United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
20-F




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


or


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





For
the fiscal year ended March 31, 2009.




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


For
the transition period from ____________ to ____________.




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




Commission
file number 0-28990




HIGHWAY
HOLDINGS LIMITED


(Exact
name of Registrant as specified in its charter)




British
Virgin Islands


(Jurisdiction
of incorporation or organization)




Suite
810, Level 8, Landmark North


39 Lung
Sum Avenue


Sheung
Shui


New
Territories, Hong Kong


(Address
of principal executive offices)




Po
Fong


Chief
Financial Officer


Suite
810, Level 8, Landmark North


39 Lung
Sum Avenue


Sheung
Shui


New
Territories, Hong Kong


telephone:
(852) 2344-4248


fax:
(852) 2343-4976


po.fong@highwayholdings.com


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





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





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





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




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




Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.  3,720,520 Common Shares were
outstanding as of March 31, 2009.




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




If this report is an annual or
transition report, indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.  Yes ̈Nox





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




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




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





Large
      accelerated filer  ̈
            
            Accelerated
      filer  ̈
            
            Non-accelerated
      filer x




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




U.S.
GAAP x




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




Other
 ̈




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




If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).  Yes ̈Nox





TABLE OF
CONTENTS




PART
      I
                
                
                
                1Item
      1.
                Identity
      of Directors, Senior Management and Advisers
                
                
                1Item
      2.
                Offer
      Statistics and Expected Timetable
                
                
                1Item
      3.
                Key
      Information
                
                
                1Item
      4.
                Information
      on the Company
                
                
                17Item
      4.A
                Unresolved
      Staff Comments
                
                
                33Item
      5.
                Operating
      and Financial Review and Prospects
                
                
                33Item
      6.
                Directors,
      Senior Management and Employees
                
                
                44Item
      7.
                Major
      Shareholders and Related Party Transactions
                
                
                50Item
      8.
                Financial
      Information.
                
                
                52Item
      9.
                The
      Listing
                
                
                52Item
      10.
                Additional
      Information
                
                
                54Item
      11.
                Quantitative
      and Qualitative Disclosures About Market Risk.
                
                
                58Item
      12.
                Description
      of Securities Other Than Equity Securities
                
                
                59PART
      II
                
                
                
                59Item
      13.
                Defaults,
      Dividend Arrearages and Delinquencies.
                
                
                59Item
      14.
                Material
      Modification to the Rights of Securities Holders and Use of
      Proceeds.
                
                
                60Item
      15.
                Controls
      and Procedures.
                
                
                60Item
      16.
                Not
      applicable.
                
                
                61Item
      16A.
                Audit
      Committee Financial Expert
                
                
                61Item
      16B.
                Code
      of Ethics
                
                
                61Item
      16C.
                Principal
      Accountant Fees and Services
                
                
                62Item
      16D.
                Exemptions
      From the Listing Standards for Audit Committees
                
                
                62Item
      16E.
                Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                
                
                62Item
      16F.
                Change
      in Registrant’s Certifying Accountant
                
                
                63Item
      16G.
                Corporate
      Governance
                
                
                63PART
      III
                
                
                
                63Item
      17.
                Financial
      statements.
                
                
                63Item
      18.
                Financial
      statements.
                
                
                63Item
      19.
                Exhibits.
                
                
                63


i


FORWARD
- LOOKING STATEMENTS




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




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




CONVENTIONS




Highway
Holdings Limited is a holding company that operates through various controlled
subsidiaries.  Unless the context indicates otherwise, all references
herein to “the Company” refer collectively to Highway Holdings Limited and its
subsidiaries. References to “China” or “PRC” are to the People’s Republic of
China (excluding Hong Kong), whereas references to “Hong Kong” are to the Hong
Kong Special Administrative Region of the People’s Republic of China. Unless
otherwise stated, all references to “dollars” or $ are to United States
dollars.  “RMB” and “Renminbi” are references to the legal currency of
China.




PART
I




Item
1.Identity of Directors, Senior Management and
Advisers




Not
Applicable




Item
2.Offer Statistics and Expected Timetable




Not
Applicable




Item
3.Key Information




Our
historical Consolidated Financial Statements are prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) and
presented in United States dollars.  The following selected statements
of operations data for each of the three years in the period ended March 31,
2009 and the balance sheet data as of March 31, 2009 and 2008 are derived
from our consolidated financial statements and notes thereto included in this
Annual Report. The selected statements of operations data for each of the years
ended March 31, 2006 and 2005 and the balance sheet data as of
March 31, 2005, 2006 and 2007 were derived from the Company’s audited
financial statements, which are not included in this Annual
Report.  The selected information is qualified in its entirety by
reference to, and should be read in conjunction with, such consolidated
financial statements, related notes and “Operating and Financial Review and
Prospects” included as Item 5 in this report.







