segment has been as an OEM manufacturer.
      Its manufacturing capabilities have improved and evolved over the past few
      years, and it is now able to manufacture complete subassemblies and products
      for
      its customers. Unlike most of its smaller competitors in Shenzhen that can
      either (i) only manufacture metal parts or (ii) only manufacture plastic and
      electric parts, the Company has the ability to manufacture and assemble high
      quality components, subassemblies and products that require all of the foregoing
      metal, plastic and electric manufacturing capabilities. The Company believes
      that it should further develop and leverage its multi-disciplinary manufacturing
      strengths, its cost structure, its logistical advantages, its reputation as
      a
      high-quality manufacturer, and its existing relationships with blue chip
      Japanese and European customers to further expand its manufacturing operations.




-15-


The
      Company’s OEM manufacturing business and operations have historically been
      directed primarily at manufacturing and assembling metal parts used in
      subsystems or other products. The Company’s revised business strategy is to use
      the plastics and electrical and electronics manufacturing and assembly
      capabilities that it developed as a clock and camera manufacturer to capture
      more revenues by manufacturing electrical and electronic products and to
      leverage its complete manufacturing capabilities to the manufacture of the
      subsystems, subassemblies, larger components, and even completed end-products
      for its clients. In addition, the Company is attempting to diversify the types
      of products that it manufactures, and, in that context, now manufactures a
      wider
      variety of parts and components for its European OEM customers, including,
      for
      example, electric motors, dishwasher water control assemblies, wireless chimes,
      coils for induction generators, complete lighting fixtures, and friction hinge
      assemblies.




As
      its
      manufacturing capabilities and the quality of its products have improved, the
      Company has attracted larger, more prestigious clients. In order to maintain
      and
      increase the amount of business it conducts with these larger, internationally
      known clients, the Company has been improving its operating capabilities, has
      been improving and upgrading its manufacturing facilities, and has taken steps
      to improve its image as a manufacturer to such clients. In addition, in order
      to
      improve and enhance its systems, in 2002 the Company received its ISO 9001
      quality management system certification, and in 2004 it also received its ISO
      14001 environmental management systems certification.




As
      part
      of restructuring its operations and its focus on its OEM operations, the Company
      continues to invest in, and to explore the use of, new technologies with
      long-term growth potential, and to enhance its technical expertise and
      capabilities in manufacturing finished products. The Company’s goal is to
      eventually become an OEM provider of such newer and technologically advanced
      products, including more complex electric and electronic products. For example,
      the Company has been developing LCD television/computer monitors. The Company
      has manufactured a limited number of these new products and has test marketed
      some of these new products but has, to date, not yet entered into any OEM
      agreements for these television/computer monitors. In addition, during the
      last
      fiscal year the Company has been engaged with one of its major customers in
      certain research and development activities related to new LED components and
      light fixtures. These activities are expected to continue through out the new
      fiscal year and, if successful, may lead to new manufacturing opportunities
      for
      the Company. However, no assurance can be given that the Company will, in fact,
      manufacture any of the new product lines that it is currently evaluating or
      developing.




-16-


Changing
      Market for Clocks and Watches; Underutilization of the “Kienzle”
Trademark .
      The
      Company has been manufacturing clocks, clock movements since its acquisition
      of
      Kienzle Uhren in 1997, and has also recently been manufacturing watches. The
      Company manufactured clock and clock movements on an OEM basis for other clock
      companies, such as Braun and Casio, as well as for its own account as “Kienzle”
products. In addition, the Company has maintained a Kienzle marketing subsidiary
      in Germany for the purpose of selling Kienzle branded clocks and watches in
      Europe. In order to further leverage the “Kienzle” brand name in Germany and
      other parts of Europe, the Company in 2003 entered into a supply and licensing
      agreement with Kienzle AG, then an unaffiliated German distributor. In
      connection with the license agreement (which agreement the Company terminated
      in
      2004), the Company also invested in Kienzle AG (a distributor of products in
      Europe) and became a minority owner of Kienzle AG.




During
      the past few years, the world-wide market for clocks has been shrinking and
      has
      become extremely price competitive. The Company believes that there is an
      industry-wide decline in sales underway, and that numerous clock manufacturers
      are being driven out of business. The Company believes that sales of the sort
      of
      clocks that were manufactured by the Company have been declining worldwide
      during the past few years both in quantity and price. Reasons for these declines
      include the fact that higher quality clocks have a longer useful life and,
      therefore, are not replaced frequently, and the fact that need for clocks is
      being supplanted by other electronic products (such as mobile phone, PDAs,
      etc.)
      that have built in alarm and other clock functions. Some of these low price
      clocks have often been sold, in the opinion of the Company, at prices that
      are
      significantly below the raw materials costs of such clocks. As a consequence,
      the Company’s sales were declining, and the Company’s marketing organization in
      Germany had continuously operated at a loss. The Company believed that it could
      offset these market forces by branding some of the clocks it sold with its
      famous “Kienzle” brandname. However, despite its efforts to exploit the brand
      value of the “Kienzle” trademark, the Company was unable to fully realize on the
      value of that trademark/brandname. As a result of these factors, the Company
      decided to (i) sell all of its rights to the “Kienzle” name, and (ii) terminate
      its unprofitable marketing arm in Germany. During the 12-month period ended
      March 31, 2006, the Company sold all of its rights to the “Kienzle” trademark
      for $2,160,000 and sold its investment in Kienzle AG at a price equal to its
      initial investment. The Company also ended its German marketing operations,
      and
      terminated all but one full-time employee of its German marketing office. The
      only on-going clock/watch operations that the Company currently conducts is
      the
      manufacture of a limited number of clocks and watches on an OEM basis for
      existing clients, such as Braun, Kienzle AG and several other smaller
      customers.




Mobile
      Telephones With Built-In Digital Cameras As Well As Digital Cameras Negatively
      Affected The Company’s Film-Based Camera Operations .
      The
      Company’s camera operations used to consist of the manufacture of (i) reusable
      low-end 35mm cameras, (ii) single-use cameras, and (iii) niche camera products,
      such as the Company’s underwater camera and other accessories for underwater
      cameras. Most of these products were based on traditional film photography.
      During the past few years, however, the sale of digital cameras has increased
      significantly, thereby decreasing the demand for traditional film cameras.
      However, more importantly, the sale and use of mobile telephones that have
      the
      ability to take and transmit digital pictures has exploded, thereby further
      significantly affecting the demand for the Company’s film-based camera products
      and, in particular, for the Company’s single-use cameras. All of the Company’s
      single-use cameras were aimed at the market for convenient, low-end photographic
      products, which market was rapidly being eroded by mobile camera telephones
      that
      provide convenient picture taking functionality at no cost. In addition to
      reducing the demand for film-based cameras, the explosion of digital photography
      also increased the price competition between manufacturers of film-based
      cameras, thereby further reducing the already small gross margins of the
      Company’s film-based camera products.




-17-


Because
      of the dwindling future market prospects for low-end film-based cameras, the
      Company decided to discontinue its single-use camera operations during the
      current fiscal year ending March 31, 2006. As part of exiting the single-use
      camera business, the Company sold most of its inventory of single-use cameras;
      all of the inventory that was not sold by the end of the fiscal year was written
      off as of March 31, 2006. The Company did, however, retain and is still
      continuing to manufacture its niche underwater cameras and products for others
      on an OEM basis. The underwater camera products market represent a small, but
      viable and profitable niche market.




**Business
      Overview**




The
      Company is primarily an integrated manufacturer of high quality metal, plastic
      and electric parts and components for major Japanese, German and United States
      OEMs and contract manufacturers. All of the Company’s manufacturing activities
      are currently conducted at three facilities in China. The Company’s principal,
      and oldest factory complex is located in Long Hua, in Shenzhen, China, at which
      the Company currently employs approximately 1,160 employees in all areas of
      its
      operations. In July 2005, the Company established a new, smaller facility in
      He
      Yuan, China, which commenced operations in November 2005 and currently employs
      about 90 employees in its light fixture manufacturing operations. The He Yuan
      facility was established in order to evaluate the costs, benefits and
      difficulties of operating a large facility at He Yuan. Depending on the outcome
      of the Company’s evaluation of the He Yuan operations, the Company may increase
      its operations at that site and may move some of its Shenzhen operations to
      He
      Yuan. The Company is currently leasing its facilities in He Yuan and is
      considering the purchase of the land-use rights of a 50,000 square meter lot
      in
      He Yuan on which a manufacturing facility could be established. The Company
      has
      made a refundable deposit of $85,000 of the purchase price of this lot. He
      Yuan
      is located about 150 kilometers from the Company’s current site in Long Hua,
      Shenzhen. Both the Shenzhen and He Yuan facility operate under agreements with
      Chinese state-owned enterprises that prohibit the sale by the Company of its
      products directly in the internal Chinese market.




In
      December 2005, the Company also incorporated Kayser (Wuxi) Metal Precision
      Manufacturing Limited, a new subsidiary in Wuxi, China, to manufacture metal
      tools and parts for the internal Chinese market. Unlike the facilities in
      Shenzhen and He Yuan, when fully operational, the Wuxi subsidiary will be able
      to sell its products in China to Chinese purchasers for use in China. The Wuxi
      subsidiary was established to access the growing business opportunities in
      the
      Shanghai region. The Company has been negotiating with the owners of two
      existing manufacturers in Wuxi to have the Company’s Wuxi subsidiary, purchase
      certain of those companies’ assets. If the foregoing purchase of certain assets
      is completed as is currently being negotiated, the owners of the purchased
      assets will obtain an equity interest in Kayser (Wuxi) Metal Precision
      Manufacturing Limited, and that subsidiary will thereafter no longer be
      wholly-owned. Although the terms of the proposed acquisition are not yet known
      and the consummation of the transaction is still not assured, the Company
      currently believes that the acquisition of certain assets of the two
      manufacturers will be completed later in the fiscal year ending March 31,
      2007.




-18-


The
      Company currently manufactures and supplies a wide variety of high quality
      metal, plastic and electric parts, components and products to its OEM clients,
      which products are used by the Company’s customers in the manufacturing of such
      products as photocopiers, laser printers, compact disc players, laser disc
      players, cassette players, computer equipment, electrical components, electrical
      connectors, cameras, clocks, automobiles, vacuum cleaners, light fixtures and
      car audio and other audio equipment. As part of its manufacturing operations,
      the Company assists customers in the design and development of the tooling
      used
      in the metal manufacturing process and provides a broad array of other
      manufacturing and engineering services. The metal manufacturing services include
      metal stamping, spray painting, screen printing, plastic injection molding,
      pad
      printing and electronic assembly services. The electronic assembly services
      include chip on board assembly, IC-bonding, and SMT automatic components
      assembly of printed circuit boards. Because it is able to provide these
      services, the Company eliminates the need to outsource these needed functions,
      and the Company is better able to assure product quality, control overall
      manufacturing costs and provide timely product delivery, all of which management
      believes is essential to maintaining, expanding and increasing the Company’s
      customer base. The Company believes its historical success as a supplier to
      respected multi-national companies is due in large part to: (i) its
      international management structure which includes Japanese, German and
      Chinese  nationals;
      (ii) its low labor and operating costs resulting from locating its manufacturing
      operations in China; (iii) its ability to consistently manufacture the type
      of
      high quality products required by the Company’s targeted customers; (iv) its
      expertise in manufacturing these products in the required quality at a
      reasonable cost; (v) the unique breadth of its manufacturing capabilities,
      and
      (vi) its engineering design and development capabilities (which it uses to
      assist its customers to design their products).




In
      prior
      years, the Company has continuously tried to strategically align its
      manufacturing operations to attract new OEM clients. For example, the Company
      combined the specialized manufacturing skills and technologies it developed
      for
      its prior clock and camera operations with its metal manufacturing strengths.
      The combination of these capabilities led to orders for more complex products
      from internationally known companies such as Berger Lahr GmbH and Miele &
Cie. KG., for whom the Company manufactures products using a combination of
      metal, electric and plastics manufacturing.




The
      Company believes that its ability to manufacture products using a combination
      of
      metal, electric and plastics components has tempered the competitive pricing
      pressures that have developed during the past few years from the competing
      metal
      manufacturers in Shenzhen. During the past few years, a number of metal
      manufacturers have been established in Shenzhen that are also able to produce
      high-quality, low cost metal parts. As a result, the manufacture of many metal
      parts had become a commodity operation that competes primarily based on price.
      In order to distinguish itself from these other stamping operations, the Company
      therefore adopted a plan in which it shifted its focus from smaller, simple
      metal stamping projects for which the Company competes solely on price, to
      the
      manufacture of more complex parts, components and entire products that utilize
      more of the Company’s vertically integrated technologies. Since the Company has
      the ability to design, manufacture and assemble complete components containing
      metal, plastic and electronics, and not just metal stamped parts, the Company’s
      new focus is on manufacturing more customized products for global companies.
      By
      shifting to the manufacturing of larger, customized products that utilize more
      of the Company’s vertically integrated and multi-disciplinary capabilities, the
      Company believes that it will be able to increase its revenues and while
      maintaining reasonable gross margins. The Company believes that its restructured
      strategy will lead to additional business opportunities to provide manufacturing
      services to certain of its existing clients, such as (i) OSRAM, a subsidiary
      of
      Siemens AG, (ii) Berger Lahr GmbH, a subsidiary of Schneider Electric, (iii)
      major German companies such as Miele & Cie. KG., and (iv) Japanese companies
      such as KEM, an indirect supplier of functional assemblies to IBM lap top
      computers.




-19-


During
      the fiscal year ended March 31, 2006, the Company also manufactures certain
      clocks and clock components on an OEM basis for internationally known clock
      companies, such as Braun of Germany and Casio of Japan. The Company (i) has
      also
      developed, and currently still manufactures, a low cost, fully automatic,
      compact 35mm camera with flash lighting and waterproof housing, which allows
      the
      camera to take photographs underwater in depths of up to 60 feet, (ii) also
      manufactures and markets an underwater single-use camera and underwater products
      for digital camera use, and (iii) manufacturers and markets a variety of
      underwater camera accessories such as waterproof video/flash lights. Neither
      the
      clock/watch sales, nor the camera product sales represent material on-going
      operations of the Company.




**Industry
      Overview**




Management
      believes that the third-party manufacturing industry has experienced major
      increases over the past decade as manufacturers increasingly outsource the
      manufacture of some or all of their component and/or product requirements to
      independent manufacturers. The benefits to OEMs of using contract manufacturers
      include: access to manufacturers in regions with low labor and overhead cost,
      reduced time to market, reduced capital investment, improved inventory
      management, improved purchasing power and improved product quality. The metal
      and electric manufacturing operations of the Company collectively represented
      approximately 59.9%, 70.6% and 84.1% of the Company’s gross revenues during the
      fiscal years ended March 31, 2004, 2005 and 2006, respectively, and have
      historically been the two largest segment of the Company’s business. Since the
      Company has now terminated most of its clock/watch and camera manufacturing
      operations, its OEM manufacturing business is expected to become an even larger
      portion of the Company’s on-going operations in the future.




The
      Company first commenced its metal stamping operations in China in 1990. At
      that
      time, the Company gained a significant cost and logistical advantage over other
      manufacturers by basing its manufacturing facilities in Long Hua, Shenzhen,
      China, less than 30 miles from Hong Kong. During the past few years, however,
      many other manufacturers have located their facilities in Shenzhen and in other
      similar low-cost areas in China and Asia. As a result, the Company now faces
      significantly more competition as a manufacturer of OEM parts. The Company
      has
      responded to the increased competition by restructuring its operations and
      by
      trying to move from manufacturing low margin, low-cost individual parts to
      manufacturing higher margin, more expensive components, subassemblies and even
      complete units for its OEM customers.




-20-


Historically,
      the Company has manufactured high-quality metal parts, mostly for Japanese
      customers. The Company did not engage in any active marketing efforts to develop
      its business for its metal manufacturing operations. Recently, however, because
      of all of the competition that has developed, in Shenzhen and elsewhere, for
      low
      cost metal stamping, the Company has changed its customer focus, its
      manufacturing goals, and its marketing efforts. As part of its business strategy
      to capture more of the revenues related to the manufacture of end-products,
      the
      Company has recently been attempting to leverage its complete manufacturing
      capabilities to the manufacture of the subsystems, subassemblies, larger
      components, and even completed end-products for its clients. The Company’s goal
      is to become a one-stop OEM provider for major international customers. In
      order
      to upgrade its technical manufacturing abilities and to suit its existing and
      potentially new international customers, the Company has obtained, and currently
      maintains, an ISO 9001 quality management systems certification and an ISO
      14001
      environment management systems certification.




**The
      Company’s Strategy**




Management
      believes that the Company’s future growth and profitability depend on its
      ability to compete as a third party manufacturer, as well as its ability to
      exploit other manufacturing opportunities that are complimentary to its
      strengths.




*Capitalize
      on its manufacturing cost structure and logistical advantages:* By
      locating the Company’s principal manufacturing facility in Long Hua, Shenzhen,
      China, less than 30 miles from Hong Kong, the Company is able to take advantage
      of the low overhead costs and inexpensive labor available in China. The close
      proximity of the factory complex to Hong Kong facilitates transportation of
      the
      Company’s products out of China to customers in Hong Kong and beyond through the
      port of Hong Kong. Management believes that there has been an increase in the
      number of Japanese and German OEMs establishing factories or using contract
      manufacturers in southern China and this provides the Company with a large
      customer base within close proximity to the Company’s operations in China. In
      order to secure a manufacturing presence in Southern China, in November 2005
      the
      Company commenced operating a second manufacturing facility in He Yuan. The
      benefits of the new He Yuan facility are (i) newer and more modern manufacturing
      facilities, (ii) cheaper and consistent supply of electricity and water, (iii)
      cheaper rental charges and lower cost of land usage, and (iv) easy access by
      highway or rail to Hong Kong and the other major markets and sea ports. In
      addition to the He Yuan facility, the Company in December 2005 also established
      a new subsidiary in Wuxi, near Shanghai, in order to access the manufacturing
      needs of the Japanese and European companies located in the Shanghai area.
      The
      Wuxi subsidiary is currently negotiating to purchase certain assets of two
      existing manufacturing businesses, which acquisition is expected to be completed
      later this year.




-21-


*Capitalize
      on, and leverage its manufacturing strength* :
      Unlike
      many of its metal part manufacturing competitors, primarily those in Shenzhen,
      China, the Company has a vertically integrated manufacturing facility that
      can
      design, manufacture and assemble more complex components and subassemblies.
      In
      addition, unlike some of its competitors in Shenzhen that are limited to either
      metal stamping or to electrical and plastics manufacturing, the Company also
      has
      the ability to combine metal stamping and electrics and plastics manufacturing.
      Accordingly, the Company’s strategy is to focus on manufacturing more complex
      products that utilize the Company’s various manufacturing strengths. As the
      Company expands its manufacturing capabilities into new and varied products,
      the
      Company has commenced promoting the use of its assembly facilities to
      manufacture more of the end-product than just some parts or components by
      emphasizing the efficiencies of assembling the products by one manufacturer.
      Management believes that the Company’s close relationships with its customers
      can increase the number of parts and services the Company provides to its
      customers. In addition, as more German and other European companies seek to
      establish a manufacturing base in China, the Company will provide manufacturing
      solutions for these European companies.




*Change
      its product line in response to market conditions* : ** The
      Company’ strategy is to respond to changes in market conditions by changing its
      product offerings. Prior examples of its ability to respond to market and other
      conditions include the development of a new line of underwater camera products
      and the development of a clock that sets itself based on radio signal
      broadcasts. The Company has also been exploring manufacturing other products,
      such as LCD monitors and LCD televisions, and is currently attempting to find
      OEM customers for these products. However, it is unclear if the Company will
      commit to large scale manufacturing of LCD monitor products or that it will
      be
      able to develop viable business connections to further the LCD monitor and
      LCD
      television business and/or to compete in this market.




*Expansion
      by acquisition, merger and other means* :
      The
      Company believes it has the opportunity to expand its business through
      acquisitions and through the establishment of additional manufacturing
      facilities. The Company continues to consider and evaluate possible
      acquisitions, both in China and elsewhere, and has previously been successful
      at
      purchasing supplier companies and transferring the manufacturing operations
      to
      its facility in China to take advantage of the low labor and operating costs
      associated with manufacturing in China. Management may seek similar
      opportunities in China, Japan, Europe and the United States. Although the
      Company is currently evaluating at least one other complimentary acquisition
      in
      China, no assurances can be given that the Company will identify acquisition
      prospects or that such prospects, if identified, will result in an
      acquisition.




In
      addition to expanding its manufacturing capabilities through acquisition,
      merger, etc., the Company may also establish additional manufacturing facilities
      in other countries that offer benefits similar to those available in China.
      The
      Company believes that there are other countries that offer low labor and
      operating costs and locations close to the Company’s customers. However, no such
      other locations have been identified, and no assurance can be given that the
      Company will be able to duplicate its China business in other
      countries.