Selected Consolidated Financial
Information


(In
thousands, except for per share data):


2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2009Statement of OperationsNet
      sales
                      
                      $
                      27,678
                      
                      
                      $
                      25,843
                      
                      
                      $
                      31,469
                      
                      
                      $
                      33,164
                      
                      
                      $
                      33,729Gross
      profit
                      
                      
                      5,130
                      
                      
                      
                      4,243
                      
                      
                      
                      6,236
                      
                      
                      
                      5,074
                      
                      
                      
                      6,704Operating
      (loss) income
                      
                      
                      (269
                      )
                      
                      
                      602
                      
                      
                      
                      386
                      
                      
                      
                      (2,277
                      )
                      
                      
                      881Net
      (loss) income
                      
                      
                      (152
                      )
                      
                      
                      42
                      
                      
                      
                      594
                      
                      
                      
                      (1,921
                      )
                      
                      
                      768Dividend
      declared and paid (1)
                      
                      
                      323
                      
                      
                      
                      1,389
                      
                      
                      
                      1,288
                      
                      
                      
                      132
                      
                      
                      
                      0Per
      share amountsNet
      (loss) income -basic
                      
                      $
                      (0.05
                      )
                      
                      $
                      0.01
                      
                      
                      $
                      0.16
                      
                      
                      $
                      (0.50
                      )
                      
                      $
                      0.21Net
      (loss) income -diluted
                      
                      
                      (0.05
                      )
                      
                      
                      0.01
                      
                      
                      
                      0.16
                      
                      
                      
                      (0.50
                      )
                      
                      
                      0.20Dividend
      declared & paid (1)
                      
                      
                      0.10
                      
                      
                      
                      0.40
                      
                      
                      
                      0.36
                      
                      
                      
                      0.035
                      
                      
                      
                      0Weighted
      average number of shares:Basic
                      
                      
                      3,260
                      
                      
                      
                      3,465
                      
                      
                      
                      3,636
                      
                      
                      
                      3,810
                      
                      
                      
                      3,744Diluted
                      
                      
                      3,260
                      
                      
                      
                      3,544
                      
                      
                      
                      3,690
                      
                      
                      
                      3,810
                      
                      
                      
                      3,774Balance Sheet DataProperty,
      plant and equipment, net
                      
                      $
                      3,473
                      
                      
                      $
                      2,787
                      
                      
                      $
                      3,980
                      
                      
                      $
                      3,646
                      
                      
                      $
                      2,840Working
      capital
                      
                      
                      9,850
                      
                      
                      
                      9,960
                      
                      
                      
                      8,944
                      
                      
                      
                      7,556
                      
                      
                      
                      9,040Total
      assets
                      
                      
                      20,100
                      
                      
                      
                      18,891
                      
                      
                      
                      22,414
                      
                      
                      
                      20,490
                      
                      
                      
                      17,811Long
      term debt
                      
                      
                      967
                      
                      
                      
                      803
                      
                      
                      
                      1,133
                      
                      
                      
                      833
                      
                      
                      
                      553Shareholders’
      equity
                      
                      
                      13,058
                      
                      
                      
                      12,274
                      
                      
                      
                      12,167
                      
                      
                      
                      10,394
                      
                      
                      
                      11,356


____________


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





RISK
FACTORS




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


2


Risks
Relating to Operating in China




Dependence on Agreements with
Chinese State-Owned Enterprises.  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 80%
of the Company’s operations were conducted during the fiscal year ended March
31, 2009 (“fiscal 2009”), is located in Long Hua, Shenzhen, China. Pursuant to
six leases (the “Premises Leases”), the Company utilizes approximately 450,000
square feet of space for manufacturing operations and dormitory facilities at
the site of its principal factory complex in Long Hua, Shenzhen.  The
Company’s operations in Long Hua, Shenzhen, are conducted pursuant to agreements
entered into between certain China companies and the Shenzhen City Baoan
District Foreign Economic Development Head Company and its designees
(collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”).
The Premises Leases were renewed in 2008 and currently expire on February 28,
2012.  The Premises Leases may be terminated by either the Company or
the landlord upon six months notice to the other party.  Should either
the Company of the landlord elect to terminate the Premises Leases prematurely
(because of a breach of the leases by the Company, or pursuant to its six-month
right to do so), the Company would have to relocate its largest facility to
other, as yet unidentified, facilities.  While the Company believes
that other suitable alternative facilities are available to the Company in or
near Long Hua, Shenzhen, on terms that are equal to or better than the terms of
the Premises Leases, any such relocation of the Company’s principal
manufacturing facilities to alternative facilities would be costly, would
materially disrupt the Company’s operations, depending on the location of the
new facilities could result in the Company having to pay increased fees
(including higher customs deposits) and costs, and would adversely affect the
Company’s operations, its business, and its financial condition during the
relocation and for at least one year thereafter.  Accordingly, the
early termination of the Premises Leases would have a material adverse affect on
the Company’s operations and financial condition in the near
future.




To
facilitate the Company’s operations in Long Hua, Shenzhen, the local government
initially set up three separate China companies that are parties to the BFDC
Agreements.  The term of two of these agreements have been extended
with the remaining two China companies, and these two agreements now expire in
2016 (by the mutual consent of the parties, the third agreement with the local
government agency no longer is active).  Pursuant to the BFDC
Agreements, the BFDC is the party responsible for providing manufacturing
facilities and supplying workers to the Company and the Company is responsible
for paying a management fee, and certain other charges to the
BFDC.  As a result of structuring its operations so that they are
conducted pursuant to the BFDC Agreements and the Premises Leases, the Company’s
operations in Long Hua, Shenzhen, are not subject to certain rules and
regulations that would be imposed on entities which are considered under China
law to be doing business in China by utilizing other business structures such as
joint ventures or wholly owned subsidiaries organized in China.  For
example, the Company has not been required to apply for permits or licenses in
China or to register to do business in China.  Should there be any
adverse change in the Company’s dealings with the BFDC, or should the local or
federal government change the rules under which the Company currently operates,
all of the Company’s operations and assets could be jeopardized.




The
Company’s subsidiary, Golden Bright Plastic Manufacturing Company Limited, also
is a party to an agreement with the Shenzhen City Longang District Foreign
Economic Development Limited regarding the operations in Pinghu Lisu that, in
substance, is similar to the BFDC agreements.  The agreement for the
Pinghu Lisu facility expires in 2020.  The BFDC Agreements concerning
the Long Hua facilities and the agreement with Shenzhen City Longang District
Foreign Economic Development Limited regarding the Golden Bright operations in
Pinghu Lisu (collectively, the “Operating Arrangements”) are dependent on the
Company’s continuing good relationship with the designees of the local
government.  In the event of a dispute involving these government
agencies involving the Operating Arrangements, the Company could have difficulty
trying to enforce its rights under these agreements because the parties to the
agreements are Chinese governmental agencies.  The Company’s
operations and prospects would be materially and adversely affected if the
governmental parties to the Operating Arrangements do not honor the current
agreements under the Operating Arrangements.


3




To date,
the Company, the BFDC and Shenzhen City Longang District Foreign Economic
Development Limited have been dealing with each other on terms different in
certain respects from those contained in their respective Operating
Arrangements.  There can be no assurance that neither the BFDC nor
Shenzhen City Longang District Foreign Economic Development Limited will insist
upon a change in the current practices so as to require stricter adherence to
the terms of their agreements, which strict adherence could be less favorable to
the Company than the practices currently in effect.  If the Company
were required to adhere to the terms of the Operating Arrangements, the
Company’s business and results of operations could be materially and adversely
affected.




Recent Changes in Labor Laws,
Environmental Regulation, Safety Regulation and Business Practices, and
Operating Costs in China, and in Shenzhen in Particular, Have Significantly
Increased the Costs and Risks of Doing Business.  As further
described in this Annual Report, the Chinese government has during the past two
years significantly changed and/or increased the enforcement of a number of laws
affecting employees (including regulations regarding their salaries and
benefits, labor unions, working conditions and overtime restrictions, and
contract duration—in particular, requirements leading to life long employment),
and safety regulations for buildings and workers.  In addition, the
Chinese government has also changed or increased the enforcement of certain
environment protection laws, which have restricted some common practices and/or
increased the Company’s cost of operations. Economic development in China,
particularly in Shenzhen, China, may be limited as well by other factors, such
as the overburdened infrastructure, inadequate transportation, power, and water
supplies.  Certain parts of China, including the Company’s facilities
in Long Hua, Shenzhen, have in the past experienced 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.  The foregoing factors have increased the risks of doing
business in China and have caused many companies to terminate their operations
in Southern China and have caused most of the remaining companies operating in
Shenzhen, China to restructure their operations.  Although the
foregoing changes materially and adversely affected the Company’s financial
results for the fiscal year ended March 31, 2009, the Company believes that its
financial strength, its high-quality operations, and its current business plan
will allow it to remain viable, and even grow, as these new changes are being
implemented in China.  However, no assurance can be given that other
business changes will not be implemented that will further negatively affect the
Company and that the Company will, in fact, be able to continue to operate
and/or prosper.




Internal Political and Other
Risks.  As of the date of this Annual Report, all of the
Company’s manufacturing facilities are located in China.  As a result,
the Company’s operations and assets are subject to significant political,
economic, legal and other uncertainties associated with doing business in
China.  Changes in policies by the Chinese government resulting in
changes in laws, regulations, or the interpretation thereof, confiscatory
taxation, restrictions on imports and sources of supply, currency re-valuations
or the expropriation of private enterprise could materially adversely affect the
Company.  The Chinese government has been pursuing economic reform
policies, including the encouragement of private economic activity and greater
economic decentralization.  There can be no assurance, however, that
the Chinese government will continue to pursue such policies, that such policies
will be successfully pursued, that such policies will not be significantly
altered from time to time, or that business operations in China would not become
subject to the risk of nationalization, which could result in the total loss of
investments.


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




Recent Changes In The China’s Labor
Laws Negatively Affect The Company’s Operations And Increase Its Operating
Costs.  In June 2007, the National People’s Congress of the PRC
enacted new labor law legislation called the Labor Contract Law and more
strictly enforced certain existing labor laws.  The new law, which
became effective on January 1, 2008, amended and formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role
of trade unions.  As a result of the new law, the Company has had to
reduce the number of hours of overtime its workers can work, substantially
increase salaries of its workers, provide additional benefits to its workers,
and revise certain other of its labor practices.  The increase in
labor costs has increased the Company’s operating costs, which increase the
Company has not always been able to pass through to its customers.  As
a result, the Company has incurred certain operating losses as its cost of
manufacturing has increased.  The Company’s attempt to increase its
prices to reflect the increase in labor and other costs has strained its
relations with certain of its principal customers.  In addition, under
the new law, employees who have worked for the Company for 10 years or more or
who have had two consecutive fixed-term contracts must be given an “open-ended
employment contract” that, in effect, constitutes a lifetime, permanent
contract, which is terminable only in the event the employee materially breaches
the Company’s rules and regulations or is in serious dereliction of his
duty.  Such non-cancelable employment contracts will substantially
increase its employment related risks and limit the Company’s ability to
downsize its workforce in the event of an economic downturn.  The
changes in the labor laws directly contributed to four strikes in the fiscal
year ended March 31, 2008 that affected three of the Company’s manufacturing
facilities.  The worker strikes required the Company to make
significant financial payments and concessions to its worker, and have resulted
in the filing of labor claims by employees against the
Company.  Although the current worldwide economic slowdown has, during
the past year, caused a steep and sudden decrease in the demand for workers in
Shenzhen, thereby relieving the shortage of workers and reducing the pressure to
increase wages, the cost of labor in China continues to be significantly higher
than it was two years ago.  Furthermore, no assurance can be given
that the Company will not in the future be subject to additional labor cost
increases or even labor strikes or other disruptions as a result of the labor
issues caused by the new laws.