-22-


*Maintain
      production quality* :
      Management believes that maintaining close relations with the Company’s
      customers is important to the success of the Company’s business. Understanding
      each customer’s needs and efficiently and quickly addressing its needs is vital
      to maintaining a competitive advantage. Certain Japanese and German companies
      have built the goodwill associated with their products and tradenames on a
      high
      level of perceived quality. By employing the type of high quality management
      standards, production standards and quality control standards historically
      utilized by many leading Japanese and German companies, the Company has been
      able to satisfy the stringent requirements of its customers which ordinarily
      cannot be written into a specification or contract. Management believes that
      the
      Company’s commitment to high level service, attention to detail and quality has
      the effect of providing customers with a sense of confidence and security that
      their product requirement will be met and their products will be delivered
      on
      time and a competitive price.




The
      Company conducts most of its manufacturing operations in accordance with typical
      Japanese manufacturing standards, paying particular attention to cleanliness,
      incoming material control, in process quality control, finished goods quality
      control and final quality audit. The Company’s metal factory complex has
      received ISO 9001 quality management system certification and an ISO 14001
      environmental management systems certification. The Company’s quality system
      helps to minimize defects and customer returns and create a higher confidence
      level among customers. Management believes that these factors increase demand
      for the Company’s services and products.




**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
      components to be used in the product. Generally, the Company must design and
      fabricate the tooling necessary to manufacture these components in its tooling
      workshop. In some instances, however, the customer already possesses the tooling
      necessary to manufacture the metal component and simply delivers the tools
      to
      the Company. Customer will sometimes also pay the Company to purchase and
      install the equipment necessary to manufacture the customer’s products. The
      Company uses computer-aided design and manufacturing equipment to produce a
      long
      lasting, high quality metal stamping tool designed to produce a high quality
      product in efficient manner. As many of the metal parts manufactured by the
      Company make use of progressive, multi-stage stamping techniques, tools and
      machines must be precisely fine tuned and aligned to achieve the required
      quality standard and maximum efficiency.




The
      tool
      making process for metal parts generally takes between 14 to 45 working days
      depending on the size and complexity of the tool. Customers typically bear
      the
      cost of producing the tools and, as is customary in the industry, the customers
      hold title to the tooling. However, the Company maintains and stores the tools
      at its factory for use in production and the Company usually does not make
      tooling for customers unless they permit the Company to store the tools on
      site
      and manufacture the related parts.




-23-


The
      Company also makes some basic plastic injection molds. Other, more complicated
      molds are made for the Company by qualified suppliers.




*Metal
      Stamping; Plastic Injection Molding* :
      Following the completion of the tooling, the materials required for the specific
      product is selected and purchased. See “Raw Material, Components Parts and
      Suppliers.” Often the customer specifies the materials to be used as well as the
      supplier. The completed tooling is fitted to the press which is selected for
      its
      size and pressing force.




Using
      separate shifts, part stamping can be conducted 24 hours a day, seven days
      per
      week other than during normal down time periods required for maintenance and
      changing of tools and during the traditional Chinese New Year holidays. Due
      to
      the strict quality requirements of customers, each machine is subject to
      stringent in-process quality controls; the Company’s quality control personnel
      inspect the products produced each hour and update in-process logs at each
      pressing machine in which they record the quantity produced, defect rate and
      product dimensions and specifications. When defects are found during production,
      the Company’s maintenance personnel inspect the tooling and the machine to
      determine which is responsible. If the tooling is the cause of the defect,
      it
      will be immediately removed from the machine and serviced or repaired by a
      team
      of technicians from the Company’s tooling maintenance department. If the machine
      is the source of the defect, the machine is serviced immediately by the
      Company’s technicians and engineers. In a continuous effort to assure quality,
      all stages of the production process are closely monitored so that all equipment
      and tools can be well maintained. The Company’s wholly
      owned subsidiary Nissin Precision Metal Manufacturing Limited, has been
      registered for ISO 9001 quality
      management system certification and for ISO 14001 environmental management
      systems certification.




*Electronic
      Assembly* :
      The
      Company’s electronic assembly manufacturing consists of chip on board assembly,
      IC-bonding and SMT technology.




*Finishing,
      Packaging and Shipping* :
      After
      pressing, the metal parts are degreased, inspected for defects and checked
      with
      custom-built test gauges. Some components are then sprayed in the Company’s
      dedicated spray-paint facilities. After being painted, the parts are baked
      at
      high temperatures in drying ovens before final inspection and packaging. Some
      parts are also screen printed by the Company. In addition, for certain metal
      products, the Company assembles metal components and these parts are delivered
      to the assembly department for spot welding, threading, riveting other
      sub-assembly processed. Each of the parts, assemblies and products is then
      inspected, packaged to the customer’s specific requirement and delivered to the
      final quality audit department for final quality inspection which is conducted
      on a random sample basis. All parts, assemblies and products are shipped by
      truck directly from the factory to the customer’s factory in China or elsewhere
      through the port of Shenzhen and/or Hong Kong.




-24-


**Raw
      Material, Component Parts and Suppliers**




The
      primary raw materials used by the Company to manufacture its metal stamped
      parts
      are various types of steel including pre-painted steel sheet, electrolytic
      zinc
      plated steel sheet, PVC laminated steel sheet and cold roll steel sheet. The
      Company selects suppliers based on the price they charge and the quality and
      availability of their materials. Often, the customer requires the Company to
      use
      specific suppliers. Most of the Company’s suppliers of steel operate through
      Hong Kong or China-based companies which deliver the materials directly to
      the
      site of the Company’s operations in China.




During
      the past fiscal year, the price of metal and plastics raw materials has
      increased significantly, and there have been shortages for some materials.
      The
      Company estimates that the cost or some metal and plastic products increased
      during the past few years by between 20% and 50% on some materials. The increase
      in raw materials prices has also increased the price of packaging. The increases
      in these prices has reduced the Company’s gross margins on some of its OEM
      manufacturing products. The Company has also required some of its customers
      who
      have low gross margin products to accept a price increase due to the material
      price increases, which has resulted in some reduction of new purchase orders.
      The Company expects that raw material prices for metal and plastic raw materials
      will continue to increase in the future.




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




**Transportation**




The
      Company transports components and finished products to customers in China and
      to
      and from Hong Kong and China by truck. Generally, the Company sells its products
      “free-on-forwarder” (“F.O.F.”) Hong Kong or “free-on-board” (F.O.B.) Hong Kong.
      To date the Company has not been materially affected by any transportation
      problems as it uses subcontract trucking services which have been readily
      available in the past. Similarly, recent improvements in the roads and highways
      in China have facilitated intra-China transportation. The Hong Kong and China
      customs departments have opened additional border crossings, extended their
      operating hours, and have been working continually to improve the flow of
      cross-border goods. In considering establishing new manufacturing facilities
      for
      the Company, the Company expects to move away from Shenzhen and Hong Kong.
      However, any new facility that the Company considers will have good
      transportation connections to Hong Kong and other key delivery sites, although
      transportation costs may increase due to the additional distance to the delivery
      sites.




-25-


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




**Customers
      and Marketing**




The
      Company’s sales are generated from sales in Hong Kong/China, Europe, the United
      States, and other Asian countries. Net sales to customers by geographic area
      are
      determined by reference to the shipping destinations specified by the Company’s
      customers (except for sales to China). For example, if the products are
      delivered to the customer in China, the sales are recorded as generated in
      Hong
      Kong; if the customer directs the Company to ship its products to Europe, the
      sales are recorded as sold in Europe. Payments are paid in Hong Kong dollars,
      United States dollars and European euros. Net sales as a percentage of net
      sales
      to customers by geographic area consisted of the following for the years ended
      March 31, 2004, 2005 and 2006:




Year
                Ended March 312004
            
            2005
            
            2006GEOGRAPHIC
                AREAS:Hong
                Kong & China
            
            
            66.1
            %
            
            62.4
            %
            
            54.1
            %Europe
            
            
            23.7
            %
            
            30.8
            %
            
            39.9
            %Other
                Asian countries
            
            
            2.4
            %
            
            1.4
            %
            
            2.0
            %United
                States
            
            
            2.4
            %
            
            4.0
            %
            
            3.8
            %Others
            
            
            5.4
            %
            
            1.4
            %
            
            0.2
            %





The
      Company’s customers for its metal stamping products are themselves
      manufacturers. The Company’s products are sold primarily to Japanese and German
      owned companies that are finished goods manufacturers or contract manufacturers
      in China.




Until
      recently, the Company has marketed its metal stamping products and services
      to
      existing customers primarily through direct contact with the Company’s
      management and senior purchasing officers of the customers. Historically, metal
      pressing sales were primarily conducted by the managing director of the metal
      stamping company, Nissin, Mr. Satoru Saito, a Japanese national, and Mr. Roland
      Kohl, a German national, who serves as the Chief Executive Officer, using
      existing contacts, word-of-mouth referrals and references from associated or
      related companies of the customers. During the past few years, the Company
      has
      gradually increased the number of foreign sales person to complement the
      activities of Mr. Kohl and Saito. Due to the international nature of senior
      management, the Company believes that it has been able to set itself apart
      from
      its competitions and bridge the cultural, language and quality gaps that most
      Japanese and German companies fear when dealing in China. In connection with
      the
      recent realignment of its operations, shift in manufacturing strategy, and
      its
      increased focus on increasing overall sales of higher quality components for
      global customers, the Company has initiated a more direct and active marketing
      strategy, including advertising in trade publications, attending trade
      shows/exhibitions and using the internet and its websites as marketing tools.




-26-


**Major
      Customers**




For
      the
      fiscal year ended March 31, 2006, three customers each accounted for more than
      10% of the Company’s gross revenues (or 51% collectively of the Company’s net
      sales). No other customers individually accounted for more than 10% of the
      Company’s gross revenues during this recent past fiscal year. During the past
      few years, the Company has relied to a large extent on a few larger customers
      and on many smaller customers. If the Company loses any of its major customers
      who account for a material portion of total net sales, or if any of those
      customer’s order decrease substantially, the Company’s results of operations and
      financial position would be materially and adversely affected if the Company
      is
      unable to replace any of its major customers.




Customers
      place manufacturing orders with the Company in the form of purchase orders
      which
      are usually supported by a delivery schedule covering one to two months of
      orders. Customers usually do not provide long term contracts for their purchases
      and are able to cancel or amend their orders at any time without penalty. In
      addition, certain customers enter into agreements with the Company in which
      the
      parties agree upon their purchase and sale procedures, but such agreements
      do
      not contain any specific purchase orders or purchase requirements. However,
      customers often provide the Company with non-binding forecasts of their
      anticipated needs for the next year. Orders from such customers are thereafter
      received from time to time by customers based on the customers’ needs, not on
      contractually fixed amounts or time periods. Accordingly, backlog has not been
      meaningful to the Company’s business. Sales of manufactured products to
      established existing clients are primarily on credit terms of up to 45 to 90
      days with payment in Hong Kong dollars, while the sale to new finished goods
      customers are completed on a wire transfer payment basis before shipment or
      other similar payment terms. Management constantly communicates with its credit
      sale customers and closely monitors the status of payment in an effort to keep
      its default rate low. However, as a result of the concentration of sales among
      a
      few of the Company’s larger customers, the Company is required to bear
      significant credit risk with respect to these customers. Typically, metal part
      orders are spread over a three-month period and the Company is able to withhold
      delivery or slow down shipments in the event of any delinquency in payment
      for
      past shipments. Parts are generally shipped 30-40 days after an order has been
      placed unless the Company is required to manufacture new tools which requires
      approximately 14-45 days to complete prior to commencing manufacturing. While
      the Company has not experienced material difficulty in securing payment from
      its
      major customers, there can be no assurance that the Company’s favorable
      collection experience will continue. The Company could be adversely affected
      if
      a major customer was unable to pay for the Company’s products or
      services.




**Industrial
      Property Rights**




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




-27-


**Competition**




The
      Company competes against numerous manufacturers, including both smaller local
      companies as well as large international companies. For example, management
      believes that firms which are smaller than the Company make up the largest
      segment of the metal manufacturing industry in China, although it is not aware
      of any empirical data defining the metal manufacturing industry in China. These
      metal stamping companies compete with the Company for standard metal stamping
      work. However, since some of the Company’s customers are large international
      enterprises that source their products from many international sources, the
      Company also competes against metal manufacturing companies in other low cost
      manufacturing countries. As a vertically integrated, multi-disciplinary
      manufacturer of complex components and products, the Company also competes
      against numerous global OEM manufacturers, whether those other manufacturers
      are
      located in Shenzhen, China or elsewhere. Most of the international competitors
      of the Company have substantially greater manufacturing, financial and marketing
      resources than the Company. The Company believes that the significant
      competitive factors are quality, price, service, and the ability to deliver
      products on a reliable basis. The Company believes that it is able to compete
      in
      its segment of the OEM manufacturing market by providing good quality products
      at a competitive prices with reliable delivery and service. In addition, since
      the Company’s main manufacturing facilities are located in the Shenzhen area,
      near some of its OEM customers, the Company has a competitive advantage by
      being
      able to reduce delivery times and transportation costs for these customers,
      by
      being able to offer “just in time” supply services, and by being able to recycle
      packaging materials for multi-use purposes.




**Other
      Activities**




The
      markets in which the Company operates are continuously changing, and the Company
      regularly seeks both (i) new or alternate products that it can manufacture
      and
      sell, and (ii) new methods of operating that may enhance its business. Certain
      of changes in the Company’s products and operations evolve from its existing
      business. For example, the Company’s quartz clock manufacturing has evolved into
      the manufacture of radio-controlled clocks, a product that the Company still
      currently manufactures on an OEM basis. In addition, the manufacture of
      single-use cameras and low-end 35mm cameras has spawned the Company’s underwater
      camera product line that the Company has maintained, despite eliminating most
      of
      its camera operations. Certain other actions deviate significantly from the
      Company’s existing manner of operations and are, as a result, subject to greater
      uncertainties. The following are some of the other actions that the Company
      has
      taken, and is taking:




A.  The
      Company is exploring the possible manufacture of liquid crystal display (LCD)
      products, such as flat panel televisions and computer monitors for use in niche
      markets. The Company recognizes that it is unable to compete against the
      dominant multi-national manufacturers of general purpose LCD televisions and
      monitors and, therefore, it has developed LCD based products for niche markets
      in which products are less price sensitive. The Company currently has the
      ability to manufacture the chassis, the television/monitor stand, and the
      complete electronic circuits of LCD televisions/monitors and to assemble
      complete LCD televisions/monitors. The Company has developed certain niche
      products such as wireless LCD monitors and LCD Monitors with built-in memory
      card readers for commercial application, as well as dust and water proof LCD
      TV/Monitor for outdoor usage. To date, sales of these LCD products by the
      Company have been limited to sales made for test marketing purposes and have
      been insignificant.




-28-


B.  In
      August
      2003, the Company acquired a 50% interest in a Panamanian company
      now known as Kayser Technik (Overseas) Inc.. that was established
      to distribute film, cameras, and batteries in Central and South America. Under
      its agreement with Kayser
      Technik (Overseas) Inc., the Company will sell certain products to that company
      and will receive one-half of the company’s profits. Some of the products
      marketed by Kayser Technik (Overseas) Inc. are sold under the “Kayser”
brandname. Sales
      to
      date from this new venture have been insignificant, and no assurance can be
      given that the Company will determine that these operations will be further
      developed or will eventually become a viable business.




**Organizational
      Structure**




Highway
      Holdings Limited is a holding company that operates through its subsidiaries.
      As
      of March 31, 2006, Highway Holdings Limited owned eleven subsidiaries, all
      of
      which were wholly-owned by Highway Holdings Limited (the new Wuxi subsidiary
      is
      expected to become a partially-owned subsidiary if the pending negotiations
      to
      purchase certain assets of two existing manufacturers are completed as planned).
      However, the Company currently conducts its business primarily through seven
      of
      these subsidiaries, six of which are incorporated in Hong Kong, one that is
      incorporated in Germany. For details regarding the names of these subsidiaries,
      the principal activities of subsidiaries, the country of their incorporation,
      and the dates of their organization, see Note 1 to the Consolidated Financial
      Statements appearing in Item 18 of this Annual Report.




**Property,
      Plants and Equipment**




*British
      Virgin Islands*




The
      Registered Office of the Company is located at Craigmuir Chambers, Road Town,
      Tortola British Virgin Islands. Only corporate administrative matters are
      conducted at these offices, through the Company’s registered agent, HWR Service
      Ltd. The Company does not own or lease any property in the British Virgin
      Islands.




*Hong
      Kong*




The
      Company leases Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
      Shui, New Territories, Hong Kong as its executive offices. These premises are
      leased under a lease that expires in July 2008. The Company believes that
      suitable alternative facilities are available if the Company cannot extend
      the
      lease on satisfactory terms.




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




-29-


*China*




The
      Company currently leases a total of approximately 450,000 square feet of space
      at the site of its factory complex located at Long Hua, Shenzhen, China from
      the
      Shenzhen Land & Sun Industrial & Trade Co., Ltd. pursuant to five
      related leases. The leased space consists of 378,000 square feet of
      manufacturing space, with the balance representing dormitories for the Company’s
      employees. This space is used predominately for the Company’s metal
      manufacturing, OEM product assembly, camera and clock manufacturing, spray
      painting, screen printing, plastic injection, tooling workshop and warehouse
      operations. There are also offices for management and administration on the
      premises. The term of the leases expires on February 28, 2009. The Company
      estimates that, depending on the Company’s operations, the utilization rate of
      these facilities during the fiscal year ended March 31, 2006 fluctuated between
      an estimated 50% and 80% of its maximum capacity. Accordingly, the Company
      has
      sufficient manufacturing space for its current needs, and its current facilities
      will continue to satisfy the Company’s space needs in the near future.




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




As
      is
      common in southern China, the factory complex has dormitory facilities to
      accommodate factory workers. The Company has leased approximately 72,000 square
      feet of space at Long Hua, Shenzhen, China which is used as dormitories for
      approximately 1,000 factory workers.




The
      Company has also entered into two three-year leases (from July 1, 2005 through
      June 1, 2008) for (i) an approximately 2,500 square meter manufacturing facility
      and (ii) an approximately 1,000 square meters of dormitory living quarters
      in He
      Yuan City, China. The Company has the right to terminate the leases before
      the
      end of the three year terms under certain conditions, including if it purchases
      and builds its own buildings in the He Yuan district. The new facilities in
      He
      Yuan are approximately 150 kilometers from the Company’s current principal
      facilities in Long Hua, Shenzhen, approximately 130 kilometers from the nearest
      ocean port, and are located near a major railroad station and highway. Under
      the
      lease, the Company pays $3,300 per month as rent. The facilities are currently
      used solely for manufacturing light fixtures. The Company is currently
      considering a possible purchase the land-use rights of a 50,000 square meter
      lot
      in He Yuan on which a manufacturing facility could be established, and has
      made
      a refundable deposit of $85,000 for the potential purchase of this lot.




*Germany*




When
      the
      Company reorganized its operations in Germany in 2005, it closed the larger
      offices and in February 2006 opened a smaller 137 square meter marketing in
      Villingen-Schwenningen, Germany. The lease for this office expires in February
      2009.




-30-


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




**Overview**




The
      Company’s net sales during the past few years were derived primarily from (i)
      the manufacture and sale of metal components, assemblies and products for its
      multi-national clients, (ii) providing electric OEM services, (iii) manufacture
      and sale of clocks, watches and watch components, and (iv) manufacture and
      sale
      of cameras. During the past fiscal year, all of the Company’s manufacturing
      operations were conducted in China. Although the Company established two smaller
      manufacturing facilities in China during the fiscal year ended March 31, 2006,
      more than 85% of the Company’s fiscal 2006 revenues were derived from its
      principal facilities in Shenzhen, China. The Company also maintained a marketing
      branch in Germany, which branch office has, since the end of fiscal 2006,
      reduced its operations.




The
      metal
      and mechanical OEM manufacturing operations accounted for the largest portion
      of
      the Company’s net sales and, during the fiscal year ended March 31, 2006, was
      the only segment of the Company’s operations that generated operating income.
      The gross profit margin on metal stamping is generally higher than that of
      camera and clock manufacturing, but it is typically more affected by
      fluctuations in raw material prices, particularly prices of rolled steel. During
      the past few years, prices for metal raw materials, a major component of the
      Company’s manufacturing costs, have significantly increased. In addition, the
      Company’s manufacturing costs were also impacted during the past fiscal year by
      increases in other costs, such as the price of plastics, the cost of labor
      and
      transportation, and energy prices.




The
      Company is not taxed in the British Virgin Islands, the state of its
      incorporation. The
      location of the Company’s executive offices in Hong Kong enables the Company to
      pay low rates of income tax due to Hong Kong’s tax structure. The Company’s
      income arising from its Hong Kong operations or derived from its operations
      within Hong Kong is subject to Hong Kong income tax. The Company has
      successfully claimed a tax benefit from the Hong Kong Inland Revenue Department
      by providing support for its position that more than half of its income is
      derived from its activities outside of Hong Kong, namely in China. The statutory
      tax rate in Hong Kong currently is 17.5%, and there are no taxes on dividends
      or
      capital gains. However, because of the Company’s multi-jurisdictional
      operations, the Company’s overall tax rate varies from the current 17.5%
      rate.