5




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




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


6




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




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




The
Company is not required to withhold taxes in China for its Hong Kong based
employees who reside less than 183 days in China.   While the
Company carefully monitors the amount of time that its affected employees spend
in China, an inadvertent violation of the employment restrictions in China by
some of the Company’s employees could expose the Company to significant
additional taxes in China.




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


7


Labor Shortages and Employee
Difficulties.  One of the principal economic advantages of
locating the Company’s operations in China has been the availability of low cost
labor.  Due to the enormous growth in manufacturing in China and the
effects of China’s one-child policy, the Company has recently experienced some
difficulty in filling its labor needs.  In addition to the recently
developing tight labor market, the Company has also been affected by cyclical
trends and other shortages in labor supply.  For approximately two
months each year, there are severe labor shortages in China as a result of the
Chinese New Year during which time the Company follows the customary practice at
its factory complex to grant its employees home leave and to, therefore,
temporarily discontinuing operations.  The Company has also
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.




China’s
strict, communist era labor laws are difficult to comply with and costly to
implement.  In addition, the Chinese government has made sweeping
changes to labor laws, including increasing minimum wages, limiting overtime
hours, permitting workers to join labor unions, permitting workers to sue their
employers to enforce labor law violations, and requiring employers to provide
other employee benefits.  As a result of the foregoing labor law
changes, the cost of hiring workers has substantially increased, which has
negatively affected the Company’s cost advantage it enjoyed compared to
non-China manufacturers.  Employers found to be violating these labor
rules are often severely penalized.  The strict enforcement of the
labor laws, combined with the shortages in the available labor pool, have
increased the Company’s costs of finding, hiring, paying, and otherwise
providing for employees.




Risks
Related to Operations




The Global Economic Weakness Has
Adversely Affected The Company’s Business And Short-Term Earnings, Liquidity And
Financial Condition And, Until Global Economic Conditions Improve, Is Expected
To Continue To Do So.  Most of the Company’s customers are
international companies that operate globally or serve global
markets.  As a result, the Company’s customers have been affected by
the unstable global financial and credit markets and by the recent downturn in
many economies. Worldwide economic conditions have been weak and may be further
deteriorating. The instability of the markets and weakness of the global economy
has adversely affected, and could continue to affect adversely, the demand for
the Company’s customers’ products, the amount and timing of their orders, the
financial strength of those customers and the Company’s suppliers, and/or the
Company’s suppliers’ and customers’ ability to fulfill their
obligations.  These factors have adversely affected, and are expected
to continue to affect the Company’s operations, earnings and financial
condition. This instability also could affect the prices at which the Company
can sell its products, which also could adversely affect the Company’s earnings
and financial condition.


8


The Company is Increasingly
Financially Dependent Upon a Few Major Customer.Historically,
a substantial percentage of the Company’s sales has been to small number of
customers.  During the years ended March 31, 2007, 2008 and 2009, the
Company’s sales to its three largest customers for such periods accounted for
approximately 46.9%, 46.1% and 48.2% of net sales respectively.  See
“Business—Major Customers.”  While the Company believes that there are
material benefits to limiting is customer base to a few, large well-established
and financially strong customers, having fewer customers also has significant
risks.  The Company’s success will depend to a significant extent on
maintaining its major customers and on the success achieved by its major
customers.  The Company could be materially adversely affected if it
loses any major customers or if the business and operations of its major
customers decreases.  While the Company has in the past been able to
replace major customers, no assurance can be given that the Company will be able
to do so in the future.  Since most of the Company’s sales
transactions with its customers are based on purchase orders received by the
Company from time to time, the Company is to a large extent dependent upon
continuously receiving new purchase orders for its future sales.  As a
result, most of the Company’s revenues are dependent upon periodic orders and
the amount of sales to its customers fluctuate from time to time.  In
addition, with fewer, larger customers, the Company’s operations are more
significantly impacted by a delay or reduction of any anticipated purchase
orders or by the loss of any one or more of its major customers.




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, 2007, 2008 and
2009, accounts receivable from the five customers with the largest receivable
balances at year-end represented 44.9%, 61.0% and 66.9% of the total outstanding
receivables.




There Are Significant Financial and
Operational Risks Related To Opening Additional Facilities in
China.  The Company has in the past expanded its operations
through acquisitions and by establishing new facilities.  All of these
actions initially have strained the Company’s financial resources and reduced
the Company’s profitability.  In addition, certain of the Company’s
acquisitions and newly established operations have not been successful, have
reduced the Company’s profitability, and have had to be
closed.  Nevertheless, the Company may, in the future, continue to
selectively acquire other companies or establish new facilities.  The
cost of acquiring, establishing, refurbishing, upgrading and integrating new
facilities normally is substantial and can negatively affected the Company’s
future earnings and financial condition.  For example, in 2006 the
Company acquired Golden Bright Plastic Manufacturing Company Limited, a company
engaged in the business of the manufacture and supply of plastic parts and
products.  The significant expenses that the Company has incurred to
date as a result of the Golden Bright acquisition (including due diligence
expenses, integration costs, the cost of upgrading certain machinery and
equipment at Golden Bright’s facilities, and the significant costs incurred to
upgrade and integrate the financial and accounting systems of Golden Bright with
those of the Company) have to date reduced the Company’s overall cash flow and
earnings.  Furthermore, the Company’s stopped its operations at its He
Yuan facility in April 2009 after that newly established facility did not
contribute to the Company’s operations as expected.  Although the
Company intends to carefully select new acquisitions or facilities, no assurance
can be given that any new acquisitions will, in fact, become profitable or will
otherwise improve the Company’s overall operations, or that future additional
acquisitions or facilities will not likewise have a negative impact on the
Company’s short-term cash position and on its results of
operations.


9




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




Dependence on, and risk of loss of
Credit Facilities.The Company used to have credit facilities
with Hong Kong and Shanghai Banking Corporation Limited (HSBC), DBS Bank (Hong
Kong) Limited and Overseas-Chinese Banking Corporation Limited. These
credit facilities are renewed annually. Although the Company, to date, has
financed its working capital needs primarily through cash generated from its
operations and from its internal financial resources, these credit facilities
have provided the Company with the ability to borrow funds when needed and have
been used for international letters of credit and similar financing
functions.  During fiscal 2009, the Company decided not to renew the
HSBC credit facility because of certain modifications to the terms offered by
HSBC.  The Company still maintains credit facilities with DBS Bank
(Hong Kong) Limited, and Overseas-Chinese Banking Corporation Limited, which
collectively provide the Company with up to $4,562,000 of
credit.  Although the Company believes that the remaining two credit
facilities are sufficient based on the Company’s current working capital and its
projected financial needs, the loss of the HSBC credit facility, and the
reduction of the total amount of credit available, may nevertheless in the
future negatively affect the Company.  Should the credit facilities
with DBS Bank (Hong Kong) Limited, and Overseas-Chinese Banking Corporation
Limited not be available to the Company, or should the amounts at these two
institutions be reduced or otherwise restricted, the Company’s ability to fund
its working capital and other needs would be negatively impacted, which could
materially and adversely affect its operations and business.  No
assurance can be given that the Company’s to remaining lenders will continue to
provide the Company with the credit facilities that it will need in the
future.




The Company Must Continuously Adapt
Its Operations To Suit Its Customers Needs, Or Else It Will Lose
Customers.  The Company’s customers are continuously changing
the mix of their products.  Accordingly, the Company must continuously
adapt its manufacturing abilities to suit the needs of its
customers.  The failure to anticipate, detect or react to its
customers changes can have severe adverse affects on the Company’s
operations.  No assurance can be given that the Company will be able
to detect and correctly react to future changes in the needs of its principal
customers, or that its investments in equipment and machinery in anticipation of
such changes will result in the anticipated return.  Should the
Company incorrectly react to changes in the needs of its current or future
customers, its business, operations and financial condition could be adversely
affected.


10


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




Since
locating its facilities in Shenzhen, China, in 1991, the Company has been able
to compete with other manufacturers based on its cost of operations in Shenzhen,
the availability of a large labor pool, its favorable tax status, and its
convenient access to Hong Kong’s shipping port and business/banking
facilities.  However, since the Company first moved to Shenzhen as one
of the first manufacturers in that locality, many other manufacturers have
re-located or established new facilities in Shenzhen, and the Company’s
competitive advantage has been significantly diminished.  In addition,
many of the larger, international companies that have established competing
facilities in Shenzhen have also established manufacturing facilities in other
low-cost manufacturing locations, many located at sites outside of China, which
have given those competitors the ability to shift their manufacturing to those
locations whenever costs at those other locations are cheaper than in
Shenzhen.  Accordingly, the Company has indirectly been competing
against both the competitors in Shenzhen as well as the other facilities outside
of China.  Recent events in China have significantly increased the
cost of operating in China, including changes in labor laws, changes in
environmental regulations and in the enforcement of such regulations, increases
in safety regulations, and a general increase in the cost of doing business have
all collectively significantly eroded the advantages of operating in
China.  No assurance can be given that the Company will continue to be
able to compete effectively against companies outside of China in its principal
businesses.




Increased Dependence on the Long
Hua, Shenzhen, Factory Complex.  In order to reduce the
Company’s dependence on a single facility in Long Hua, Shenzhen, the Company in
July 2005 opened a second, smaller manufacturing facility, in He Yuan,
China.  Thereafter in 2006, the Company also commenced operations at a
small manufacturing facility in Wuxi, China, and a plastic products manufacturer
in Pinghu, approximately 15 kilometers from the Company’s main facility in Long
Hua.  As a result, during the fiscal year ended March 31, 2009, the
Company was operating at four locations.  However, despite these new
sites, over 80% of the Company’s revenues for fiscal 2009 were generated from
the Long Hua, Shenzhen facility.  In addition, in April 2009 the
Company stopped all operations at one of its four facilities (the He Yuan
facility is currently being closed) and has reduced its Golden Bright facility
by one-third.  Accordingly, the Company will be more dependent upon
its principal Shenzhen facility in the future than it was in fiscal 2009, and
the loss of this facility, or any material disruption of its operations at this
facility would be costly, could materially disrupt the Company’s overall
operations, and would have a material and adverse impact on the Company’s
operations and financial condition.  The Company currently maintains
fire, casualty and theft insurance aggregating approximately $30,000,000
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.