Under
      the
      BFDC Agreements that apply to the Company’s principal operations in Shenzhen,
      the Company does not pay taxes in China because it is not considered to be
      doing
      business in China under current China law. The BFDC is responsible for paying
      its own taxes incurred as a result of its operations under the BFDC Agreements
      (which taxes are indirectly passed through to the Company). Arrangements such
      as
      the BFDC Agreements under which the Company operates in China are one of the
      most common types of arrangements in southern China for Hong Kong manufacturers.
      Management believes the Company will continue to benefit from a low overall
      effective tax rate in the future, barring unforeseen changes in tax laws. The
      facilities that the Company opened in fiscal 2006 in HeYuan operate on a similar
      basis as in Shenzhen, and the Company therefore does not directly pay taxes
      on
      its He Yuan operations in China. However, since the Company has now opened
      a
      wholly-owned subsidiary in Wuxi that is a registered company in China and that
      is authorized to manufacture and sell products for China domestic market, the
      Company will have to pay Chinese domestic taxes with respect to its Wuxi
      operations.




-31-


Net
      sales
      to customers by geographic area are generally determined by the shipping
      destinations specified by the customers. For example, if a customer directs
      the
      Company to ship a product to the U.S. (or any other overseas market), the sale
      is recorded as a sale to the U.S. (or the specified market).




**Results
      of Operations**




*General*




During
      the past three years discussed below, the Company’s revenues have been derived
      primarily from the manufacture and sale of (i) OEM manufacture of metal and
      mechanical parts, (ii) clocks, clock movements and watches, (iii) cameras and
      camera accessories, and (iv) OEM manufacture of electric components and
      products. Revenues during these periods also include revenues generated by
      the
      Company from the sale of “Kienzle” branded watches and other products that it
      did not manufacture. As described elsewhere in this Annual Report, in its recent
      reorganization and restructuring, the Company sold the rights to the “Kienzle”
trademark and substantially terminated all clock/watch and camera manufacturing
      operations, other than a small amount of OEM manufacturing of these products.




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 31,2004
            
            2005
            
            2006Net
                Sales
            
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            79.9
            
            
            81.5
            
            
            83.6Gross
                profit
            
            
            20.1
            
            
            18.5
            
            
            16.4Operating
                income/(loss)(1)
            
            
            3.5
            
            
            (1.0
            )
            
            2.3Non-operating
                income /(loss)(2)
            
            
            1.2
            
            
            0.7
            
            
            (1.8
            )Income/(loss)
                before income taxes before minority interest
            
            
            4.3
            
            
            (0.3
            )
            
            0.5Income
                taxes
            
            
            (0.4
            )
            
            (0.3
            )
            
            (0.3
            )Income/(loss)
                before minority interest
            
            
            3.9
            
            
            (0.6
            )
            
            0.2Net
                income/(loss)
            
            
            3.9
            %
            
            (0.6
            )%
            
            0.2
            %





Note:


(1)
            Operating
                income/(loss) includes (i) selling and administrative expenses, (ii)
                impairment loss of long-lived assets, and (iii) gain on sale of “Kienzle”
                industrial property rights.


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





-32-





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




Net
      sales
      for the fiscal year ended March 31, 2006 (“fiscal 2006”) decreased by
      $1,835,000, or 6.6%, from the year ended March 31, 2005 (“fiscal 2005”). The
      decrease in net sales was due to the Company’s restructuring and reorganization
      in which it substantially reduced its clock and watch operations and its camera
      operations (other than its niche underwater camera operations). As a result
      of
      the Company’s decision to cease most of its camera operations and most of its
      clock/watch manufacturing operations, net sales of cameras decreased from
      $5,990,000 in fiscal 2004, to $3,836,000 in fiscal 2005 to $1,487,000 in fiscal
      2006. Likewise, the sale of clocks/watches decreased from $4,301,000 in fiscal
      2005 to $2,630,000 in fiscal 2006. The Company anticipates that net sales of
      camera, watch and clocks in the fiscal year ending March 31, 2007 (“fiscal
      2007”) will further decrease as the Company only retained a small portion of
      each of those operations. The decrease in camera operations and in
      clocks/watches sales was partially offset by a $1,612,000 increase in metal
      and
      mechanical OEM net sales. The Company’s strategic plan that it implemented in
      fiscal 2006 was to decrease its unprofitable clock/watch and camera operations
      and increase its higher margin, profitable OEM manufacturing operations. Metal,
      mechanical and electric OEM net sales represented $21,726,000, or 84.1% of
      the
      Company’s total net sales of $25,843,000.




The
      Company’s gross profits as a percentage of its net sales decreased from 18.5% in
      the year ended March 31, 2005 to 16.4% fiscal 2006. As a result of decreased
      sales in fiscal 2006 and lower gross margins, the Company’s gross profits
      decreased from $5,130,000 in fiscal 2005 to $4,243,000 in fiscal 2006. A major
      reason for the decrease in the Company’s gross margin percentage was the
      liquidation of inventory at reduced prices in connection with the termination
      of
      its camera and clock/watch operations. During fiscal 2006, the Company sold
      a
      large part of its single-use cameras at prices less than the historical prices
      in order to liquidate its inventory. The inventory of single-use cameras, as
      well as all the watch and clock inventory not directly related to the watch
      and
      clock OEM business that remained at March 31, 2006, was written off. The Company
      will continue to sell its remaining inventory of cameras, clocks, and watches,
      which sales (though not expected to be significant) will be reflected as sales
      in fiscal 2007 (with no attendant cost of manufacturing). Cost of sales as
      a
      percentage of net sales also was negatively impacted by continuing increases
      in
      the cost of certain raw materials and labor costs in Shenzhen. The new, smaller
      facility that the Company opened in He Yuan during fiscal 2006 is intended
      to
      offset the higher costs of operations in Shenzhen, but did not have a material
      impact in fiscal 2006 due to its limited operations during fiscal 2006 and
      the
      inefficiencies normally associated with initiating operations at a new facility.
      Although the Company believes that the cost of operations in the future will
      generally be less in He Yuan. The Company will, however, continue to conduct
      substantially all of its current operations at its existing facilities in
      Shenzhen, China, during fiscal 2007. Although the Company’s future revenues will
      be primarily generated by its OEM metal and mechanical manufacturing operations,
      which operations historically have been its highest gross margin operations,
      the
      Company expects its future gross margins to remain lower than historical rates
      for OEM sales due to continuing increases in raw material, energy,
      transportation and operating costs, and to the Company’s attempt to increase
      sales of its OEM operations (which may require the Company to reduce some of
      its
      margins in order to attract additional business).




-33-


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




Selling,
      general and administrative expenses for fiscal 2006 increased by $180,000,
      or
      3.6%, over fiscal 2005. As a result of the increase in selling, general and
      administrative expenses and the decrease in net sales, those expenses
      represented 20.0% of total net sales, compared to 18.0% in fiscal 2005. The
      increase in selling, general and administrative expenses was due in part to
      the
      significant costs incurred in closing most of the Company’s operations in
      Germany, and increased professional fees. Selling, general and administrative
      expenses also increased due to increases in marketing activities, through trade
      shows, advertisements, and new catalogues. Selling, general and administrative
      expenses are expected to increase further in fiscal 2007 due to the additional
      facility the Company recently opened in Wuxi, China, and as the Company
      implements additional financial controls and procedures that are required under
      Section 404 of the Sarbanes-Oxley Act of 2002.




The
      Company’s net income was negatively affected during the fiscal 2006 due to a
      $614,000 currency exchange net loss as a result of adverse currency rate
      fluctuations. In fiscal 2005, the Company had realized a currency exchange
      rate
      gain of $249,000. The loss in fiscal 2006 was the result of the decrease in
      the
      value of the euro compared to the U.S. dollar, which decreased the value of
      payments the Company received in euros from its sales in Europe. A number of
      the
      Company’s European customers have elected to pay the Company in euros. Since the
      Company does not undertake any currency hedging transactions, its financial
      results will continue to be affected by the fluctuations of
      currencies.




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




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







*Year
      Ended March 31, 2005 Compared to Year Ended March 31, 2004*




Net
      sales
      for fiscal 2005 increased by $2,322,000, or 9.2%, from the year ended March
      31,
      2004 (“fiscal 2004”). The increase in net sales was due to a $3,006,000 increase
      in sales of all of the Company’s two OEM operations (for metal manufactured
      products and for electrical products) from fiscal 2005 compared to fiscal 2004.
      The Company’s other two business segments (clocks and cameras) decreased in
      sales compared to the prior fiscal year. As discussed in this Annual Report,
      the
      Company believed that the markets for both its film-based camera products and
      for its clocks were declining and, as a result, the Company decided to terminate
      most its single-use camera and clock operations.




-34-


Sales
      of
      metal manufactured parts products and components increased during fiscal 2005
      by
      $3,006,000 to $17,792,000. Sales to the Company’s European, primarily German,
      customers represented the largest increase in metal manufacturing in fiscal
      2005. Metal and OEM manufacturing sales represented 64.3% of the Company’s total
      sales in fiscal 2005 compared to 58.3% of the Company’s total sales in fiscal
      2004. The increase in metal and OEM manufacturing sales is a result of the
      Company’s focus on manufacturing more complex components and products for
      larger, European customers.




Sales
      of
      electric OEM products increased by $1,351,000 to $1,749,000 from fiscal 2004
      to
      fiscal 2005. Virtually all of the increase in sales of electric OEM products
      represented sales to the Company’s European customers, who represented 98.9% of
      the total net sales of electric OEM products. As a percentage of the Company’s
      net sales, electric OEM sales in fiscal 2005 increased to 6.3% of the Company’s
      overall fiscal 2005 net sales from 1.6% in fiscal 2004.




Net
      sales
      of cameras decreased in fiscal 2005 by $2,154,000 due to the declining market
      for film-based cameras. Since the Company decided that it would discontinue
      the
      manufacture and sales of single-use cameras, net sales of cameras represented
      only 13.9% of the Company’s total net sales in fiscal 2005 compared to 23.6% in
      fiscal 2004.




Sales
      of
      clocks and watches for fiscal 2005 also decreased compared to fiscal 2004.
      The
      Company has also been using the clock/watch division to manufacture OEM electric
      products for the Company’s OEM manufacturing divisions. During fiscal 2005,
      sales of clocks and watches represented 15.5%, of the Company’s net sales,
      compared to 16.5% of the Company’s net sales for the year ended March 31, 2004.
      The total amount of revenues attributed to the clock/watch division during
      fiscal 2005 was approximately $4,301,000. In addition to the decline in net
      sales of clocks and watches manufactured by the Company, net sales of “Kienzle”
labeled products distributed by Kienzle AG, a German distribution company,
      also
      decreased significantly and generated only approximately $20,000 of revenues
      in
      fiscal 2005 compared to $1,665,000 of revenues in fiscal 2004. The distribution
      agreement with Kienzle AG has been terminated, and in June 2005 the Company
      sold
      its rights to the “Kienzle” trademark for products other than clocks and watches
      to Kienzle AG’s appointees for $1,000,000. Sales of the Company’s principal
      clock products, quartz clocks, declined in fiscal 2005 due to low priced clocks
      sold by competing clock manufacturers, some of whom the Company believes are,
      directly or indirectly, subsidized by the Chinese government and therefore
      are
      able to sell clocks at very low prices, often below the cost of raw materials.




The
      Company’s gross profits as a percentage of its net sales decreased from 20.1% in
      the year ended March 31, 2004 to 18.5% in the year ended March 31, 2005. Cost
      of
      sales as a percentage of net sales increased from 79.9% to 81.5% as a result
      of
      increases in the prices of raw materials, particularly the significant increases
      in the cost of raw metal and plastics. During fiscal 2005, the Company continued
      to write off some of its inventory by writing off $409,000 of its inventories
      (compared to a major $640,000 write-off of inventory for the fiscal year ended
      March 31, 2004). The
      Company periodically writes down inventory for estimated obsolete or
      unmarketable inventory equal to the difference between the costs of inventory
      and estimated market value, based upon assumptions about future demand and
      market conditions. In
      fiscal 2003, the Company wrote off only $52,000 of obsolete inventory. The
      Company attributes the large inventory written off during fiscal 2005 to the
      decline in the Company’s camera and clock businesses and to the decline in the
      market for these products which occurred in 2005. The low
      gross margins also are a reflection of the increasing cost of operating in
      Shenzhen, including the increasing cost of labor and other operating costs,
      such
      as the cost of water and electricity. As a result of the increasing costs,
      the
      Company has been exploring obtaining alternative manufacturing facilities and
      has entered into a lease for a smaller, additional facility in He Yuan. The
      Company believes that the cost of operations generally is less in He Yuan.




-35-


Selling,
      general and administrative expenses for the year ended March 31, 2005 increased
      by $766,000, or 18.2%, over fiscal 2004. As a result, selling, general and
      administrative expenses represented 18.0% of total net sales, compared to 16.6%
      in fiscal 2004. The increase in selling, general and administrative expenses
      as
      a percentage of net sales was due in part to the increase in net sales, to
      $337,000 of non-cash compensation expenses, and to $414,000 impairment losses
      for its camera, clock and watch property, plant and equipment and industrial
      property rights. The foregoing write off of certain of the Company’s camera and
      clock/watch assets during fiscal 2005 reflected the losses that the Company
      has
      sustained from these divisions in the past, and the likelihood that the Company
      will not generate increased revenues or profits from these assets and divisions
      in the future. During fiscal 2005, the Company paid certain professional fees
      by
      issuing options to purchase 50,000 shares at an exercise price of $1.00 per
      share. This option grant was reflected as a $177,000 compensation expense.
      In
      addition, under its employment agreement with Mr. Kohl, the Company’s Chief
      Executive Officer, the Company was obligated to issue 29,154 shares to Mr.
      Kohl
      in fiscal year 2005. No shares were issued to Mr. Kohl in prior years. The
      Company is obligated to issue 29,154 shares per year to Mr. Kohl in future
      years
      under the employment agreement. Selling, general and administrative expenses
      also increased due to increases in marketing activities, through trade shows,
      advertisements, and new catalogues. The Company recognized an expense of
      $160,000 for the issuance of these shares.




During
      the fiscal year ended March 31, 2005, the Company realized a $249,000 gain
      due
      to currency exchange rate fluctuations. The Company realized a currency exchange
      rate gain of $278,000 in fiscal 2004. The gains were the result of the strength
      of the euro compared to the U.S. dollar, which increased the value of payments
      the Company received in euros from it sales in Europe. Since the Company does
      not undertake any currency hedging transactions, its financial results will
      continue to be affected by the fluctuations of currencies.




The
      Company’s interest expenses increased in fiscal 2005 by $33,000 over the prior
      fiscal year due to an increase in the amounts borrowed under its line of credit
      and to an increase in the overall rate of interest paid by the Company.




The
      decrease in gross margins combined with the increase in selling, general and
      administrative expenses and the impairment loss of property, plant and equipment
      and industrial property rights, resulted in the Company’s recognizing an
      operating loss of $269,000 compared to operating income of $875,000 in fiscal
      2004. After taxes, the Company’s fiscal 2005 net loss was $152,000 compared to
      net income of $982,000 in fiscal 2004.




-36-


**Liquidity
      and Capital Resources**




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




**Year
                Ended March 31,****2004**
            
            **2005**
            
            **2006****(****In
                  thousands****)**Net
                cash provided by operating activities
            
            $
            1,515
            
            $
            708
            
            $
            1,315Net
                cash (used in) provided by investing activities
            
            
            (1,114
            )
            
            (170
            )
            
            1,984Net
                cash provided by (used in) financing activities
            
            
            649
            
            
            (665
            )
            
            (995
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            1,050
            
            
            (127
            )
            
            2,304Cash
                and cash equivalents at beginning of period
            
            
            3,148
            
            
            4,158
            
            
            3,948Effect
                of exchange rate changes
            
            
            (40
            )
            
            (83
            )
            
            132Cash
                and cash equivalents at end of period
            
            $
            4,158
            
            $
            3,948
            
            $
            6,384







At
      March
      31, 2006, the Company had a working capital of $9,960,000, compared to working
      capital of $9,850,000 at March 31, 2005. The Company’s working capital increased
      in fiscal 2006 despite a decrease in net sales and despite two dividend
      distributions that the Company made during fiscal 2006. In fiscal 2006, the
      Company distributed a total of $1,389,000 to its stockholders in the form of
      two
      cash dividend payments.




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. Although the Company’s net income was only $42,000 for the fiscal
      year ended March 31, 2006, the Company generated $1,315,000 of cash from its
      operating activities. The amount of cash generated from operating activities
      was
      primarily the result of a $1,376,000 decrease in accounts receivable (resulting
      in an increase in cash), non-cash depreciation and amortization expenses of
      $1,090,000 (which decreased net income but had not effect on cash flows), and
      a
      $944,000 decrease in inventories (resulting in the liquidation into cash of
      existing inventories). In addition, the company’s cash position was further
      improved by the $2,160,000 of proceeds that the Company realized from the sale
      of its properties in connection with the reorganization and reduction of certain
      of its operations. The foregoing increases in cash were, however, partially
      reduced by the two cash dividends the Company paid in fiscal 2006, and by the
      $500,000 investment the Company made in its new Wuxi subsidiary. The Company
      also received $267,000 during fiscal 2006 from the proceeds of stock option
      exercises.




-37-


The
      Company’s liquidity in fiscal 2006 was improved by the June 2005 sale of all of
      its rights to the “Kienzle” trademark in all markets other than clocks and
      watches for $1,000,000, by the return of the Company’s 100,000 euro investment
      in Kienzle AG (approximately $121,000 at currency exchange rates in effect
      on
      the date of receipt), and by the sale in November 2005 of the Company’s
      remaining interest in the “Kienzle” trademark for $1,160,000.




Because
      of the Company’s international operations, the Company’s banking facilities
      provide the Company with credit facilities for letters of credit and import
      loans. In addition, in order to fund certain of the Company’s capital
      requirements, the Company also has borrowed funds from its banks to finance
      some
      of its machinery and equipment purchases and some of its building costs. The
      foregoing banking facilities are currently being provided to the Company through
      a credit facility with the Hong Kong and Shanghai Banking Corporation Limited
      (HSBC) and a credit facility with DBS Bank (Hong Kong) Limited.




The
      HSBC
      credit facility, as of the date of this Annual Report, provides for a maximum
      credit facility of $1,928,000 (subject to various sub-limits). The HSBC credit
      facility consists of an import loan facility that bears interest at 1.0% over
      the banks’ best lending rate as in effect in Hong Kong from time to time, and is
      secured by a charge on certain time deposits the Company maintains at the bank
      and cross guarantees and indemnities among certain of the Company’s
      subsidiaries.




The
      DBS
      facility is in favor of the Company’s metal, clock and camera subsidiaries and
      provides for a maximum letter or credit/trust receipt facility of $1,928,000
      and
      for an aggregate of $1,024,000 for capital expenditure/equipment loans. The
      interest rates under the DBS letter of credit facility is 1% over the best
      lending rate quoted by the bank from time to time for Hong Kong dollar credits,
      and the bank’s standard bills rate for U.S. dollar credits. The DBS capital
      expenditure loans are repayable in monthly installments ranging from 16 months
      to 36 months. Interest rates under the DBS capital expenditure facility vary
      from 0.25% below the prime rate quoted by the bank from time to time, to 1.5%
      over the prime rate quoted from time to time. The DBS facility is also secured
      by a charge on various accounts maintained by the Company at that bank and
      by
      cross guarantees indemnities by Highway Holdings Limited and the various
      borrowing subsidiaries. As of March 31, 2006, the Company had borrowings of
      a
      total of $2,312,000 outstanding under its credit facilities and had a total
      of
      $1,544,000 of available credit remaining under the two credit facilities. The
      Company’s long-term debt was $322,000 as of March 31, 2006.




As
      a
      result of its currently available working capital and its internal projections
      for the next year, the Company expects that its working capital requirements
      and
      capital needs for at least the next 12 months can be funded through a
      combination of internally generated funds and existing facilities. The Company’s
      additional manufacturing facility that has been leased effective July 1, 2005
      and will be operated during the current fiscal year is not projected to have
      any
      negative effect on the Company’s liquidity as the operating savings are
      projected to offset the additional leasing and transportation costs. However,
      the Company currently is currently considering the purchase of a 50,000 square
      meter lot in He Yuan should it elect to expand its operations in He Yuan. The
      subsequent expansion of the He Yuan operations would result in the use of some
      of the Company’s currently available cash proceeds and negatively impact its
      future liquidity.




-38-


The
      Company is not a party to off-balance sheet arrangements and does not engage
      in
      trading activities involving non-exchange traded contracts. In addition, the
      Company has no financial guarantees, debt or lease agreements or other
      arrangements that could trigger a requirement for an early payment or that
      could
      change the value of the Company’s assets.