11




The Cost Of Purchasing Components
Has Been Erratic And Could Increase, Thereby Negatively Affecting The Company’s
Margins And Operating Results.  The Company purchases many of
the components used in manufacturing its products.  An estimate of the
cost of these components is included in the price that the Company quotes to its
customers.  However, the Company does not have written agreements with
most of its suppliers of components. This typically results in the Company
bearing the risk of component price increases because the Company may be unable
to procure the required materials at a price level necessary to generate
anticipated margins.  During fiscal 2009, the cost of many components
increased substantially and thereafter decreased as demand for those components
softened.  Accordingly, increases in component prices could materially
and adversely affect the Company’s gross margins and operating
results.




Fluctuation in Foreign Currency
Exchange Rates.Because the Company engages in international
trade, the Company is subject to the risks of foreign currency exchange rate
fluctuations.  In prior years, the Company’s exposure to currency
fluctuations was limited  because most of its sales were denominated
in either U.S. or Hong Kong dollars.  However, as a result of its
increasing sales to European customers, many of which are paid in Euros, the
Company is exposed to the risks associated with possible foreign currency
controls, currency exchange rate fluctuations or devaluations.  The
Company’s financial results have, from time to time, been affected by currency
fluctuations.  For example, the Company recognized a net foreign
currency exchange gain of $283,000 for the fiscal year ended March 31, 2008 due
to the appreciation of the value of the Euro compared to the U.S.
dollar.  However, the Company had a currency exchange loss of $330,000
for fiscal 2009.  Notwithstanding these currency conversion rate
fluctuations, the Company does not attempt to hedge its currency exchange risks
and, therefore, will continue to experience certain gains or losses due to
changes in foreign currency exchange rates.  The Company does attempt
to limit its currency exchange rate exposure in certain of its OEM contracts
through contractual provisions, which may limit, though not eliminate, these
currency risks.  In addition, the Company has an understanding with
many of its larger European customers that the Company’s quoted prices will be
periodically adjusted to reflect currency exchange rate
fluctuations.




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


12




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




Future Acquisitions Or Strategic
Investments May Not Be Successful And May Harm The Company’s Operating
Results.  As part of its strategy, the Company has in the past
acquired or established smaller facilities in China, and it may do so in the
future.   For example, during the past three years, the Company
has established three new manufacturing facilities in China in He Yuan, Wuxi and
Pinghu.  Future acquisitions or strategic investments could have a
material adverse effect on the Company’s business and operating results because
of:




·
            The
      assumption of unknown liabilities, including employee
      obligations.  Although the Company normally conducts extensive
      legal and accounting due diligence in connection with its acquisitions,
      there are many liabilities that cannot be discovered, and which
      liabilities could be material.




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




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




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


13




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




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




Risks
Relating to Hong Kong




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




Risks Related To The Exchange Rate
Between Hong Kong Dollar and U.S. Dollar.  A substantial
portion of the Company’s net sales and expenses are denominated in the Hong Kong
monetary unit, the Hong Kong dollar.  Since 1983, the exchange rate
between Hong Kong dollar and the U.S. dollar has been fixed at approximately
HK$7.78 to $1.00. However, due to the currency turmoil that has affected many
countries in Southeast Asia, there has been pressure to re-value the Hong Kong
dollar.  All dollar amounts (“$”) set forth in this Annual Report are
in U.S. dollars.  The peg of the Hong Kong dollar to the U.S. dollar
has remained and been defended by the Hong Kong Special Administrative Region
Government.  While the Hong Kong Government has indicated that it has
no plans to break the peg with the U.S. dollars, no assurances can be given that
this will remain so in the future.  The Company incurs significant
amount of its expenses in Hong Kong dollars and generates its revenue’s
primarily in U.S. dollars and Euros.  As a result, the Company would
be negatively affected if the value of the Hong Kong dollar were to
appreciate.  An appreciation of the Hong Kong dollar against the U.S.
dollar would increase the expenses of the Company when translated into U.S.
dollars and could adversely affect profit margins.  There can be no
assurance that the exchange rate of the Hong Kong dollar will not fluctuate in
the future and that such fluctuations will not have a materially adverse effect
on the Company’s business and results of operations.


14


Certain
Legal Consequences of Incorporation in the British Virgin Islands




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




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




Risks
Associated With An Investment in the Company’s Securities




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




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


15




Our Common Shares May Be Delisted
From The Nasdaq Capital Market If Our Stock Price Does Not Meet The Requirements
For Continued Listing.  In general, under the rules of the
Nasdaq Capital Market, a security must maintain a minimum $1.00 closing bid
price in order to continue to be listed on the Nasdaq Capital
Market.  During fiscal year 2009, the value of the Company’s Common
Shares, which are listed on the Nasdaq Capital Market, had a closing bid price
below $1.00.  However, beginning with an announcement on
October 16, 2008, Nasdaq has temporarily suspended the enforcement of its
rules requiring a minimum $1.00 closing bid price until July 20,
2009.  Therefore, despite our Common Shares having a closing bid price
below $1.00, the Company was still considered in compliance with the Nasdaq
listing qualifications.  Once the suspension period is over, if we
eventually fail to comply with this condition for continued listing, our Common
Shares may be delisted from the Nasdaq Capital Market.   There is
no assurance that our Common Shares will be listed for trading or quoted
elsewhere and an active trading market for our Common Shares may cease to exist,
which would materially and adversely impact the market value of our Common
Shares.