The
      following is a summary of the Company’s contractual obligations as of March 31,
      2006 is as follows:




**Payment
                due by Year Ended March 31,****Contractual
                Obligations**
            
            **Total**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011
                and thereafter****000’s**
            
            **000’s**
            
            **000’s**
            
            **000’s**
            
            **000’s**
            
            **000’s**Facility
                Leases
            
            
            2,511
            
            
            902
            
            
            875
            
            
            734
            
            
            --
            
            
            --Finance
                Leases
            
            
            803
            
            
            481
            
            
            258
            
            
            64
            
            
            --
            
            
            --Capital
                commitment on purchase of property, plant and equipment
            
            
            496
            
            
            496Purchase
                obligations
            
            
            2,907
            
            
            2,907
            
            
            --
            
            
            --
            
            
            --
            
            
            --Short
                term borrowing
            
            
            2,015
            
            
            2,015
            
            
            --
            
            
            --
            
            
            --
            
            
            --Interest
                commitments
            
            
            63
            
            
            47
            
            
            14
            
            
            2
            
            
            --
            
            
            --Total
            
            
            8,795
            
            
            6,848
            
            
            1,147
            
            
            800
            
            
            --
            
            
            --







**Impact
      of Inflation**




The
      Company believes that inflation has not had a material effect on its
      business.




**Seasonality**




The
      first
      calendar quarter (the last quarter of the Company’s March 31 fiscal year) is
      typically the Company’s lowest sales period because, as is customary in China,
      the Company’s manufacturing facilities in China are usually closed for one to
      two weeks for the Chinese New Year holidays. The Company does not experience
      any
      other significant seasonal fluctuations. The Company does not consider any
      issues with respect to seasonality to be material.




**Exchange
      Rates**




The
      Company transacts its business with its vendors and customers primarily in
      U.S.
      dollars, Hong Kong dollars and euros. In addition, all of the payments the
      Company is required to make under the BFDC Agreements for its manufacturing
      facilities and factory workers in both Shenzhen and He Yuan, as management
      fees
      and other operating charges are based on the Hong Kong dollar. The Company
      makes
      the lease payments and other operating expenses at the new Wuxi facilities
      in
      renminbi. The exchange rate between the U.S. dollar and the Hong Kong dollar
      has
      been fixed since 1983 at approximately HK $7.78 to US $1.00. Accordingly, the
      Company has not been subject to material currency fluctuations with respect
      to
      these aspects of its operations. However, since the Company’s fiscal 2006 clock
      and other sales in Europe were denominated in euros, and since a number of
      the
      Company’ European customers insist on paying in euros, the Company is subject to
      the risks of exchange rate fluctuations. During the fiscal year ended March
      31,
      2004 and 2005, the Company experienced net currency exchange gains of $278,000
      and $249,000, respectively. However, during the fiscal year ended March 31,
      2006, the Company experienced a net currency exchange loss of $614,000. The
      recent exchange rate loss is due to the decrease in the value of the euro
      compared to the U.S. dollar. The Company does not utilize any form of financial
      hedging or option instruments to limit its exposure to exchange rate or material
      price fluctuations and has no current intentions to engage in such activities
      in
      the future. Accordingly, material fluctuations in the exchange rates between
      the
      U.S. dollar and other currencies, the euro in particular, could have a material
      impact on the Company’s future earnings/losses.




-39-


**Critical
      Accounting Policies**




The
      Company prepares its consolidated financial statements in accordance with
      accounting principles generally accepted in the United States of America. The
      preparation of these financial statements requires the Company to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amount of revenues and expenses during the reporting
      period. On an on-going basis, the Company evaluates its estimates and judgments,
      including those related to bad and doubtful debts, inventories, income taxes,
      impairment of assets, and intangible assets. The Company bases its estimates
      and
      judgments on historical experience and on various other factors that the Company
      believes are reasonable. Actual results may differ from these estimates under
      different assumptions or conditions.




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




Revenue
      recognition - The Company recognizes revenue when all of the following
      conditions are met (i) persuasive evidence of an arrangement exists; (ii)
      delivery has occurred; (iii) price to the customer is fixed or determinable;
      and
      (iv) collectibility is reasonably assured.




Bad
      and
      doubtful debts - The Company maintains allowances for its bad and doubtful
      accounts for estimated losses resulting from the inability of its customers
      to
      make required payments. The
      allowances are determined by (1) analyzing specific customer accounts that
      have
      known or potential collection issues and (2) applying historical loss rates
      to
      the aging of the remaining accounts receivable balances. The allowances for
      doubtful accounts were $99,000 and $31,000 in fiscal years ended March 31,
      2005
      and 2006 respectively. If
      the
      financial condition of its customers changed, changes to these allowances may
      be
      required, which would impact the Company’s future operating
      results.




Inventories
      - Inventories, consisting of finished goods, raw materials and packaging
      materials, are stated at the lower of cost or market with cost determined using
      the first-in, first-out method. The Company makes certain obsolescence and
      other
      assumptions to adjust inventory based on historical experience and current
      information. The Company writes down inventory for estimated obsolete or
      unmarketable inventory equal to the difference between the costs of inventory
      and estimated market value, based upon assumptions about future demand and
      market conditions. These assumptions, although consistently applied, can have
      a
      significant impact on current and future operating results and financial
      position.




-40-


Income
      taxes - The Company records a valuation allowance to reduce its deferred tax
      assets to the amount that the Company believes is more likely than not to be
      realized. In the event the Company was to determine that it would be able to
      realize its deferred tax assets in the future in excess of its recorded amount,
      an adjustment to the deferred tax asset would increase income in the period
      such
      determination was made. Likewise, should the Company determine that it would
      not
      be able to realize all or part of its net deferred tax asset in the future,
      an
      adjustment to the deferred tax asset would be charged to income in the period
      such determination was made.




Impairment
      of assets - The Company's long-lived assets principally include property, plant
      and equipment and intangible assets. 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.
      In performing the annual assessment of long-lived assets for impairment for
      the
      fiscal years ended March 31, 2004, the Company determined that none of the
      long
      lived assets’ carrying values were close to exceeding their respective fair
      values. Due
      to
      the poor financial performance of the manufacturing of cameras, clocks and
      watches, the Company reassessed its property, plant and equipment and industrial
      property rights for impairment, and an impairment loss of $347,000 and $67,000,
      respectively, was recognized during the fiscal year ended March 31, 2005, and
      the Company further recognized an impairment loss of $197,000 for property,
      plant and equipment, and an impairment loss of $60,000 for industrial property
      rights during the fiscal year ended March 31, 2006.




-41-


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




**Directors
      and Executive Officers**




The
      Directors and executive officers of the Company as of June 29, 2006 are listed
      below. The Directors hold office until the next annual meeting of shareholders,
      which currently is scheduled to be held on August 10, 2006.




Name
            Age
            PositionsRoland
                W. Kohl
            57
            Chief
                Executive Officer, Director, Chairman of the BoardSatoru
                Saito
            57
            Sales
                Director, Metal Stamping Operations, DirectorFong
                Po Shan
            40
            Chief
                Financial Officer, SecretaryMay
                Tsang Shu Mui
            46
            Chief
                Administrative Officer, DirectorQuan
                Vinh Can (Joseph)
            57
            Chief
                Operating Officer, Metal Stamping OperationsTiko
                Aharonov
            59
            DirectorDirk
                Hermann
            42
            DirectorUri
                Bernhard Oppenheimer(1)(2)
            70
            DirectorShlomo
                Tamir(1)(2)
            59
            DirectorKevin
                Yang Kuang Yu(1)
            49
            DirectorIrene
                Wong Ping Yim(1)
            40
            DirectorBrian
                Geary
            49
            DirectorGeorge
                Leung Wing Chan
            53
            Director


____________


(1)
            Member
                of Audit Committee.


(2)
            Member
                of Compensation Committee





**Roland
      W. Kohl** .
      Mr.
      Kohl was the founder of the Company and has been its Chief Executive Officer
      since its inception in 1990. He has been a Director of the Company since March
      1, 1995. He has overall responsibility for the day-to-day operations of the
      Company and its subsidiaries. Prior to forming the Company, Mr. Kohl was the
      Managing Director of Dialbright Company Limited, a camera manufacturer located
      in China. Mr. Kohl received a degree in mechanical engineering and has over
      twenty year’s experience in managing factories and manufacturing operations in
      China. Mr. Kohl is a German national and resides in Hong Kong.




**Satoru
      Saito** .
      Mr.
      Saito has been employed by the Company since its inception and has been a
      Director since September 14, 1996. Mr. Saito’s responsibilities include
      supervision of sales and marketing in the metal manufacturing division. Mr.
      Saito has extensive experience in working with Japanese companies in Japan
      and
      China. Mr. Saito is a Japanese national and resides in Hong Kong.




**Fong
      Po Shan** .
      Ms.
      Fong was employed as a Chief Financial Officer and Secretary of the Company
      in
      January 1998. Ms. Fong’s responsibilities include planning financial development
      and setting up the internal systems. From 1995-1997, Ms. Fong worked at Philips
      Hong Kong Limited and KONE Elevator (HK) Limited as a Management Accountant
      and
      Financial Control and Supply Manager, respectively. From 1991-1994 Ms. Fong
      was
      employed as an Accounting Manager of the Company. She is a member of CPA
      Australia and Hong Kong Institute of Certified Public Accountants. She graduated
      from Simon Fraser University with a Bachelor Degree in Business Administration
      in Canada in 1990 and received a Masters in Accounting from the Charles Stuart
      University in 1994.




-42-


**Tiko
      Aharonov** .
      Mr.
      Aharonov has been a Director of the Company since its inception in 1990 and
      was
      a General Manager of the Company’s camera operations from 1998 to 2004. Until
      the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as
      the General Manager of the Bulgarian operations. Mr. Aharonov currently is
      a
      Director of several unaffiliated Israeli companies. He was a bank manager for
      a
      leading Israeli commercial and retail bank in the past five years has operated
      his own real estate and investment company for high net worth individuals
      desiring to invest in real estate in Israel.




**May
      Tsang Shu Mui** .
      Ms.
      Tsang has been the Company’s Factory Manager in charge of camera manufacturing
      and a Director of the Company since 1990. In 2001, Ms. Tsang became the
      Company’s Administration Manager, and most recently became the Company's
      Chief Administrative Officer. Ms. Tsang is a Chinese national and resides
      in Hong Kong.




**Quan
      Vinh Can (Joseph)** .
      Mr.
      Quan has been employed as the Company’s Factory Manager since 1994. He is
      responsible for all of the Company’s manufacturing operations. Mr. Quan
      currently is the Company's Chief Operating Officer, Metal Stamping Operations.
      He joined the Company’s metal stamping operations in 1990 as an assistant
      Production Manager. He graduated from the national Taiwan University with a
      Bachelors Degree in Electrical Engineering in 1974.




**Dirk
      Hermann.** Dr.
      Hermann was appointed to the Board of Directors in January 2003. Dr. Hermann
      currently serves as the regional marketing manager for the southwestern region
      of Germany for Allianz Versicherungs-AG. He joined Allianz, the German insurance
      firm, in 1994 as a marketing executive assistant based in Munich. Prior, he
      held
      a marketing position with MSU Management Consulting GmbH. He began his marketing
      career with Gruber, Titze and Blank GmbH, a management consulting firm based in Germany. Dr. Hermann graduated from the University
      of
      Konstanz in Germany with a bachelor’s degree in business administration. He also
      holds a master’s degree in business administration from the University of St.
      Gallen in Switzerland. He earned a Ph.D. degree in business administration
      from
      the University of Leipzig, in Germany.




**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
      Manager.




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




-43-


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




**Brian
      Geary.** Mr.
      Geary was
      appointed to the Board of Directors in December 2005. Mr. Geary has since 2002
      been a director of LMI Aerospace, a public company that manufactures components,
      assemblies, and kits for the aerospace, defense, and technology industries,
      and
      since October 2003 has been a director of Stockholder Mattman Specialty
      Vehicles. From 1978
      until 2002, Mr. Geary was the President and owner Versaform Corp. and Versaform
      Canada ,
      two
      companies that were sold to LMI Aerospace in 2002.




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




Dr.
      Hermann is the brother-in-law of Roland Kohl. Other than the foregoing
      relationship, there is no family relationship between any of the above-named
      officers, directors or employees. To the Company’s knowledge, no arrangement or
      understanding exists between any such director and executive officer and any
      major shareholder, customer, supplier or other party pursuant to which any
      director or executive officer was elected as a director or executive officer
      of
      the Company.




**Compensation
      of Directors and Officers**




The
      aggregate amount of compensation (including non-cash benefits) paid by the
      Company and its subsidiaries during the year ending on March 31, 2006 to all
      of
      the directors and officers listed above, as a group (13 people), for services
      rendered to the Company and its subsidiaries in all capacities was approximately
      $1,132,000.




During
      the past fiscal year, the Company paid each non-executive director (Tiko
      Aharonov, Dirk Hermann, Uri Bernhard Oppenheimer, Shlomo Tamir, Kevin Yang
      Kuang
      Yu, Irene Wong Ping Yim, Brian
      Geary, and George
      Leung Wing Chan) an annualized director’s fee of $6,000 (Mr. Geary and
      Mr. Leung joined the Board of Directors in December and received a fee of
      $1,750 each), and reimbursed them for their reasonable expenses incurred in
      connection with their services as directors. In addition, members of any Board
      committee and the Chairman of the Audit Committee are paid an additional fee
      of
      $1,000 per year for each committee on which they serve. In the past, the Company
      has also granted stock options to its non-executive director, outside directors,
      although the Company did not grant any options to its directors during the
      fiscal year ended March 31, 2006. However, on June 24, 2006, the Company granted
      options to purchase 50,000 shares to all of its directors, other than Mr. Kohl,
      the Company’s Chief Executive Officer. On June 24, 2006, each director received
      a five-year option to purchase 5,000 shares at an exercise price of $3.42 (the
      last sale price on the first business day following the option grant). The
      options become vested and are exercisable only after the first anniversary
      (June
      24, 2007) of the option grant date.




-44-


**Board
      Practices**




Directors
      of the Company are elected each year at the Company’s annual meeting of
      shareholders and serve until their successors take office, or until their death,
      resignation or removal. The Company generally holds its annual meeting of
      shareholders within 90 days after the filing of its Annual Report on Form 20-F
      with the Commission. Executive officers serve at the pleasure of the Board
      of
      Directors of the Company. As of the date of this Annual Report, there are no
      agreements with any of the Directors that would provide the Directors with
      any
      benefits upon termination of employment.




*Audit
      Committee* The
      members of the Audit Committee of the Board of Directors are Uri Bernhard
      Oppenheimer, Shlomo Tamir, Kevin Yang Kuang Yu, and Irene Wong Ping Yim. The
      Audit Committee reviews, acts on and reports to the Board of Directors on
      various auditing and accounting matters, including the selection of the
      Company’s auditors, the scope of the annual audits, fees to be paid to the
      auditors, the performance of the independent auditors, any additional services
      to be provided by the auditors, and the Company’s accounting practices. Each of
      these individuals is a non-employee director and is independent as defined
      under
      the Nasdaq Stock Market’s listing standards, and each has significant knowledge
      of financial matters (two of the members have received advanced degrees in
      business administration). Ms. Wong has been designated by the Board as the
      “audit committee financial expert” as defined under Item 401(h) (2) of
      Regulation S-K of the Securities Exchange Act of 1934, as amended. The Audit
      Committee met once during fiscal 2006. The Audit Committee operates under a
      formal charter that governs its duties and conduct.




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




All
      eleven of the Company's current directors (six of whom are independent
      directors) have participated in the selection of 2006 director nominees.
      Accordingly, the Board of Directors has not yet found it necessary to have
      a
      separate Nominating Committee. The Board of Directors has not established any
      specific minimum qualifications for director candidates or any specific
      qualities or skills that a candidate must possess in order to be considered
      qualified to be nominated as a director. Qualifications for consideration as
      a
      director nominee may vary according to the particular areas of expertise being
      sought as a complement to the existing board composition. In making its
      nominations, the Board of Directors generally will consider, among other things,
      an individual’s business experience, industry experience, financial background,
      breadth of knowledge about issues affecting our company, time available for
      meetings and consultation regarding company matters and other particular skills
      and experience possessed by the individual.




-45-


**Employees**




As
      of
      March 31, 2006, the Company a total of 1,250 persons were working on a full-time
      basis for the Company. Of these, 1,217 workers in China were supplied to the
      Company by the BFDC under the BFDC Agreements and the Company’s agreement with
      the Heyuan Foreign Trade & Economy Cooperation Bureau. As with the employees
      in Shenzhen, the employees at He Yuan are technically employed by the local
      authorities, not by the Company. However, since the Company’s Wuxi subsidiary is
      a registered Chinese company, the employees at the Wuxi facility are employees
      of the Company’s Wuxi subsidiary. The Company only has one full-time employee
      left at its office in Germany. As of March 31, 2006, 32 employees in Hong Kong
      were employees of the Company’s subsidiaries. Of the foregoing workers and
      employees, 88 were engaged in the administration of the Company, 1,120 were
      engaged in manufacturing (including research and development, design,
      engineering, quality control, and shipping), 10 were engaged in marketing,
      and
      the balance (32 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
      persons working at the Company’s Shenzhen, China, facilities are employed by
      BFDC pursuant to the BFDC Agreements. The number of workers employed by the
      BFDC
      fluctuates largely due to the availability of workers and the time of year.
      The
      seasonality is also dependent, to a lesser extent, on orders held by the
      Company. The Company has experienced temporary shortages of labor and has taken
      action to attract additional workers from other provinces of China to its
      factory complex in Long Hua, Shenzhen. From time to time, labor supply has
      been
      adversely affected primarily due to transportation difficulties in bringing
      workers to Shenzhen due to flooding or other natural disasters as well as
      seasonal demands on labor such as harvesting when the mainly rural-based
      laborers are required to return to their village. Due to the nature of the
      labor
      force working at facilities such as the Company’s in Shenzhen, the Company
      experiences high turnover of employees annually.




The
      Company’s employees are not parties to any labor union or collective bargaining
      agreement, and the Company has, to date, not experienced any material labor
      stoppages. The Company believes that its relations with employees are good.




**Options
      of Directors and Senior Management**




The
      following table sets forth the number of options to purchase Common Shares
      that
      each current Director and executive officer of the Company owns as of June
      27,
      2006, together with the exercise price of such options and the expiration date
      of the options.




Name
                of Beneficial Owner Or Identity of Group
            
            Number
                of Common Shares
            
            Expiration
                Date
            
            Exercise
                PriceTiko
                Aharonov
            
            
            3,000
            
            
            June
                2, 2008
            
            $
            1.476,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            *
            
            June
                23, 2011
            
            $
            3.42May
                Tsang Shu Mui
            
            
            3,000
            
            
            June
                2, 2008
            
            $
            1.476,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            *
            
            June
                23, 2011
            
            $
            3.42Satoru
                Saito
            
            
            6,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            *
            
            June
                23, 2011
            
            $
            3.42Dirk
                Hermann
            
            
            1,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.505,000
            *
            
            June
                23, 2011
            
            $
            3.42Quan
                Vinh Can (Joseph)
            
            
            3,000
            
            
            June
                2, 2008
            
            $
            1.476,000
            
            
            October
                27, 2008
            
            $
            3.1710,000
            
            
            June
                30, 2010
            
            $
            3.50Fong
                Po Shan
            
            
            10,000
            
            
            June
                30, 2010
            
            $
            3.50Kevin
                Yang Kuang Yu
            
            
            5,000*
            
            
            June
                23, 2011
            
            $
            3.42Irene
                Wong Ping Yim
            
            
            5,000*
            
            
            June
                23, 2011
            
            $
            3.42Shlomo
                Tamir
            
            
            5,000*
            
            
            June
                23, 2011
            
            $
            3.42Brian
                Geary
            
            
            5,000*
            
            
            June
                23, 2011
            
            $
            3.42George
                Leung Wing Chan
            
            
            5,000*
            
            
            June
                23, 2011
            
            $
            3.42Uri
                Bernhard Oppenheimer
            
            
            5,000*
            
            
            June
                23, 2011
            
            $
            3.42


_____________________


* These
      options will vest and become exercisable on June 24, 2007





-46-


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




The
      Company has adopted the 1996 Stock Option Plan (the “Option Plan”) that
      currently covers 600,000 shares of the Common Shares. The Option Plan provides
      for the grant of options to purchase Common Shares to employees, officers,
      directors and consultants of the Company. The Option Plan is administered by
      the
      Compensation Committee appointed by the Board, which determines the terms of
      the
      options granted, including the exercise price (provided, however, that the
      option price shall not be less than the fair market value or less than the
      par
      value per share on the date the options granted), the number of Common Shares
      subject to the option and the option’s exercisability. As of March 31, 2006,
      options granted under the Option Plan to purchase a total of 161,750 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, 2006 was $3.25 per share.