Failure To Establish And Maintain
Effective Internal Controls Over Financial Reporting Could Have A Material And
Adverse Effect On The Accuracy In Reporting Our Financial Results Or Preventing
Fraud.We are subject to the
reporting obligations under the U.S. securities laws. The SEC, as required under
Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring
public companies to include a report of management on the effectiveness of such
companies’ internal control over financial reporting in its annual report. In addition, commencing
with the fiscal year ending March31, 2010, an independent
registered public accounting firm for a public company must attest to and report
on the effectiveness of our company’s internal control over financial
reporting.  Because of the difficulty in hiring and keeping highly
qualified accounting personnel (which have been exacerbated by the recent
acquisitions of the Golden Bright and Wuxi facilities), management may not be
able to conclude that the Company’s internal control over financial reporting is
fully effective.  Moreover, even if management concludes that the
Company’s internal control over financial reporting is effective, the Company’s
independent registered public accounting firm may issue a report that is
qualified if such firm is not satisfied with the Company’s internal controls
over financial reporting or the level at which those controls are documented,
designed, operated or reviewed, or if such firm interprets the relevant
requirements differently from the Company.  In addition, during the
course of such evaluation, documentation and testing, the Company may identify
deficiencies which the Company may not be able to remedy in time to meet the
deadline imposed by the Sarbanes-Oxley Act for compliance with the
requirements.  Any of these possible outcomes could result in an
adverse reaction in the financial marketplace due to a loss of investor
confidence in the reliability of our reporting processes, which in turn could
harm the Company’s business and negatively impact the trading price of the
Company’s common shares.




The Financial Costs and
Administrative Burdens of Implementing The Sarbanes-Oxley Act of 2002 Could
Materially and Adversely Affect Our Financial Results and Financial
Condition.  To date, the Company has been exempted from some of
the regulations under the Sarbanes-Oxley Act of 2002 that are applicable to U.S.
public companies.  Except for the provisions of Section 404 of the
Sarbanes-Oxley Act that requires our independent registered public accounting
firm to attest to our internal controls, all of the provisions of that act that
will apply to the Company must now be implemented.  These rules
require the Company to make a number of changes in some of its corporate
governance, securities disclosure and compliance practices.  In
addition, in response to the requirements of the Sarbanes-Oxley Act, the Nasdaq
Stock Market has also promulgated new rules on a variety of
subjects.  Compliance with all of these new rules imposed by the SEC
and by the Nasdaq Stock Market as well as the Sarbanes-Oxley Act of 2002 will
continue to be a significant burden on the Company’s legal, financial and
accounting costs, and the Company expects these increased costs to continue in
the current fiscal year ending March 31, 2010.


16





We may not declare or pay cash
dividends.The Company attempts to pay a cash dividend annually to all
holders of its Common Shares, subject to its profitability and cash
position.  Because of the financial uncertainty concerning the global
economy and the effect that the slowdown in the global economy could have on the
Company, the Board did not declare or pay any dividends during the fiscal year
ended March 31, 2009.  Dividends are declared and paid at the
discretion of the Board of Directors and depend upon, among other things, the
Company’s net profit after taxes, the anticipated future earnings of the
Company, the success of the Company’s business activities, the Company’s capital
requirements, and the general financial conditions of the
Company.  Although it is the Company’s intention to pay dividends
during profitable fiscal years, no assurance can be given that the Company will
pay, in fact, pay any dividends in the future even if its has a profitable year
or is otherwise capable of doing so.  If we do not pay a cash
dividend, our shareholders will not realize a return on their investment in our
Common Shares except to the extent of any appreciation in the value of our
Common Shares. Our Common Shares may not appreciate in value, or may decline in
value.




Item
4.Information on the Company




History
and Development of the Company.




Highway
Holdings Limited is a holding corporation that was incorporated on July 20, 1990
as a limited liability International Business Company under the laws of the
British Virgin Islands.  The Company’s corporate administrative
matters are conducted in the British Virgin Islands through its registered
agent: HWR Services Limited, P.O. Box 71, Craigmuir Chambers, Road Town,
Tortola, British Virgin Islands.  The Company’s administrative offices
for its subsidiaries are located in Hong Kong at Suite No. 810, Level 8,
Landmark North, Sheung Shui, New Territories, Hong Kong and the Company may be
contacted at (852)2344-4248.  Highway Holdings Limited currently
operates through five active controlled subsidiaries.




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


17




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




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




In 1997,
the Company purchased substantially all the assets of Kienzle Uhrenfabrik GmbH
(“Kienzle Uhren”), a clock and watch manufacturer that traces its origin back to
1822 in Germany, which was at the time in receivership.  The purchase
included the trademark to the “Kienzle” name and the equipment, machinery,
tools, patents and furniture and office equipment of Kienzle
Uhren.  Subsequent to purchasing the equipment, the assets of Kienzle
Uhren were dismantled, packed and shipped from Germany to the Company’s
facilities in Hong Kong and China.  Thereafter, the Company commenced
manufacturing clocks for third parties for sale under various brand names (such
as Braun, Swatch, and Casio), as well as clocks for the Company’s own account
(which clocks were sold under the Company’s own “Kienzle” brand
name).  During the fiscal years ended March 31, 2003 and 2004, the
Company has also licensed the “Kienzle” mark for use with various other products
in Europe, which products were manufactured by others.  The Company
also manufactured and sold watches, both under its “Kienzle” brand name and for
sale under other labels.  However, as with the camera operations,
because of the clock and alarm features of mobile telephones, the market for
clocks and watches has significantly decreased and become extremely price
competitive.  As a result, in fiscal year ended March 31, 2006, the
Company sold all of its rights to the “Kienzle” trademark for an aggregate
purchase price of $2,160,000 and terminated most of its clock and watch
operations.  The Company now only manufactures clocks and watches on a
limited basis as an OEM manufacturer for third party clock/watch
companies.