As
      of
      June 27, 2006 the Company had outstanding stock options for an aggregate total
      of 211,750 Common Shares.




-47-


As
      part
      of the compensation that the Company has agreed to issue to Mr. Kohl, the
      Company’s Chief Executive Officer, commencing on April 1, 2004 and continuing
      annually thereafter until 2009, 29,154 Common Shares. As required by the
      employment agreement, Mr. Kohl was issued 29,154 in June 2005 and again in
      June
      2006.




**Item
      7.**  **Major
      Shareholders and Related Party Transactions**




Major
      Shareholders .
      The
      Company is not directly or indirectly owned or controlled by any other
      corporation or any foreign government. The following table sets forth, as of
      June 27, 2006, 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 Owneror Identify of Group(1)
            
            Number
                of Common SharesBeneficially Owned
            
            Percent
                BeneficialOwned(**)Roland
                W. Kohl
            
            468,105
            
            13.42
            %Tiko
                Aharonov
            
            250,000
            (2)
            7.15%Dirk
                Hermann
            
            6,000
            (3)
            *Satoru
                Saito
            
            355,980
            (4)
            10.19%May
                Tsang Shu Mui
            
            69,171
            (2)
            1.98%George
                Leung Wing Chan
            
            -
                -Brian
                Geary
            
            5,000
            
            *Irene
                Wong Ping Yim
            
            -
                -Kevin
                Yang Kung Yu
            
            8,244
            
            *Shlomo
                Tamir
            
            -
                -Uri
                Bernhard Oppenheimer
            
            -
                -Cartwright
                Investments Limited
            
            346,830
            
            9.94
            %Fong
                Po Shan
            
            1,283
            
            *Quan
                Vinh Can
            
            33,665
            (2)
            *





*
            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 9,000 Common Shares which are currently
                exercisable.


(3)
            Includes
                stock options to purchase 1,000 Common Shares which are currently
                exercisable.


(4)
            Includes
                stock options to purchase 6,000 Common Shares which are currently
                exercisable.








There
      are
      no arrangements known to the Company, the operation of which may at a subsequent
      date result in a change in control of the Company. All holders of the Common
      Shares have the same voting rights, and the Company’s major shareholders do not
      have different voting rights.




-48-


Related
      Party Transactions .




The
      Company did not engage in any related party transactions during the fiscal
      year
      ended March 31, 2006.




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




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




Selected
      Consolidated Financial Information In Thousands, Except Per Share
      Data




**1****st******
              **Quarter**
            
            **2****nd******
              **Quarter**
            
            **3****rd******
              **Quarter**
            
            **4****th******
              **Quarter**(restated)
            
            
            
            (restated)2005Net
                Sales
            
            $
            6,148
            
            $
            6,404
            
            $
            7,309
            
            $
            7,817Gross
                profit
            
            
            1,476
            
            
            1,107
            
            
            1,198
            
            
            1,349Operating
                income (loss)
            
            
            342
            
            
            (26
            )
            
            (169
            )
            
            (416
            )Net
                income (loss)
            
            
            346
            
            
            28
            
            
            116
            
            
            (642
            )Income
                (loss) per share - basic
            
            
            0.11
            
            
            0.01
            
            
            0.04
            
            
            (0.21
            )Income
                (loss) per share - diluted
            
            
            0.10
            
            
            0.01
            
            
            0.03
            
            
            (0.21
            )2006Net
                Sales
            
            $
            6,563
            
            $
            6,855
            
            $
            6,448
            
            $
            5,977Gross
                profit (restated for 3rdquarter)
            
            
            1,381
            
            
            1,202
            
            
            1,030
            
            
            630Operating
                income (loss) (restated for 1stand 3rdquarters)
            
            
            982
            
            
            (195
            )
            
            544
            
            
            (729
            )Net
                income (loss)
            
            
            540
            
            
            (112
            )
            
            411
            
            
            (797
            )Income
                per share (loss) - basic
            
            
            0.16
            
            
            (0.03
            )
            
            0.12
            
            
            (0.24
            )Income
                per share (loss) - diluted
            
            
            0.16
            
            
            (0.03
            )
            
            0.12
            
            
            (0.24
            )





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




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




-49-


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




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




Dividend
      Policy .
      The
      Company attempts to pay a cash dividend annually to all holders of its common
      shares, subject to its profitability and cash position. During the fiscal year
      ended March 31, 2006, the Company made two cash dividend payments of $0.20
      per
      share each ($0.40 during the fiscal year), based on profits it derived in part
      from the sale of its “Kienzle” trademark. The Company also paid a cash dividend
      of $0.10 per share in August 2004, and a cash dividend of $0.08 per share in
      August 2003. Prior to the 2003 dividend, the Company had not paid a dividend
      since the fiscal year ended March 31, 2000 due to its operating losses. Future
      dividend will be paid at the discretion of the Board of Directors and will
      depend upon, among other things, the Company’s net profit after taxes, the
      anticipated future earnings of the Company, the success of the Company’s
      business activities, the Company’s capital requirements, and the general
      financial conditions of the Company. Although it is the Company’s intention to
      pay dividends during profitable fiscal years, no assurance can be given that
      the
      Company will pay, in fact, pay any dividends in the future even if its has
      a
      profitable year or is otherwise capable of doing so.




Legal
      Proceedings .




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




**Item
      9.**  **The
      Listing**




The
      Company’s Common Shares are currently traded on The Nasdaq SmallCap Market under
      the symbol “HIHO” and are not listed for trading in any trading market outside
      the United States. On June 26, 2006, the last reported sale price of our common
      shares on The Nasdaq SmallCap Market was $3.42 per share. As of June 26, 2006,
      there were 51 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, 2006:




Year
                Ended
            
            High
            
            LowMarch
                31, 2006
            
            $
            5.48
            
            $
            2.77March
                31, 2005
            
            $
            5.80
            
            $
            3.09March
                31, 2004
            
            $
            7.39
            
            $
            1.40March
                31, 2003
            
            $
            2.00
            
            $
            0.47March
                31, 2002
            
            $
            1.33
            
            $
            0.60





-50-


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, 2006
            
            $
            5.48
            
            $
            3.25December
                31, 2005
            
            $
            3.59
            
            $
            2.77September
                30, 2005
            
            $
            3.95
            
            $
            3.20June
                30, 2005
            
            $
            4.55
            
            $
            3.26March
                31, 2005
            
            $
            4.75
            
            $
            4.15December
                31, 2004
            
            $
            4.75
            
            $
            3.09September
                30, 2004
            
            $
            5.80
            
            $
            4.18June
                30, 2004
            
            $
            5.60
            
            $
            4.00





The
      following table sets forth the high and low closing sale prices of the Company’s
      Common Shares as reported by The Nasdaq Stock Market during each of the most
      recent six months.




Month
                Ended
            
            High
            
            LowMay
                31, 2006
            
            $
            4.17
            
            $
            3.36April
                30, 2006
            
            $
            3.85
            
            $
            3.36March
                31, 2006
            
            $
            3.90
            
            $
            3.42February
                28, 2006
            
            $
            5.47
            
            $
            3.78January
                31, 2006
            
            $
            3.65
            
            $
            3.25December
                31, 2005
            
            $
            3.59
            
            $
            2.77





**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, 2006 and June 26, 2006, there were 3,487,758
      and 3,556,712 Common Shares, respectively, outstanding, net of 37,800 treasury
      shares, all of which was fully paid. The number of shares outstanding could
      increase by the shares issued upon the exercise of currently issued and
      outstanding options (see, “Item 6, Share Ownership,” above). As of March 31,
      2006, the Company no longer had any warrants to purchase Common Shares
      outstanding.




**Memorandum
      And Articles Of Association**




Highway
      Holdings Limited is registered at Craigmuir Chambers, P.O. Box 71, Road Town,
      Tortola, British Virgin Islands and has been assigned company number 32576.
      The
      objectives or purposes of the Company are to engage in any act or activity
      that
      is not prohibited under British Virgin Islands law as set forth in Clause 4
      of
      the Memorandum of Association. The Company does not believe that there are
      any
      restrictions in its charter or under British Virgin Island law that materially
      limit the Company’s current or proposed operations.




-51-


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.




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.




-52-


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.




-53-


The
      Company is also a party to (i) the BFDC Agreements and related agreements
      described in Item 4 “Information on our Company” and filed as exhibits to the
      Company’s Securities and Exchange Commission filings, (ii) the leases, and
      extensions thereof, described in the Property, Plant and Equipment section
      of
      Item 4 “Information on our Company” and filed as exhibits to the Company’s
      Securities and Exchange Commission filings, and (iii) the bank lines of credit
      described in the Liquidity and Capital Resources section under Item 5 “Operating
      and Financial Review and Prospects”.




**Exchange
      Controls**




There
      are
      no exchange control restrictions on payment of dividends on the Company’s Common
      Shares or on the conduct of the Company’s operations either in Hong Kong, where
      the Company’s principal executive officers are located, or the British Virgin
      Islands, where the Company is incorporated. Other jurisdictions in which the
      Company conducts operations may have various exchange controls. Taxation and
      repatriation of income regarding the Company’s China operations are regulated by
      Chinese laws and regulations. To date, these controls have not had and are
      not
      expected to have a material impact on the Company’s financial results. There are
      no material British Virgin Islands laws which impose foreign exchange controls
      on the Company or that affect the payment of dividends, interest or other
      payments to nonresident holders of the Company’s securities.




**Taxation**




No
      reciprocal tax treaty regarding withholding tax exists between the U.S. and
      the
      British Virgin Islands. Under current British Virgin Islands law, dividends,
      interest or royalties paid by the Company to individuals and gains realized
      on
      the sale or disposition of shares are not subject to tax as long as the
      recipient is not a resident of the British Virgin Islands. The Company is not
      obligated to withhold any tax for payments of dividends and shareholders receive
      gross dividends irrespective of their residential or national
      status.




**Documents
      On Display**




The
      documents concerning the Company which are referred to in this Annual Report
      may
      be inspected by shareholders of this Company at the offices of this Company
      in
      Hong Kong.




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




The
      Company sells most of our products in Hong Kong dollars, U.S. dollars, and
      in
      euros. The exchange rate between the U.S. dollar and Hong Kong dollar has
      remained stable. However, the exchange rate between the euro and the U.S. and
      Hong Kong dollars has fluctuated, resulting in currency exchange gains and
      losses. Since the Company engages in transactions in Europe that are denominated
      in euros, the Company is subject to fluctuations in the rates of exchange
      between the dollar and the euro, which fluctuations will affect the Company’s
      results of operations and its balance sheet. For example, an increase in the
      value of a particular currency (such as the euro) relative to the dollar will
      increase the dollar reporting value for transactions in that particular
      currency, and a decrease in the value of that currency relative to the dollar
      will decrease the dollar reporting value for those transactions. This effect
      on
      the dollar reporting value for transactions is generally only partially offset
      by the impact that currency fluctuations may have on costs. Currently, most of
      the Company’s currency fluctuation exposure is tied to the exchange rate between
      the U.S. dollar and the euro.




-54-


To
      the
      extent that the Company has to convert U.S. dollars into renminibi for its
      operations, an appreciation in the value of the renminbi compared to the U.S.
      dollar would reduce the amount of renminbi the Company would receive upon
      conversion. Accordingly, an appreciation of the renminbi’s value would require
      the Company to pay more U.S. dollars to fund it renminbi operating expenses.
      The
      United States and certain European countries have recently been calling for
      the
      re-valuation of the renminbi, which revaluation would result in the appreciation
      of the renminbi. During the past year, the exchange rate between the yuan and
      the U.S. dollar changed slightly as China allowed the yuan to appreciate in
      value compared to the U.S. dollar. Currently, because the amount of transactions
      conducted by the Company in renminbi is relatively low, even a 5% appreciation
      in the value of the yuan would not materially change the Company’s expenses. For
      example, if the renminbi had been 1% and 5% less valuable against the U.S.
      dollars than the actual rate as of March 31, 2006, our net asset value, as
      presented in U.S. dollars, would have been approximately reduced by $50,000
      and
      $229,000, respectively. Conversely, if the renminbi had been 1% and 5% more
      valuable against the U.S. dollars as of that date, then our net asset value
      would have increased by $50,000 and $229,000, respectively. We believe our
      most
      significant foreign exchange risk results from material sales made in euro.
      Approximately 21% of our net sales were made in euros in fiscal year ended
      March
      31, 2006. If the euro had been 1% and 5% less valuable against the U.S. dollars
      than the actual rate as of March 31, 2006, our net asset value, as
      presented in U.S. dollars, would have been approximately reduced by $55,000
      and
      $270,000, respectively. Conversely, if the euro had been 1% and 5% more valuable
      against the U.S. dollars as of that date, then our net asset value would have
      increased by $55,000 and $270,000, respectively . However,
      should the Chinese government allow a significant renminbi appreciation, or
      should the Company’s operating expenses in renminbi significantly increase in
      the future, the Company’s cost structure and pricing could change and have a
      material negative effect on its operations, sales and financial
      results.




The
      Company has not engaged in currency hedging transactions to offset the risks
      associated with variations in currency exchange rates. Consequently, significant
      foreign currency fluctuations and other foreign exchange risks may have a
      material adverse effect on the Company’s business, financial condition and
      results of operations. The Company does not currently own any market risk
      sensitive instruments. However, the Company may in the future undertake hedging
      or other transactions or invest in market risk sensitive instruments if it
      determines that such instruments can offset these risks is a sound and
      cost-efficient manner.




The
      Company is also exposed to interest rate fluctuations as a result of the
      short-term investments that it makes and the borrowings it incurs. The Company
      maintains its excess cash in short-term borrowings that are subject to interest
      rate fluctuations. The Company had $2,496,000 of short-term borrowings that
      are
      subject to interest rate changes and $322,000 of long-term borrowings
      outstanding as of March 31, 2006. However, taking into consideration that the
      Company had cash and cash equivalents of $6,384,000 available as of March 31,
      2006, the Company believes that its interest rate risk on these borrowing was
      acceptable.




-55-


**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.**




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in reports filed under the Securities
      Exchange Act of 1934 (the “Act”), as amended, is recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and forms, and
      that such information is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required disclosure.
      Management, under the supervision of the Company’s Chief Executive Officer and
      Chief Financial Officer, evaluated the effectiveness of our disclosure controls
      and procedures that were designed to ensure that the information required to
      be
      disclosed by us in the reports that we file or submit under the Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      SEC
      rules and forms, and that such information is accumulated and communicated
      to
      our management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure.




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




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




Item 16
      A. Audit
      Committee Financial Expert





The
      Company’s Board of Directors has determined that Ms. Irene Wong Ping Yim of the
      Audit Committee qualifies as an “audit committee financial expert” as defined by
      Item 401(h) of Regulation S-K, adopted pursuant to the Securities Exchange
      Act
      of 1934. Ms. Wong currently is the Chief Accountant of CNIM HK Ltd. in Hong
      Kong, holds a Master of Business Administration from Deakin University, and,
      from 1994 to 2001 was the Accounting Manager of Highway Holdings. In
      addition, each of the other members of the audit committee have extensive
      financial and business experience as presidents, chief operating officers,
      and
      directors of various public and private enterprises.




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




-56-


Item 16
      B. Code
      of Ethics





The
      Company has adopted a Code of Ethics for the Chief Executive Officer and Chief
      Financial Officer, which applies to the Company’s principal executive officer
      and to its principal financial and accounting officers. A copy of the Code
      of
      Ethics is attached as Exhibit 14.1. Shareholders can also obtain a copy of
      the Code of Ethics from:




Highway
      Holdings Limited


Suite
      810, Level 8, Landmark North


39
      Lung
      Sum Avenue


Sheung
      Shui


New
      Territories, Hong Kong




Attn:
      Chief Financial Officer







Item 16
      C. Principal
      Accountant Fees and Services





The
      Company’s independent public accountant for each of the fiscal years in the
      three-year period ended March 31, 2006 has been Deloitte Touche Tohmatsu. The
      auditor is selected annually by the Company’s Board of Directors and ratified by
      the shareholders at the Annual General Meeting. The Audit Committee has selected
      Deloitte Touche Tohmatsu as the auditor for the fiscal year ended March 31,
      2006
      and will propose to the Annual General Meeting convening on August 15, 2006
      that
      Deloitte Touche Tohmatsu be ratified as the auditor for that fiscal year.




The
      following table sets forth the aggregate fees for professional services and
      other services rendered by Deloitte Touche Tohmatsu to the Company during the
      fiscal years ended March 31, 2005 and 2006.




**2005**
            
            **2006**Audit
                Fees (1)
            
            $
            149,000
            
            $
            248,000Audit-Related
                Fees (2)
            
            $
            6,000
            
            
            -Tax
                Fees (3)
            
            $
            67,000
            
            $
            31,000All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            222,000
            
            $
            279,000







(1)
      Audit
      fees represent fees for professional services provided in connection with the
      audit of the Company’s consolidated financial statements and review of the
      Annual Report on Form 20-F, and audit services provided in connection with
      other
      statutory or regulatory filings.




(2)
      Audit-related fees consist of assurance and related services reasonably related
      to the audit or a review of the Company’s financial statements.




(3)
      Tax
      Fees include fees for the preparation of tax returns.




As
      part
      of is policies and procedures, all audit related services, tax services and
      other services rendered by were Deloitte Touche Tohmatsu pre-approved by the
      Audit Committee.




-57-


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





Not
      applicable




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





Not
      applicable




**PART
      III**




**Item
      17.**  **Not
      applicable**




**Item
      18.**  **Financial
      statements.**




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




**Item
      19.**  **Exhibits.**




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




1.1
            Memorandum
                and Articles of Association, as amended, of Highway Holdings Limited,
                (incorporated by reference to Exhibit 1.1 of registrant's Form 20-F
                for
                the year ended March 31, 2001.)1.2
            Amendment
                to Memorandum and Articles of Association, as filed on January 20,
                2003
                (incorporated by reference to Exhibit 1.2 of registrant’s Form 20-F for
                the year ended March 31, 2002.)1.3
            Form
                of Amendment to Articles of Association, as filed on November 2,
                2005.4.1
            1996
                Stock Option Plan (incorporated by reference to Exhibit 10.32 of
                the
                registrant’s Registration Statement on Form F-1, Reg. No. 333-05980, filed
                with the SEC on November 8, 1996.)4.3
            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).






-58-




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,
                2004).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)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.4.13
            Tenancy
                Renewal, dated March 10, 2006, between Nissin Precision Metal
                Manufacturing Limited and SHK Sheung Shui Landmark Investment
                Limited8.1
            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 200213.1
            Certifications
                pursuant to Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 200223.1
            Consent
                Of Independent Registered Public Accounting Firm





-59-


**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
              LIMITEDDate:
                June 29, 2006
            By:
            /s/ PO
              S.
              FONGPo
                S. Fong
              *Chief
                Financial Officer and Secretary*












HIGHWAY
        HOLDINGS LIMITED
 
 Consolidated
        Financial Statements
 For
        each
        of the three years in the period ended March 31, 2006
 and
        Report of Independent Registered Public Accounting Firm
 
 
 
 
  HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 INDEX
 
 
  PageCONSOLIDATED
                  FINANCIAL STATEMENTSReport
                  of Independent Registered Public Accounting Firm
              
              F
                  -
                  2Consolidated
                  Statements of Operations for each of the three years in the periodended
                  March 31, 2006
              
              F
                  -
                  3Consolidated
                  Balance Sheets as of March 31, 2005 and 2006
              
              F
                  -
                  4Consolidated
                  Statements of Shareholders' Equity and ComprehensiveIncome
                  (loss) for each of the three years in the period ended March 31,
                  2006
              
              F
                  -
                  5Consolidated
                  Statements of Cash Flows for each of the three years in the periodended
                  March 31, 2006
              
              F
                  -
                  6Notes
                  to Consolidated Financial Statements
              
              F
                  -
                  8
 
 
  
 
 
 
 F-1
 
 
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Shareholders and Board of Directors of
 Highway
        Holdings Limited:
 
 We
        have
        audited the accompanying consolidated balance sheets of Highway Holdings
        Limited
        and its subsidiaries (the "Company") as of March 31, 2005 and 2006, and the
        related consolidated statements of operations, shareholders' equity and
        comprehensive income (loss) and cash flows for each of the three years in
        the
        period ended March 31, 2006. These financial statements are the responsibility
        of the Company's management. Our responsibility is to express an opinion
        on
        these financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company's internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, such consolidated financial statements referred to above present
        fairly, in all material respects, the financial position of Highway Holdings
        Limited and its subsidiaries as of March 31, 2005 and 2006, and the results
        of
        their operations and their cash flows for each of the three years in the
        period
        ended March 31, 2006, in conformity with accounting principles generally
        accepted in the United States of America.
 
 
 
 
 
 **Deloitte
        Touche Tohmatsu**
 Certified
        Public Accountants
 Hong
        Kong
 June
        2,
        2006
 
 F-2
  HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (Dollars
        in thousands except per share data)
 
 
  Year
                  ended March 31,2004
              
              2005
              
              2006Net
                  sales:Third
                  parties
              
              $
              23,691
              
              $
              27,633
              
              $
              25,843Affiliate
              
              
              1,665
              
              
              45
              
              
              -$
              25,356
              
              $
              27,678
              
              $
              25,843Cost
                  of sales
              
              
              (20,262
              )
              
              (22,548
              )
              
              (21,600
              )Gross
                  profit
              
              
              5,094
              
              
              5,130
              
              
              4,243Selling,
                  general and administrative expenses
              
              
              (4,219
              )
              
              (4,985
              )
              
              (5,165
              )Impairment
                  of industrial property rights (note 2)
              
              
              -
              
              
              (67
              )
              
              (60
              )Impairment
                  of property, plant and equipment (note 2)
              
              
              -
              
              
              (347
              )
              
              (197
              )Gain
                  on sale of "Kienzle" industrial property rights (note 1)
              
              
              -
              
              
              -
              
              
              1,781Operating
                  income (loss)
              
              
              875
              
              
              (269
              )
              
              602Non-operating
                  income (expense):Exchange
                  gain (loss), net
              
              
              278
              
              
              249
              
              
              (614
              )Interest
                  expense
              
              
              (77
              )
              
              (110
              )
              
              (134
              )Interest
                  income
              
              
              9
              
              
              14
              
              
              66Other
                  income
              
              
              105
              
              
              56
              
              
              195Total
                  non-operating income (expense)
              
              
              315
              
              
              209
              
              
              (487
              )Affiliates:Impairment
                  of investment in an affiliate
              
              
              (109
              )
              
              (5
              )
              
              -Equity
                  in income of an affiliate
              
              
              2
              
              
              -
              
              
              -(107
              )
              
              (5
              )
              
              -Income
                  (loss) before income taxes and minority interests
              
              
              1,083
              
              
              (65
              )
              
              115Income
                  taxes (note 3)
              
              
              (100
              )
              
              (86
              )
              
              (73
              )Income
                  (loss) before minority interests
              
              
              983
              
              
              (151
              )
              
              42Minority
                  interests
              
              
              (1
              )
              
              (1
              )
              
              -Net
                  income (loss)
              
              $
              982
              
              $
              (152
              )
              $
              42Net
                  income (loss) per share - basic
              
              $
              0.32
              
              $
              (0.05
              )
              $
              0.01Net
                  income (loss) per share - diluted
              
              $
              0.30
              
              $
              (0.05
              )
              $
              0.01Weighted
                  average number of shares outstanding (in thousands)-
                  basic
              
              
              3,030
              
              
              3,260
              
              
              3,465Weighted
                  average number of shares outstanding (in thousands)-
                  diluted
              
              
              3,258
              
              
              3,260
              
              
              3,544
  See
        accompanying notes to consolidated financial statements.
  F-3
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 (Dollars
        in thousands except share data)
 
 ASSETS
 
 March
                  31,2005
              
              2006Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,948
              
              $
              6,384Restricted
                  cash (note 8)
              
              
              965
              
              
              965Accounts
                  receivable, net of allowances fordoubtful
                  accounts of $99 in 2005 and $31 in 2006
              
              
              5,165
              
              
              3,789Inventories
                  (note 4)
              
              
              5,062
              
              
              4,118Investment
                  securities (note 5)
              
              
              296
              
              
              300Prepaid
                  expenses and other current assets
              
              
              721
              
              
              546Total
                  current assets
              
              
              16,157
              
              
              16,102Property,
                  plant and equipment, net (note 6)
              
              
              3,473
              
              
              2,787Industrial
                  property rights, at cost less accumulated amortization of$704
                  in 2005 and $nil in 2006
              
              
              468
              
              
              -Investments
                  in and advance to affiliates (note 7)
              
              
              2
              
              
              2Total
                  assets
              
              $
              20,100
              
              $
              18,891LIABILITIES
                  AND SHAREHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              2,846
              
              $
              2,498Short-term
                  borrowings (note 8)
              
              
              1,449
              
              
              2,015Obligations
                  under capital leases - current portion (note 9)
              
              
              409
              
              
              481Accrued
                  mold charges
              
              
              208
              
              
              246Accrued
                  payroll and employee benefits
              
              
              331
              
              
              292Income
                  taxes payable
              
              
              119
              
              
              -Other
                  liabilities and accrued expenses
              
              
              945
              
              
              610Total
                  current liabilities
              
              
              6,307
              
              
              6,142Obligations
                  under capital leases - net of current portion (note 9)
              
              
              558
              
              
              322Deferred
                  income taxes (note 3)
              
              
              174
              
              
              153Minority
                  interest
              
              
              3
              
              
              -Commitments
                  and contingencies (note 10)Shareholders'
                  equity:Common
                  shares $0.01 par value (Authorized: 20,000,000 shares)
              
              
              33
              
              
              35Additional
                  paid-in capital
              
              
              9,820
              
              
              10,245Retained
                  earnings
              
              
              3,480
              
              
              2,133Accumulated
                  other comprehensive loss
              
              
              (222
              )
              
              (86
              )Treasury
                  shares, at cost - 37,800 shares
              
              
              (53
              )
              
              (53
              )Total
                  shareholders' equity
              
              
              13,058
              
              
              12,274Total
                  liabilities and shareholders' equity
              
              $
              20,100
              
              $
              18,891
 See
          accompanying notes to consolidated financial statements.
 F-4
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 AND
        COMPREHENSIVE INCOME (LOSS)
 (In
        thousands except per share data)
 
 
 
 
 
 
 Common
                  shares, issued and
                  outstanding
              
              Additionalpaid-in
              
              Retained
              
              Accumulatedothercomprehensive
              
              Treasuryshares
              
              Totalshareholders'
              
              ComprehensiveincomeShares
              
              Amount
              
              capital
              
              earnings
              
              income (loss)
              
              at
                  cost
              
              equity
              
              (loss)Balance
                  at April 1, 2003
              
              
              2,936
              
              $
              30
              
              $
              8,793
              
              $
              3,210
              
              $
              (73
              )
              $
              (53
              )
              $
              11,907Issued
                  during the year
              
              
              138
              
              
              1
              
              
              242
              
              
              -
              
              
              -
              
              
              -
              
              
              243Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              982
              
              
              -
              
              
              -
              
              
              982
              
              $
              982Unrealized
                  holding loss on investmentsecurities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (13
              )
              
              -
              
              
              (13
              )
              
              (13
              )Translation
                  adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (40
              )
              
              -
              
              
              (40
              )
              
              (40
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              929Cash
                  dividends ($0.08 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              (237
              )
              
              -
              
              
              -
              
              
              (237
              )Balance
                  at March 31, 2004
              
              
              3,074
              
              
              31
              
              
              9,035
              
              
              3,955
              
              
              (126
              )
              
              (53
              )
              
              12,842Issued
                  during the year
              
              
              242
              
              
              2
              
              
              448
              
              
              -
              
              
              -
              
              
              -
              
              
              450Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (152
              )
              
              -
              
              
              -
              
              
              (152
              )
              $
              (152
              )Legal
                  advisors' options
              
              
              -
              
              
              -
              
              
              177
              
              
              -
              
              
              -
              
              
              -
              
              
              177Director's
                  stock compensation
              
              
              -
              
              
              -
              
              
              160
              
              
              -
              
              
              -
              
              
              -
              
              
              160Unrealized
                  holding loss on investmentsecurities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (13
              )
              
              -
              
              
              (13
              )
              
              (13
              )Translation
                  adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (83
              )
              
              -
              
              
              (83
              )
              
              (83
              )Comprehensive
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              (248
              )Cash
                  dividends ($0.1 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              (323
              )
              
              -
              
              
              -
              
              
              (323
              )Balance
                  at March 31, 2005
              
              
              3,316
              
              
              33
              
              
              9,820
              
              
              3,480
              
              
              (222
              )
              
              (53
              )
              
              13,058Issued
                  during the year
              
              
              209
              
              
              2
              
              
              265
              
              
              -
              
              
              -
              
              
              -
              
              
              267Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              42
              
              
              -
              
              
              -
              
              
              42
              
              $
              42Director's
                  stock compensation
              
              
              -
              
              
              -
              
              
              160
              
              
              -
              
              
              -
              
              
              -
              
              
              160
              
              
              -Unrealized
                  holding gain on investmentsecurities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4
              
              
              -
              
              
              4
              
              
              4Translation
                  adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              132
              
              
              -
              
              
              132
              
              
              132Comprehensive
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              178Cash
                  dividends ($0.4 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,389
              )
              
              -
              
              
              -
              
              
              (1,389
              )Balance
                  at March 31, 2006
              
              
              3,525
              
              $
              35
              
              $
              10,245
              
              $
              2,133
              
              $
              (86
              )
              $
              (53
              )
              $
              12,274
 See
        accompanying notes to consolidated financial statements.
  F-5
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Dollars
        in thousands)
 
 
 Year
                  ended March 31,2004
              
              2005
              
              2006Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              982
              
              $
              (152
              )
              $
              42Adjustments
                  to reconcile net income (loss) to netcash
                  provided by operating activities:Impairment
                  of industrial property rights
              
              
              -
              
              
              67
              
              
              60Impairment
                  of investment in an affiliate
              
              
              109
              
              
              5
              
              
              -Gain
                  on disposal of property, plant and equipment
              
              
              (24
              )
              
              (49
              )
              
              -Loss
                  on disposal of industrial property rights
              
              
              -
              
              
              59
              
              
              -Gain
                  on sale of "Kienzle" industrial property rights
              
              
              -
              
              
              -
              
              
              (1,781
              )Impairment
                  of property, plant and equipment
              
              
              -
              
              
              347
              
              
              197Gain
                  on disposal of a subsidiary
              
              
              -
              
              
              -
              
              
              (3
              )Gain
                  on disposal of an affiliate
              
              
              -
              
              
              -
              
              
              (121
              )Depreciation
                  and amortization
              
              
              1,112
              
              
              1,148
              
              
              1,090Minority
                  interests
              
              
              1
              
              
              1
              
              
              -Directors'
                  stock compensation expense
              
              
              -
              
              
              160
              
              
              160Equity
                  in income of an affiliate
              
              
              (2
              )
              
              -
              
              
              -Deferred
                  income taxes
              
              
              (53
              )
              
              (4
              )
              
              (21
              )Stock
                  options granted to legal advisors
              
              
              -
              
              
              177
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (891
              )
              
              (1,402
              )
              
              1,376Inventories
              
              
              178
              
              
              (668
              )
              
              944Prepaid
                  expenses and other current assets
              
              
              (385
              )
              
              (82
              )
              
              175Accounts
                  payable
              
              
              379
              
              
              550
              
              
              (348
              )Accrued
                  mold charges
              
              
              86
              
              
              (25
              )
              
              38Accrued
                  payroll and employee benefits
              
              
              (28
              )
              
              10
              
              
              (39
              )Income
                  taxes payable
              
              
              78
              
              
              41
              
              
              (119
              )Other
                  liabilities and accrued expenses
              
              
              (27
              )
              
              525
              
              
              (335
              )Net
                  cash provided by operating activities
              
              
              1,515
              
              
              708
              
              
              1,315Cash
                  flows from investing activities:Purchase
                  of property, plant and equipment
              
              
              (853
              )
              
              (178
              )
              
              (250
              )Acquisition
                  of investment securities
              
              
              (322
              )
              
              -
              
              
              -Repayment
                  of payable to an affiliate
              
              
              (109
              )
              
              -
              
              
              -Purchase
                  of industrial property rights
              
              
              (75
              )
              
              (47
              )
              
              (93
              )Acquisition
                  of an affiliate
              
              
              (5
              )
              
              -
              
              
              -Proceeds
                  from disposal of an affiliate
              
              
              -
              
              
              -
              
              
              121Proceeds
                  from disposal of property, plant andequipment
              
              
              58
              
              
              55
              
              
              46Proceeds
                  from disposal of industrial property rights
              
              
              -
              
              
              -
              
              
              2,160Decrease
                  in restricted cash
              
              
              192
              
              
              -
              
              
              -Net
                  cash (used in) provided by investing activities
              
              
              (1,114
              )
              
              (170
              )
              
              1,984
  See
        accompanying notes to consolidated financial statements.
  F-6
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS - continued
 (Dollars
        in thousands)
 
 Year
                  ended March 31,2004
              
              2005
              
              2006Cash
                  flows from financing activities:Cash
                  dividends paid
              
              $
              (237
              )
              $
              (323
              )
              $
              (1,389
              )Repayment
                  of long-term debt
              
              
              (134
              )
              
              (308
              )
              
              (439
              )Increase
                  (decrease) in short-term borrowings - net
              
              
              777
              
              
              (484
              )
              
              566Proceeds
                  from shares issued on exercise of options
              
              
              243
              
              
              450
              
              
              267Net
                  cash provided by (used in) financing activities
              
              
              649
              
              
              (665
              )
              
              (995
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              1,050
              
              
              (127
              )
              
              2,304Cash
                  and cash equivalents, beginning of year
              
              
              3,148
              
              
              4,158
              
              
              3,948Effect
                  of exchange rate charges
              
              
              (40
              )
              
              (83
              )
              
              132Cash
                  and cash equivalents, end of year
              
              $
              4,158
              
              $
              3,948
              
              $
              6,384Supplemental
                  cash flow information:Cash
                  paid during the year forInterest
              
              $
              77
              
              $
              110
              
              $
              133Income
                  taxes
              
              
              75
              
              
              61
              
              
              195
 Non-cash
        transactions:
 
 Additions
        to property, plant and equipment of $890 and $275 during the year ended March
        31, 2005 and 2006, respectively, were acquired under arrangements qualified
        as
        capital leases.
 
 
 
 See
        accompanying notes to consolidated financial statements.
 
 
 F-7
  HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
        in thousands except per share data)
 
 
 1.
            ORGANIZATION
                AND BASIS OF FINANCIAL STATEMENTS 
 Highway
                  Holdings Limited (the "Company") was incorporated in the British
                  Virgin
                  Islands on July 20, 1990. It operates through its subsidiaries
                  operating
                  in the Hong Kong Special Administrative Region ("Hong Kong") of
                  the
                  People's Republic of China ("China"), in Shenzhen and He Yuan,
                  China, in
                  Germany and in the Republic of Bulgaria
                  ("Bulgaria").
 
 The
                  Company and its subsidiaries operate in four principal business
                  segments -
                  metal stamping and mechanical original equipment manufacturing
                  ("OEM"),
                  the manufacture and trading of cameras and underwater products,
                  clocks and
                  watches, and electric OEM.Historically,
                  the Company has been in the business of manufacturing and trading
                  of
                  single-use cameras and certain clocks and watches under the name
                  "Kienzle." However, this year the Company has been reorganized
                  and made
                  certain changes which streamlined its business activities and ceased
                  the
                  manufacturing and trading of single-use cameras as well as the
                  manufacturing of clocks and watches under the name "Kienzle." The
                  Company's manufacturing activities are principally conducted in
                  Shenzhen
                  and He Yuan and its selling activities are principally conducted
                  in Hong
                  Kong, Shenzhen and Germany.
 
 The
                  financial statements of the Company and its subsidiaries have been
                  prepared in accordance with accounting principles generally accepted
                  in
                  the United States of America ("U.S. GAAP").
 
 On
                  January 30, 2003, the Company entered into a license agreement
                  with
                  Kienzle AG, a German stock corporation which is engaged in the
                  marketing,
                  sale and distribution of products under the brand name of "Kienzle".
                  Under
                  the license agreement, the Company granted to Kienzle AG a five-year
                  exclusive, royalty-free license to use and display the trademark
                  of
                  "Kienzle" solely in conjunction with the promotion, marketing,
                  sale, and
                  distribution by Kienzle AG of products under the brand name of
                  "Kienzle"
                  in specified countries. Under the license agreement, Kienzle AG
                  was
                  required to purchase all products under the brand name of "Kienzle"
                  from
                  the Company with minimum purchases at each of the four years ended
                  on
                  December 31, 2006. Under the license agreement, Kienzle AG was
                  required to
                  purchase $3,000 of products from the Company during the year ended
                  December 31, 2003; and in subsequent years, the amount of required
                  purchases is required to increase to no less than $6,000 in the
                  year
                  ending December 31, 2004, $14,000 in the year ending December 31,
                  2005,
                  and $28,000 in the year ending December 31, 2006. The Company would
                  have
                  the right to terminate the license agreement if Kienzle AG fails
                  to meet
                  these minimum requirements.
 
 On
                  March 28, 2003, the Company acquired a 20% equity interest in Kienzle
                  AG
                  for $109. Kienzle AG was accounted for in the consolidated financial
                  statements as an affiliate using the equity method. The Company
                  reassessed
                  its investment in Kienzle AG in 2004 and determined that the investment
                  had been impaired as Kienzle AG did not meet the minimum purchase
                  requirement and had dissatisfactory operating results. An impairment
                  loss
                  of $109 in respect of the investment in Kienzle AG has thus been
                  recognized during the year ended March 31, 2004. The Company sold
                  all
                  "Kienzle" trademarks relating to clock and non-clock business for
                  $2,160
                  and recognized gain on sale of $1,781 during the year ended March
                  31,
                  2006.
 
 Additionally,
                  the Company received $121 for the sale of its 20% equity interest
                  and
                  recognized a gain of $121 on disposal of investment in Kienzle
                  AG during
                  the year ended March 31, 2006.
 
 F-8
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 1.
              ORGANIZATION
                  AND BASIS OF FINANCIAL STATEMENTS -
                  continued
 
 Upon
                  the sale of the "Kienzle" trademark, the Company did not renew
                  the lease
                  on its marketing office in Germany and incurred costs related to
                  involuntary termination of most of the employees in its marketing
                  office
                  in Germany. These costs were accrued and paid out in the year ended
                  March
                  31, 2006. There are no additional costs for exiting the Kienzle
                  clock
                  business.
 
 At
                  March 31, 2006, details of the Company's subsidiary companies are
                  as
                  follows:
 
 Place
                  of
                  incorporation
              
              
              Name
                  of entity
              
              
              Date
                  of incorporation
              
              
              Principal
                  activitiesHong
                  Kong
              
              
              Antemat
                  Limited
              
              
              May
                  5, 1989
              
              
              DormantHong
                  Kong
              
              
              Nissin
                  Mechatronic Limited
              
              
              May
                  25, 1990
              
              
              DormantHong
                  Kong
              
              
              Cavour
                  Industrial Limited
              
              
              May
                  9, 1989
              
              
              Providing
                  tooling, handling andrepairing
                    services in China andmanagement
                    services tofellow
                    subsidiariesHong
                  Kong
              
              
              Hi-Lite
                  Camera Company
              
              
              November
                  10, 1978
              
              
              Trading
                  of camera and underwaterLimited
                  ("Hi-Lite")
              
              
              
              
              
              productsHong
                  Kong
              
              
              Kayser
                  Technik Limited
              
              
              June
                  23, 1994
              
              
              Sales
                  of metal partsBulgaria
              
              
              Kienzle
                  Bulgaria Limited
              
              
              January
                  23, 2001
              
              
              Dormant("Kienzle
                    Bulgaria")Hong
                  Kong
              
              
              Kienzle
                  Time (H.K.) Limited
              
              
              August
                  24, 1997
              
              
              Manufacturing
                  OEM business and("Kienzle
                    HK")
              
              
              
              
              
              trading
                  of clocks, watches, cameraand
                    underwater productsGermany
              
              
              Kienzle
                  Uhrenfabriken G.m.b.h.
              
              
              April
                  1, 1999
              
              
              Sales
                  of clocks, watches and others("Kienzle
                  Germany")
              
              
              
              
              
              (wound
                  down trading operations inGermany
                    since November 2005)Hong
                  Kong
              
              
              Nissin
                  Precision Metal
              
              
              November
                  21, 1980
              
              
              Metal
                  stamping, tooling design andManufacturing
                  Limited
              
              
              
              
              
              manufacturing
                  and assembling OEM("Nissin")
              
              
              
              
              
              productsHong
                  Kong
              
              
              Saiwan
                  Industries Limited
              
              
              August
                  10, 1990
              
              
              Manufacturing
                  of plastic injectionparts
                  to fellow subsidiariesChina
              
              
              Kayser
                  (Wuxi) Metal Precision
              
              
              December
                  21, 2005
              
              
              Metal
                  stamping but has notManufacturing
                  Limited
              
              
              
              
              
              commenced
                  operations as of("Kayser
Wuxi")
              
              
              
              
              
              March
                  31, 2006
 All
        of
        the subsidiaries are wholly-owned.
 
 F-9
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES 
 **Principles
        of consolidation** -
        The
        consolidated financial statements include the assets, liabilities, revenues
        and
        expenses of the Company and all its subsidiaries. All significant intercompany
        transactions and balances have been eliminated on consolidation. Affiliated
        companies (20% to 50% owned companies) in which the Company has significant
        influence but does not have a controlling interest are accounted for using
        the
        equity method.
 
 **Revenue
        recognition** - The
        Company recognizes revenue from the sale of products, when all of the following
        conditions are met:
 
 ·
            Persuasive
                evidence of an arrangement exists; ·
            Delivery
                has occurred; ·
            Price
                to the customer is fixed or determinable;
                and ·
            Collectibility
                is reasonably assured. 
 Revenue
                  from sales of products is recognized when the title is passed to
                  customers
                  upon shipment and when collectibility is assured. The 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.
 
 **Cash
                  and cash equivalents**-
                  Cash and cash equivalents include cash on hand, cash accounts,
                  interest
                  bearing savings accounts, and certificates of time deposit with
                  a maturity
                  of three months or less at the time of
                  purchase.
 
 **Inventories** -
        Inventories are stated at the lower of cost determined by the first in first
        out
        method, or market value. Work-in-progress and finished goods consist of raw
        materials, direct labor and overhead associated with the manufacturing process.
        Write-off on inventory is based on management's specific analysis of future
        sales and demand forecasts.
 
 **Property,
                  plant and equipment**-
                  Property, plant and equipment are stated at cost. Depreciation
                  and
                  amortization are provided using the straight-line method based
                  on the
                  estimated useful lives of 10 years for machinery and equipment
                  and
                  generally 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.
 
 **Industrial
                  property rights**-
                  Industrial property rights represent the patents, technology and
                  the
                  rights relating to the name "Kienzle" and are stated at cost. Amortization
                  is provided on a straight-line basis over a period of 10 years
                  which is
                  the estimated useful lives of these assets. Amortization expense
                  charged
                  to operating income for the years ended March 31, 2004, 2005 and
                  2006 was
                  $127, $125 and $122 respectively.
 
 During
                  the year ended March 31, 2006, the Company sold all industrial
                  property
                  rights to Kienzle AG.
  F-10
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 **Investment
                  securities**-
                  Investment securities, which consist primarily of capital guaranteed
                  investment fund, have been categorized as available for sale and,
                  as a
                  result, are stated at fair value based generally on quoted market
                  prices.
                  Unrealized holding gains and losses are included as a component
                  of
                  accumulated other comprehensive income
                  (loss).
 
 **Impairment
                  of long-lived assets**-
                  The Company reviews its long-lived assets for impairment whenever
                  events
                  or changes in circumstances indicate that the carrying amount of
                  an asset
                  may no longer be recoverable. When these events occur, the Company
                  measures impairment by comparing the carrying value of the long-lived
                  assets to the estimated undiscounted future cash flows expected
                  to result
                  from the use of the assets and their eventual disposition. If the
                  sum of
                  the expected undiscounted cash flow is less than the carrying amount
                  of
                  the assets, the Company would recognize an impairment loss based
                  on the
                  fair value of the assets.
 
 Due
                  to the poor financial performance of the manufacturing of cameras,
                  clocks
                  and watches, the Company reassessed its property, plant and equipment
                  and
                  industrial property rights for impairment and an impairment loss
                  of $347
                  and $67 respectively, had been recognized during the year ended
                  March 31,
                  2005; and $197 and $60 respectively, had been recognized during
                  the year
                  ended March 31, 2006.
 
 No
                  impairment on long-lived assets was noted during the year ended
                  March 31,
                  2004.
 
 **Foreign
        currency translation** - The
        Company uses the United States dollar as its reporting currency. Assets and
        liabilities of non-United States dollar functional currency financial statements
        of subsidiaries are translated at year-end exchange rates, while revenues
        and
        expenses are translated at average currency exchange rates during the year.
        Adjustments resulting from translating non-United States dollar functional
        currency financial statements are reflected as accumulated other comprehensive
        gain (loss). Gains or losses from foreign currency transactions are included
        in
        net income (loss).
 
 **Income
        taxes** -
        Deferred income taxes are provided using the asset and liability method.
        Under
        this method, deferred income taxes are recognized for all significant temporary
        differences and classified as current or non-current based upon the
        classification of the related asset or liability in the financial statements.
        A
        valuation allowance is provided to reduce the amount of deferred tax assets
        if
        it is considered more likely than not that some portion of, or all, the deferred
        tax asset will not be realized.
 
 **Concentration
        of Credit Risk** -
        Financial instruments that potentially expose the Company to concentrations
        of
        credit risk consist primarily of cash and cash equivalents, and accounts
        receivable. The Company places its cash and cash equivalents with financial
        institutions with high-credit ratings and quality.
 
 The
        Company conducts credit evaluations of customers and generally does not require
        collateral or other security from its customers. The Company establishes
        an
        allowance for doubtful accounts primarily based upon the age of the receivables
        and factors surrounding the credit risk of specific customers.
  F-11
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 2.  SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 **Use
        of estimates** - The
        preparation of financial statements in conformity with generally accepted
        accounting principles in the United States of America requires management
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities and disclosures of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.
 
 **Stock
        options** - The
        Company does not recognize compensation expense for employee stock-based
        compensation if the strike-price is equal to or greater than the market price
        of
        the stock at the date of grant. The Company's policy is to generally grant
        stock-based compensation to employees with a stock price equal to the market
        price of the stock on the date of grant. The Company continues to account
        for
        stock-based compensation arrangements under Accounting Principles Board ("APB")
        Opinion No. 25, *"Accounting
        for Stock Issued to Employees"* and
        provides additional financial statement disclosure in accordance with Statement
        of Financial Accounting Standard ("SFAS") No. 123, *"Accounting
        for Stock-Based Compensation"* .
        The
        Company recognizes compensation expense for all stock-based compensation
        granted
        to non-employees by estimating the fair value of the stock-based compensation
        utilizing the Black-Scholes option-pricing model. See note 15.
 
 The
        Company has stock option plan and stock purchase rights, as more fully described
        in note 15. Stock-based employee compensation costs are not reflected in
        net
        income (loss) when options granted under the plan had an exercise price equal
        to
        the market value of the underlying common stock on the date of
        grant.
 
 The
        following table illustrates the effect on net income (loss) per share as
        if the
        Company had applied the fair value recognition.
  2004
              
              2005
              
              2006Net
                  income (loss), as reported
              
              
              
              
              $
              982
              
              $
              (152
              )
              $
              42Less:
                  Stock based compensation costs under fairvalue
                  based method for all awards
              
              
              
              
              
              (212
              )
              
              (152
              )
              $
              (140
              )Net
                  income (loss), pro forma
              
              
              
              
              
              770
              
              
              (304
              )
              
              (98
              )Net
                  income (loss) per share - basic
              
              
              As
                  reported
              
              $
              0.32
              
              $
              (0.05
              )
              $
              0.01Pro
                    forma
              
              
              0.25
              
              
              (0.09
              )
              
              (0.03
              )Net
                  income (loss) per share - diluted
              
              
              As
                  reported
              
              $
              0.30
              
              $
              (0.05
              )
              $
              0.01Pro
                  forma
              
              
              0.24
              
              
              (0.09
              )
              
              (0.03
              )
  F-12
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 **Net
        income (loss) per share** -
        Basic
        net income (loss) per share is computed by dividing net income (loss)
        attributable to common shareholders by the weighted average of common shares
        outstanding for the period. Diluted earnings per share gives effect to all
        dilutive potential common shares outstanding during the year. The weighted
        average number of common shares outstanding is adjusted to include the number
        of
        additional common shares that would have been outstanding if the dilutive
        potential common shares had been issued. In each of the three years ended
        March
        31, 2006, the Company had nil, 242,150 and nil respectively, of outstanding
        employee stock options and stock purchase rights which could potentially
        dilute
        basic earnings per share ("EPS") in the future, but were excluded in the
        computation of diluted EPS in such periods, as the effect would have been
        antidilutive.
 
 **Comprehensive
                  income****(loss)**-
                  Comprehensive income (loss) is defined to include all changes in
                  equity
                  except those resulting from investments by owners and distributions
                  to
                  owners. Comprehensive income (loss) for the years, which comprises
                  foreign
                  currency translation adjustments, unrealized holding (loss) gain
                  on
                  investment securities and net income (loss), has been disclosed
                  within the
                  consolidated statements of shareholders' equity and comprehensive
                  income
                  (loss).
 
 **Recently
                  issued accounting pronouncements**-
                  In December 2004, the Financial Accounting Standards Board ("FASB")
                  issued
                  SFAS No. 123 (Revised 2004) ("SFAS No. 123R"). This statement is
                  a
                  revision to SFAS No. 123 and supercedes APB Opinion No. 25. This
                  statement
                  establishes standards for the accounting for transactions in which
                  an
                  entity exchanges its equity instruments for goods or services,
                  primarily
                  focusing on the accounting for transactions in which an entity
                  obtains
                  employee services in share-based payment transactions. Entities
                  will be
                  required to measure the cost of employee services received in exchange
                  for
                  an award of equity instruments based on the grant-date fair value
                  of the
                  award (with limited exceptions). That cost will be recognized over
                  the
                  period during which an employee is required to provide service
                  within the
                  requisite service period (usually the vesting period) in exchange
                  for the
                  award. The grant-date fair value of employee share options and
                  similar
                  instruments will be estimated using option-pricing models. If any
                  equity
                  award is modified after the grant date, incremental compensation
                  cost will
                  be recognized in an amount equal to the excess of the fair value
                  of the
                  modified award over the fair value of the original award immediately
                  before the modification. This statement will be effective to the
                  Company
                  for the fiscal year beginning April 1,
                  2006.
 
 F-13
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES -
                  continued
 
 Upon
                  adoption, the Company has two application methods to choose from:
                  the
                  modified-prospective transition approach or the modified-retrospective
                  transition approach. Under the modified-prospective transition
                  method, the
                  Company would be required to recognize compensation cost for share-based
                  awards to employees based on their grant-date fair value from the
                  beginning of the fiscal period in which the recognition provisions
                  are
                  first applied as well as compensation cost for awards that were
                  granted
                  prior to, but not vested as of the date of adoption. Prior periods
                  remain
                  unchanged and pro forma disclosures previously required by SFAS
                  No. 123
                  continue to be required. Under the modified-restrospective transition
                  method, the Company would restate prior periods by recognizing
                  compensation cost in the amounts previously reported in the pro
                  forma
                  footnote disclosure under SFAS No. 123. Under this method, the
                  Company is
                  permitted to apply this presentation to all periods presented or
                  to the
                  start of the fiscal year in which SFAS No. 123R is adopted. The
                  Company
                  would follow the same guidelines as in the modified-prospective
                  transition
                  method for awards granted subsequent to adoption and those that
                  were
                  granted and not yet vested. The Company has not yet determined
                  which
                  methodology it will adopt but believes that the impact that the
                  adoption
                  of SFAS No. 123R will have on its financial position or results
                  of
                  operations will approximate the magnitude of the stock-based employee
                  compensation cost disclosed in note 2 pursuant to the disclosure
                  requirements of SFAS No. 148.
 
 In
        March
        2005, the FASB issued FASB Interpretation No. ("FIN") 47, *"Accounting
        for Conditional Asset Retirement Obligations, an interpretation of SFAS No.
        143".* FIN 47
        clarifies that an entity is required to recognize a liability for a legal
        obligation to perform an asset retirement activity if the fair value can
        be
        reasonably estimated even though the timing and/or method of settlement are
        conditional on a future event. FIN 47 is required to be adopted for annual
        reporting periods ended after December 15, 2005. Adoption of the FIN 47 did
        not
        result in an impact on the Company's financial position, results of operations
        or cash flows.
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
        ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20,
        "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
        Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
        guidance on the accounting for and reporting of accounting changes and error
        corrections. It establishes retrospective application, or the latest practicable
        date, as the required method for reporting a change in accounting principle
        and
        the reporting of a correction of an error. SFAS 154 is effective for accounting
        changes and corrections of errors made in fiscal years beginning after December
        15, 2005. The Company does not anticipate that the adoption of this statement
        will have a material effect on the Company's financial position or results
        of
        operations.
  F-14
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 2.  SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
 In
        September 2005, the FASB's Emerging Issues Task Force ("EITF") reached a
        final
        consensus on Issue 04-13, *"Accounting
        for Purchases and Sales of Inventory with the Same
        Counterparty"* .
        EITF
        04-13 requires that two or more legally separate exchange transactions with
        the
        same counterparty be combined and considered a single arrangement for purposes
        of applying APB Opinion No. 29, *"Accounting
        for Nonmonetary Transactions"* ,
        when
        the transactions are entered into in contemplation of one another. EITF 04-13
        is
        effective for new arrangements entered into, or modifications or renewals
        of
        existing arrangements, in interim or annual periods beginning after March
        15,
        2006. The Company is evaluating the effect of the adoption of EITF 04-13.
        It is
        not expected to have a material impact on the Company's financial position,
        results of operations or cash flows.
 
 In
        December 2005, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
        -
        an amendment of APB Opinion No. 29" ("SFAS 153"), which amends Accounting
        Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions"
        to
        eliminate the exception for nonmonetary exchanges of similar productive assets
        and replaces it with a general exception for exchanges of nonmonetary assets
        that do not have commercial substance. SFAS 153 is effective for nonmonetary
        assets exchanges occurring in fiscal periods beginning after June 15, 2005.
        The
        Company does not anticipate that the
        adoption of this statement will have a material effect on the Company's
        financial position or results of operations.
 
 F-15
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 3.
            INCOME
                TAXES 
 Income
                  is subject to taxation in the various countries in which the Company
                  and
                  its subsidiaries operate.
 
 The
                  components of income (loss) before income taxes and minority interests
                  are
                  as follows:
 
 Year
                    ended March 31,2004
              
              2005
              
              2006Hong
                  Kong
              
              $
              1,663
              
              $
              1,211
              
              $
              942Europe
              
              
              (580
              )
              
              (1,276
              )
              
              (827
              )$
              1,083
              
              $
              (65
              )
              $
              115
 
 The
        Company is not taxed in the British Virgin Islands where the holding company
        is
        incorporated.
 
 The
        Company's operating subsidiaries, other than Kienzle Germany and Kienzle
        Bulgaria, are all incorporated in Hong Kong and are subject to Hong Kong
        taxation on their activities conducted in Hong Kong.
 
 The
        Company's manufacturing operations are currently conducted solely in China.
        These manufacturing operations are conducted pursuant to agreements entered
        into
        between certain China companies set up by the local government and the Shenzhen
        City Baoan District Foreign Economic Development Head Company and its designees
        (collectively, the "BFDC") (the agreements, collectively the "BFDC
        Agreements").
 
 In
                  connection with its recent establishment of its new facility in
                  China
                  during the year, the Company entered into an agreement with the
                  He Yuan
                  Foreign Trade & Economy Cooperation Bureau that is similar to the BFDC
                  Agreements.
 
 Under
                  the BFDC Agreements, the Company is not considered by local tax
                  authorities to be doing business in China; accordingly, the Company's
                  activities in China have not been subject to local taxes. The BFDC
                  is
                  responsible for paying taxes it incurs as a result of its operations
                  under
                  the BFDC Agreements. There can be no assurances, however, that
                  the Company
                  will not be subject to such taxes in the future. If China did impose
                  a tax
                  upon the Company, the tax could materially adversely affect the
                  Company's
                  business and results of operations.
 
 As
        the
        Company's subsidiaries' manufacturing operations are carried out in China
        under
        those BFDC Agreements, in accordance with the Hong Kong Inland Revenue
        Departmental Interpretation and Practice Note No. 21, 50% of the income for
        the
        year arising in Hong Kong has been determined as not subject to Hong Kong
        profits tax. The calculation of Hong Kong profits tax has been based on such
        tax
        relief.
  F-16
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 3.  INCOME
        TAXES - continued
 
 The
        provision for income taxes consists of the following:
 
 March
                  31,2004
              
              2005
              
              2006Hong
                  KongCurrent
              
              $
              153
              
              $
              90
              
              $
              94Deferred
              
              
              (53
              )
              
              (4
              )
              
              (21
              )$
              100
              
              $
              86
              
              $
              73
   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 31,2004
              
              2005
              
              2006Profits
                  tax rate in Hong Kong
              
              
              17.5
              %
              
              (17.5
              %)
              
              17.5
              %Non-deductible
                  items/non-taxable income
              
              
              (10.9
              %)
              
              153.1
              %
              
              (848.1
              %)Changes
                  in valuation allowances
              
              
              15.2
              %
              
              36.9
              %
              
              1,027.8
              %International
                  rate difference
              
              
              (3.5
              %)
              
              (31.5
              %)
              
              (100.7
              %)Increase
                  in opening deferred income taxesresulting
                  from an increase in profitstax
                  rate in Hong Kong
              
              
              2.0
              %
              
              -
              
              
              -Other
              
              
              (11.1
              %)
              
              (8.7
              %)
              
              (33.0
              %)Effective
                  tax rate
              
              
              9.2
              %
              
              132.3
              %
              
              63.5
              %
  Deferred
                  income tax (assets) liabilities are as
                  follows:
  March
                  31,2005
              
              2006Deferred
                tax liability:Property,
                  plant and equipment
              
              $
              352
              
              $
              241Deferred
                  tax asset:Operating
                  loss carryforwards
              
              
              (1,178
              )
              
              (2,270
              )Valuation
                  allowance
              
              
              1,000
              
              
              2,182Total
                  net deferred tax asset
              
              
              (178
              )
              
              (88
              )Net
                  deferred tax liability
              
              $
              174
              
              $
              153
 
 At
                  March 31, 2005 and 2006, subsidiaries of the Company had tax loss
                  carryforwards for Hong Kong profit tax purposes, subject to the
                  agreement
                  of the Hong Kong Inland Revenue Department, amounting to approximately
                  $2,942 and $7,368, respectively, which have no expiration
                  date.
  F-17
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 3.  INCOME
        TAXES - continued
 
 At
        March
        31, 2006, the tax loss carryforwards in Bulgaria and Germany and their future
        expiration dates are as follows:
 
 Bulgaria
              
              Germany
              
              TotalYear
                  ending March 31,-
                  2007
              
              $
              66
              
              $
              -
              
              $
              66-
                  2008
              
              
              -
              
              
              -
              
              
              --
                  2009
              
              
              104
              
              
              -
              
              
              104-
                  2010
              
              
              2
              
              
              -
              
              
              2-
                  2011
              
              
              7
              
              
              -
              
              
              7-
                  Indefinite
              
              
              -
              
              
              3,551
              
              
              3,551$
              179
              
              $
              3,551
              
              
              3,730
   The
                  tax loss carryforwards can only be utilized by the subsidiaries
                  generating
                  the losses.
 
 
 4.
            INVENTORIES 
 Inventories
        by major categories are summarized as follows:
 
 March
                  31,2005
              
              2006Raw
                  materials
              
              $
              2,841
              
              $
              2,353Work
                  in progress
              
              
              725
              
              
              644Finished
                  goods
              
              
              1,496
              
              
              1,121$
              5,062
              
              $
              4,118
 
 Inventories
                  amounting to $640, $409 and $592 were written off in 2004, 2005
                  and 2006,
                  respectively.
 
 
 5.
            INVESTMENT
                SECURITIES   March
                  31,2005
              
              2006Cost
              
              $
              322
              
              $
              322Gross
                  unrealized holding loss
              
              
              (26
              )
              
              (22
              )Fair
                  value
              
              $
              296
              
              $
              300
 
 F-18
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except per share data)
 
 
 6.
            PROPERTY,
                PLANT AND EQUIPMENT, NET 
 Property,
        plant and equipment, net consist of the following:
  March
                    31,2005
              
              2006At
                cost:Machinery
                  and equipment
              
              $
              10,422
              
              $
              9,764Furniture
                  and fixtures
              
              
              770
              
              
              35Leasehold
                  improvements
              
              
              538
              
              
              390Total
              
              
              11,730
              
              
              10,189Less:
                  Accumulated depreciation
              
              
              (8,257
              )
              
              (7,402
              )Net
                  book value
              
              $
              3,473
              
              $
              2,787
 
 Depreciation
                  expense charged to operating income for the year ended March 31,
                  2004,
                  2005 and 2006 was $985, $1,023 and $968,
                  respectively.
 
 Included
                  in property, plant and equipment, net are assets held under capital
                  leases
                  with the following net book values:
  March
                  31,2005
              
              2006Machinery
                  and equipment, at cost
              
              $
              1,825
              
              $
              2,001Less:
                  Accumulated depreciation
              
              
              (283
              )
              
              (207
              )$
              1,542
              
              $
              1,794
   Depreciation
                  of machinery and equipment held under capital leases, which is
                  included in
                  depreciation expense in the accompanying consolidated statements
                  of
                  operations, was $45, $185 and $196 for the year ended March 31,
                  2004, 2005
                  and 2006, respectively.
 
 
 7.
            INVESTMENTS
                IN AND ADVANCE TO AFFILIATES 
 On
                  January 25, 2000, the Company and an unrelated party established
                  Kienzle
                  U.S.A. Limited ("Kienzle USA"), a company incorporated in the United
                  States of America ("USA") to sell clocks, with each party owning
                  50% of
                  its common shares. It is accounted for in the consolidated financial
                  statements as an affiliate. Kienzle USA has been inactive since
                  September
                  2002.
 
 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.) ("Kayser Photo")),
                  a
                  company incorporated in the Republic of Panama, at a cash consideration
                  of
                  $5. Kayser Technik (Overseas) is engaged in the trading of camera
                  batteries, films and disposable cameras. It is accounted for in
                  the
                  consolidated financial statements as an affiliate using the equity
                  method.
                  The Company reassessed its investment in Kayser Technik (Overseas)
                  in 2005
                  and an impairment loss of $5 in respect of the investment in Kayser
                  Technik (Overseas) has been recognized during the year ended March
                  31,
                  2005.
 
 F-19
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands)
 
 
 8.
            SHORT-TERM
                BORROWINGS 
 Short-term
                  borrowings include import loans obtained from
                  banks.
  March
                  31,2005
              
              2006Credit
                  facilities granted
              
              $
              3,856
              
              $
              3,856Weighted
                  average interest rate on borrowings atend
                  of year
              
              
              5.2
              %
              
              6.3
              %
  At
                    March 31, 2005 and 2006, the Company pledged bank deposits of
                    $965 and
                    $965, and investment securities of $296 and $300, respectively,
                    to banks
                    to secure banking facilities granted. There are no restrictive
                    financial
                    covenants associated with these bank
                    facilities.
  Interest
                        rates are generally based on the banks' best lending rate
                        in Hong Kong
                        plus 1% to 2% per annum, subject to fluctuations at the banks'
                        discretion.
                        The credit facilities are subject to annual review by the
                        banks.
 9.
            OBLIGATIONS
                UNDER CAPITAL LEASES  Interest
                        rates are generally based on the banks' best lending rate
                        in Hong Kong
                        plus 1% to 2% per annum, subject to fluctuations at the banks'
                        discretion.
                        The credit facilities are subject to annual review by the
                        banks.
 Future
                  minimum lease payments as at March 31, 2006 are as
                  follows:
 
 Year
                  ending March 312007
              
              $
              4812008
              
              
              2582009
              
              
              64$
              803
 
 The
                  capital lease commitment amounts above exclude implicit interest
                  of $47,
                  $14 and $2 payable in the years ending March 31, 2007, 2008 and
                  2009,
                  respectively.
 
 F-20
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands)
 
 
 10.
            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 $725, $817 and $879 in 2004, 2005 and 2006,
                  respectively.
 
 At
                  March 31, 2005, the Company and its subsidiaries were committed
                  under
                  operating leases requiring minimum lease payments as
                  follows:
 
 Year
                  ending March 31,-
                  2007
              
              $
              902-
                  2008
              
              
              875-
                  2009
              
              
              734$
              2,511
 
 (b)
              The
                  Company had a total capital commitment of $496 for the purchase
                  of
                  property, plant and equipment as of March 31,
                  2006.
 
 (c)
              The
                  BFDC Agreements (see note 3) have all been extended to March 31,
                  2016
                  while one agreement with a China company was retired by mutual
                  consent of
                  both the Company and the China company. Pursuant to the BFDC Agreements,
                  the Company is not subject to certain rules and regulations that
                  would be
                  imposed on entities which are considered under China law to be
                  doing
                  business in China by utilizing other business structures such as
                  joint
                  ventures or wholly owned subsidiaries organized in China. Should
                  there be
                  any adverse change in the Company's dealings with the BFDC, or
                  should the
                  local or federal government change the rules under which the Company
                  currently operates, all of the Company's operations and assets
                  could be
                  jeopardized.
 
 In
                  addition, transactions between the Company and the BFDC are on
                  terms
                  different in certain respects from those contained in the BFDC
                  Agreements.
                  There can be no assurance that the BFDC will not insist upon a
                  change in
                  the current practices so as to require adherence to the terms of
                  the BFDC
                  Agreements, which the Company considers less favorable to it than
                  the
                  practices currently in effect, or that the Company or BFDC may
                  not be
                  required to do so by the Ministry of Foreign Trade and Economic
                  Co-operation of China and other relevant authorities. There can
                  also be no
                  assurances that the Company will be able to negotiate extensions
                  and
                  further supplements to any of the BFDC Agreements or that the Company
                  will
                  be able to continue its operations in China. If the Company were
                  required
                  to adhere to the terms of the BFDC Agreements, the Company's business
                  and
                  results of operations could be materially and adversely
                  affected.
 
 In
                  connection with its recent establishment of its new facility in
                  China
                  during the year, the Company entered into an agreement with the
                  He Yuan
                  Foreign Trade & Economy Cooperation Bureau that is similar to the BFDC
                  Agreements.
  F-21
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except share and per share amounts)
 
 
 11.
            CAPITAL
                STOCK 
 In
                  August 1998, the Board of Directors authorized the Company to repurchase
                  shares up to the value of $400 with a maximum repurchase price
                  of $3.50
                  per share. During the year ended March 31, 2003, the Company purchased
                  6,000 shares for a total cash consideration of $4 at prices per
                  share
                  ranging from $0.60 to $1.41. At March 31, 2005 and 2006, these
                  shares were
                  held in treasury and are not eligible to vote or receive
                  dividends.
 
 
 12.
            CONCENTRATIONS
                OF CREDIT RISK AND MAJOR CUSTOMERS  A
                      substantial percentage of the Company's sales are made to three
                      customers
                      and are typically on an open account basis. Details of the
                      customers
                      accounting for 10% or more of total net sales in any of the
                      years ended
                      March 31, 2004, 2005 and 2006 are as
                      follows:
 Year
                  ended March 31,2004
              
              2005
              
              2006Company
                  A
              
              
              17.1
              %
              
              18.1
              %
              
              19.0
              %Company
                  B
              
              
              22.4
              %
              
              17.7
              %
              
              16.4
              %Company
                  C
              
              
              N/A
              
              
              N/A
              
              
              15.9
              %
  Details
                        of the accounts receivable from the three customers with
                        the largest
                        receivable balances at March 31, 2005 and 2006 are as
                        follows:
 Percentage
                  of accounts receivableMarch
                  31,2005
              
              2004Company
                  A
              
              
              15.8
              %
              
              16.4
              %Company
                  B
              
              
              30.8
              %
              
              32.1
              %Company
                  C
              
              
              N/A
              
              
              12.1
              %Three
                  largest receivable balances
              
              
              46.6
              %
              
              60.6
              %
  Details
                          of the movements of the allowance for doubtful account
                          for the years ended
                          March 31, 2004, 2005 and 2006 are as
                          follows:
 
 2004
              
              2005
              
              2006At
                  beginning of year
              
              $
              63
              
              $
              111
              
              $
              99Bad
                  debt expense
              
              
              142
              
              
              57
              
              
              9Amount
                  written off
              
              
              (94
              )
              
              (69
              )
              
              (77
              )At
                  end of year
              
              $
              111
              
              $
              99
              
              $
              31
 
 F-22
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except share and per share amounts)
 
 
 13.
            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,****2004**
              
              **2005**
              
              **2006**Net
                  income (loss) (numerator), basic and diluted
              
              $
              982
              
              $
              (152
              )
              $
              42Shares(denominator):Weighted
                  average common shares outstanding usedin
                  computing basic net income (loss) per share
              
              
              3,029,605
              
              
              3,260,144
              
              
              3,465,390Effect
                  of dilutive securities:Weighted
                  average shares from assumed exercise ofstock
                  options and issuance of common shares to the director
              
              
              228,604
              
              
              -
              
              
              78,826Weighted
                  average shares used in computing dilutednet
                  income (loss) per share
              
              
              3,258,209
              
              
              3,260,144
              
              
              3,544,216Net
                  income (loss) per share, basic
              
              $
              0.32
              
              $
              (0.05
              )
              $
              0.01Net
                  income (loss) per share, diluted
              
              $
              0.30
              
              $
              (0.05
              )
              $
              0.01
 
 As
                  of March 31, 2005, the Company had 242,150 outstanding employee
                  stock
                  options and stock purchase rights, and 29,154 common shares had
                  been
                  granted to the director (note 16) but not yet issued that could
                  have
                  potentially diluted basic net loss per share in the future, but
                  which were
                  excluded in the computation of diluted net loss per share in the
                  year
                  presented, as their effect would have been
                  anti-dilutive.
 
 
 14.
            FAIR
                VALUE OF FINANCIAL INSTRUMENTS 
 The
                  estimated fair value amounts have been determined by the Company,
                  using
                  available market information and appropriate valuation methodologies.
                  The
                  estimates presented herein are not necessarily indicative of amounts
                  that
                  the Company could realize in a current market
                  exchange.
 
 The
                  carrying amounts of cash and cash equivalents, restricted cash,
                  investment
                  securities, accounts receivable, accounts payable, accrued liabilities,
                  short-term borrowings and long-term debt are reasonable estimates
                  of their
                  fair value. The interest rates on the Company's long-term debt
                  approximate
                  those which would have been available at March 31, 2006 for debt
                  of
                  similar remaining maturities and credit
                  rating.
 
 
 F-23
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except share and per share data)
 
 
 15.
            STOCK
                OPTIONS AND STOCK PURCHASE RIGHTS 
 The
                  Company has adopted the 1996 Stock Option Plan (the "Option Plan").
                  The
                  Option Plan provides for the grant of options to purchase Common
                  Shares to
                  employees, officers, directors and consultants of the Company.
                  The Option
                  Plan is administered by the Compensation Committee appointed by
                  the Board
                  of Directors, which determines the terms of the options granted,
                  including
                  the exercise price (provided, however, that the option price shall
                  not be
                  less than fair market value or less than the par value per share
                  on the
                  date the options granted), the number of Common Shares subject
                  to the
                  option and the option's exercisability. The maximum exercisable
                  period of
                  options granted under the Option Plan is five years. In addition
                  to the
                  options that can be granted under the Option Plan, the Company
                  also
                  granted stock purchase rights to purchase 262,076 Common Shares
                  to certain
                  of the directors and key employees prior to its December 1996 initial
                  public offering and granted stock purchase rights to purchase 100,000
                  Common Shares to a director during the year ended March 31,
                  2004.
 
 In
                  May 2004, the Board of Directors proposed to increase the number
                  of stock
                  options under the Option Plan from 400,000 to 600,000 to provide
                  incentives to those persons performing services to the Company.
                  The
                  increase of stock options were approved by the shareholders during
                  AGM in
                  August 2004.
 
 On
                  December 30, 2004, the Board of Directors approved and granted
                  stock
                  options of 50,000 to legal advisors in accordance with the settlement
                  agreement and mutual release. The options were immediately vested
                  with the
                  expiration of twelve months. The Company recorded an expense of
                  $177 for
                  the options based on the Black-Scholes option-pricing model during
                  the
                  year ended March 31, 2005.
 
 The
                  fair value of options granted to employees and directors in 2004
                  and 2006
                  and legal advisors in 2005 was $1.213, $1.155 and $3.531, respectively,
                  using the Black-Scholes option-pricing model based on the following
                  assumptions:
 
  2004
              
              2005
              
              2006Risk-free
                  interest rate
              
              
              4.75
              %
              
              2.67
              %
              
              3.84
              %Expected
                  life
              
              
              1
                  year
              
              
              1
                  year
              
              
              5
                  yearsExpected
                  volatility
              
              
              101.73
              %
              
              74
              %
              
              55
              %Expected
                  dividend yield
              
              
              2.5
              %
              
              1.90
              %
              
              5.71
              %
 
 The
                  options vest in accordance with the terms of the agreements entered
                  into
                  by the Company and the grantee of the
                  options.
  F-24
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except share and per share data)
 
 
 15.  STOCK
        OPTIONS AND STOCK PURCHASE RIGHTS - continued
 
 The
                  following summarizes the stock purchase rights and options
                  outstanding:
 
 Stock
                  purchase rights
              
              Stock
                  optionsAverageexerciseprice
              
              Numberof
                  shares
              
              Averageexerciseprice
              
              Numberof
                  sharesApril
                  1, 2004
              
              $
              1.7154
              
              
              132,781
              
              $
              2.0217
              
              
              308,500Stock
                  options granted
              
              
              -
              
              
              -
              
              $
              1.0000
              
              
              50,000Stock
                  purchase rights exercised
              
              
              2.200
              
              
              (32,781
              )
              
              -
              
              
              -Stock
                  options exercised
              
              
              -
              
              
              -
              
              $
              1.8047
              
              
              (209,350
              )Stock
                  options lapsed/cancelled
              
              
              -
              
              
              -
              
              $
              1.4700
              
              
              (7,000
              )March
                  31, 2005
              
              $
              1.55
              
              
              100,000
              
              $
              1.9374
              
              
              142,150Stock
                  options granted
              
              
              -
              
              
              -
              
              $
              3.5
              
              
              121,000Stock
                  purchase rights exercised
              
              $
              1.55
              
              
              (100,000
              )
              
              -
              
              
              -Stock
                  options exercised
              
              
              -
              
              
              -
              
              $
              1.4
              
              
              (80,150
              )Stock
                  options lapsed/cancelled
              
              
              -
              
              
              -
              
              
              -
              
              
              (21,250
              )March
                  31, 2006
              
              
              
              
              
              -
              
              $
              3.2531
              
              
              161,750
   At
                  of March 31, 2005 and 2006, there were 242,150 and 161,750, respectively,
                  of stock options/purchase rights
                  exercisable.
 
 Additional
                  information on options outstanding at March 31, 2006 is as
                  follows:
 
 Exercise
                prices
              
              Numberoutstanding
              
              Weighted
                average
                remainingcontractuallife
                  (years)$1.4700
              
              
              15,000
              
              
              2.17$3.1700
              
              
              28,570
              
              
              2.57$3.5000
              
              
              118,000
              
              
              4.25161,750
              
              
              2.13
  F-25
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except share and per share data)
 
 
 16.
            STOCK
                COMPENSATION 
 The
                  Company entered into an employment contract with a director on
                  April 1,
                  2004, which entitles the director to an annual bonus of 29,154
                  common
                  shares upon completion of his service with the Company for the
                  years ended
                  March 31, 2005 and 2006. The grant date of the share award was
                  determined
                  to be April 1, 2004.
 
 The
                  shares were issued to the director on June 3, 2005 and June 1,
                  2006
                  respectively. The Company recorded a compensation expense of $160
                  for the
                  years ended March 31, 2005 and 2006, based on the fair value of
                  the shares
                  granted as of April 1, 2004.
 
 F-26
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands except share and per share data)
 
 
 17.
            SEGMENT
                INFORMATION 
  The
                  Company's chief operating decision maker evaluates segmentperformanceand allocates resources based on several factors, of which the
                  primary
                  financial measure is operating
                  income.
 
  The
                  Company considers its reportable segments to be metal and mechanical
                  OEM,
                  electric OEM, the manufacture and trading of cameras and underwater
                  products, and clocks and watches. A summary of the net sales,
                  profitability information and asset information by segment and
                  geographical areas is shown below:
  Year
                    ended March 31,Net
                  sales:
              
              2004
              
              2005
              
              2006Metal
                  and Mechanical OEM:Unaffiliated
                  customers
              
              $
              14,786
              
              $
              17,792
              
              $
              19,404Intersegment
                  sales
              
              
              1,190
              
              
              1,357
              
              
              2,50315,976
              
              
              19,149
              
              
              21,907Electric
                  OEM:Unaffiliated
                  customers
              
              
              398
              
              
              1,749
              
              
              2,322Intersegment
                  sales
              
              
              296
              
              
              1,109
              
              
              794694
              
              
              2,858
              
              
              3,116Cameras
                  and underwater products:Unaffiliated
                  customers
              
              
              5,990
              
              
              3,836
              
              
              1,487Intersegment
                  sales
              
              
              413
              
              
              206
              
              
              1206,403
              
              
              4,042
              
              
              1,607Clocks
                  and watches:Unaffiliated
                  customers
              
              
              4,182
              
              
              4,301
              
              
              2,630Intersegment
                  sales
              
              
              119
              
              
              67
              
              
              2944,301
              
              
              4,368
              
              
              2,924Corporate:Intersegment
                  sales
              
              
              1,209
              
              
              1,497
              
              
              93Intersegment
                  eliminations
              
              
              (3,227
              )
              
              (4,236
              )
              
              (3,804
              )Total
                  net sales
              
              $
              25,356
              
              $
              27,678
              
              $
              25,843Operating
                  income (loss):Metal
                  and Mechanical OEM
              
              $
              1,304
              
              $
              1,371
              
              $
              806Electric
                  OEM
              
              
              142
              
              
              202
              
              
              12Cameras
                  and underwater products
              
              
              41
              
              
              (891
              )
              
              (319
              )Clocks
                  and watches
              
              
              (465
              )
              
              (807
              )
              
              388Corporate
                  expenses (net)
              
              
              (147
              )
              
              (144
              )
              
              (285
              )Total
                  operating income (loss)
              
              $
              875
              
              $
              (269
              )
              $
              602
   F-27
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands)
 
 
 17.  SEGMENT
        INFORMATION - continued
  Year
                  ended March 31,2004
              
              2005
              
              2006Interest
                  expense:Metal
                  and Mechanical OEM
              
              $
              67
              
              $
              100
              
              $
              126Electric
                  OEM
              
              
              1
              
              
              6
              
              
              4Cameras
                  and underwater products
              
              
              2
              
              
              -
              
              
              -Clocks
                  and watches
              
              
              7
              
              
              4
              
              
              4Total
                  interest expense
              
              $
              77
              
              $
              110
              
              $
              134Depreciation
                  and amortization expense:Metal
                  and Mechanical OEM
              
              $
              588
              
              $
              647
              
              $
              638Electric
                  OEM
              
              
              87
              
              
              113
              
              
              220Cameras
                  and underwater products
              
              
              148
              
              
              88
              
              
              13Clocks
                  and watches
              
              
              203
              
              
              214
              
              
              216Corporate
                  assets
              
              
              86
              
              
              86
              
              
              3Total
                  depreciation and amortization
              
              $
              1,112
              
              $
              1,148
              
              $
              1,090Capital
                  expenditure:Metal
                  and Mechanical OEM
              
              $
              896
              
              $
              813
              
              $
              471Electric
                  OEM
              
              
              66
              
              
              88
              
              
              36Cameras
                  and underwater products
              
              
              95
              
              
              85
              
              
              -Clocks
                  and watches
              
              
              143
              
              
              123
              
              
              167Corporate
                  assets
              
              
              17
              
              
              6
              
              
              -Total
                  capital expenditure
              
              $
              1,217
              
              $
              1,115
              
              $
              674
  As
                  at March 31,2005
              
              2006Identifiable
                  assets:Metal
                  and Mechanical OEM
              
              $
              11,489
              
              $
              13,100Electric
                  OEM
              
              
              2,711
              
              
              3,198Cameras
                  and underwater products
              
              
              1,807
              
              
              680Clocks
                  and watches
              
              
              3,405
              
              
              1,764Corporate
                  assets
              
              
              688
              
              
              149Total
                  identifiable assets
              
              $
              20,100
              
              $
              18,891Long-lived
                  assets:Metal
                  and Mechanical OEM
              
              $
              2,614
              
              $
              1,895Electric
                  OEM
              
              
              743
              
              
              641Cameras
                  and underwater products
              
              
              13
              
              
              -Clocks
                  and watches
              
              
              570
              
              
              251Corporate
                  assets
              
              
              3
              
              
              -Total
                  long-lived assets
              
              $
              3,943
              
              $
              2,787
  F-28
 HIGHWAY
        HOLDINGS LIMITED AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - continued
 (Dollars
        in thousands)
 
 
 17.  SEGMENT
        INFORMATION - continued
  All
                      of the Company's sales are co-ordinated through its head office
                      in Hong
                      Kong. The Company considers revenues generated from physical
                      location of
                      customers and the breakdown by destination is as
                      follows:
  Year
                  ended March 31,2004
              
              2005
              
              2006Net
                  sales:Hong
                  Kong and China
              
              $
              16,748
              
              $
              17,284
              
              $
              13,981Other
                  Asian countries
              
              
              596
              
              
              387
              
              
              524Europe
              
              
              6,004
              
              
              8,517
              
              
              10,298USA
              
              
              621
              
              
              1,096
              
              
              978Others
              
              
              1,387
              
              
              394
              
              
              62$
              25,356
              
              $
              27,678
              
              $
              25,843
 
 The
                    locations of the Company's identifiable assets are attributed
                    to the
                    location of identifiable assets and the breakdown by destination
                    is as
                    follows:
 As
                  at March 31,2005
              
              2006Hong
                  Kong
              
              $
              10,049
              
              $
              10,653China
              
              
              8,007
              
              
              7,751Europe
              
              
              1,787
              
              
              144USA
              
              
              257
              
              
              343$
              20,100
              
              $
              18,891
 
 18.
            SUBSEQUENT
                EVENT 
 Subsequent
                  to the year ended March 31, 2006, the Company began negotiating
                  with the
                  owners of two existing manufacturers in Wuxi, China for the purchase
                  of
                  certain machineries and equipment. The Company is expected to complete
                  the
                  purchase of the respective assets later in the year ending March
                  31, 2007.
 
 
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  F-29