In
addition to its largest and principal manufacturing facility in Long Hua,
Shenzhen, that it has operated since 1991, during fiscal 2009 the Company
operated three other manufacturing facilities located in Pinghu, Wuxi and He
Yuan in China.  During the past three fiscal years, the Company paid a
total of $1,214,000 to acquire its Golden Bright Plastic Manufacturing Company
Limited subsidiary and to establish its Kayser (Wuxi) Metal Precision
Manufacturing Limited subsidiary.


18




Pinghu.  In
September 2006, the Company acquired all of the shares of Golden Bright Plastic
Manufacturing Company Limited, a Hong Kong company primarily engaged in the
business of the manufacture and supply of plastic parts and
products.  Golden Bright Plastic Manufacturing specializes in tool
making, plastic injection molding, silk screen printing, spray painting and
mechanic and electronic assembly.  Golden Bright produces components,
subassemblies and finished products for its OEM customers.  Golden
Bright maintains its factory in Pinghu, approximately 15 kilometers from the
Company’s principal facilities in Long Hua, Shenzhen.  Approximately
100 employees work at the Pinghu facility as of March 31,
2009.  Initially, the Pinghu facility consisted of an approximately
14,600 square meter
facility.  However, the Company has recently reduced the size of this
facility by approximately one-third.  The operations of Pinghu were
severely affected by the labor strikes that affected the Company during the
fiscal year ended March 31, 2008.  During fiscal 2009, the Company
eliminated some of the duplicative administrative functions at Pinghu and
consolidated those functions into its administrative headquarters in Hong
Kong.  This consolidation has improved the operating results of the
Pinghu facility.




Wuxi.  In
December 2005, the Company also incorporated Kayser (Wuxi) Metal Precision
Manufacturing Limited under the laws of China.  The new Chinese
subsidiary was established in Wuxi, China, to manufacture metal tools and parts
for the internal Chinese market. Unlike the facilities in Shenzhen and He Yuan,
because it is a Chinese company, the Wuxi subsidiary is able to sell its
products in China to Chinese purchasers for use in China.  The Wuxi
subsidiary was established for the purpose of accessing the growing business
opportunities in the Shanghai region and to serve the large number of European
and Japanese OEMs in the region, most of whom require local
delivery.  The Wuxi subsidiary was established by the Company by
purchasing the assets of an existing local manufacturing
operation.  The Company intended to transfer a 29% stake in Kayser
(Wuxi) Metal Precision Manufacturing Limited to the two unaffiliated persons
from whom the Company purchased the assets.  However, because of the
substantial difficulties and high costs involved in evaluating and transferring
non-cash investments, the Company has not yet formally transferred 29% of the
stock of the Wuxi subsidiary to the two minority shareholders, and the Company
currently officially still holds 100% of the shares of the Wuxi local foreign
invested company.  Accordingly, as of March 31, 2009, the Company
owned a 71% financial interest in the Wuxi subsidiary and the two minority
shareholders hold the remaining 29% financial
interest.  In June 2009, the Company entered an agreement for the
acquisition of a 19% financial interest in Wuxi from one of the minority
shareholders.  Upon the completion of the acquisition of the 19%
financial interest, the Company will own 90% financial interest in the Wuxi
subsidiary.  The other 10% financial interest in the Wuxi
subsidiary will continue to be owned by the remaining minority shareholder, who
is also the factory manager of the Wuxi facility.  The Wuxi facility
currently employs approximately 28 employees.  Kayser Wuxi has, to
date, operated at a negative cash flow.  As a result, unless the
company increases its revenues and commences operating at a profit, the Company
may stop providing financial support to the subsidiary, which could result in
the closure of this facility.


19


He
Yuan.  The He Yuan, China, manufacturing facility commenced
operations in November 2005.  During fiscal 2009, that facility
manufactured light fixtures.  The He Yuan facility, located in the
city of He Yuan, consisting of 3,500 square meter, was established in order to
evaluate the costs, benefits and difficulties of operating a much larger
facility at He Yuan.  The facility was established under an agreement
with the government of He Yuan, and was intended to operate under a tax free
arrangement similar to the BFDC agreements in Long Hua,
Shenzhen.  However, after the facility was established and was fully
operational, the He Yuan government informed the Company that the facility was,
in fact, subject to substantial taxes (including taxes on presumed profits, even
though that facility had not yet produced profits).   As a result
of this change in the local government’s policy, the Company stopped all
operations at the He Yuan facility in April 2009, and the Company currently is
relocating the He Yuan equipment back to Long Hua.




Current
Business Overview




The
Company is primarily a fully integrated manufacturer of high quality metal,
plastic, electric and  electronic components, subassemblies and
finished products for major Japanese, German and United States OEMs and contract
manufacturers.  All of the Company’s manufacturing activities are
currently conducted at three locations in China.  The Company’s
principal, and oldest factory complex is located in Long Hua, Shenzhen, China,
at which the Company currently employs approximately 700 employees in all areas
of its operations.  The Company’s Kayser (Wuxi) Metal Precision
Manufacturing Limited subsidiary in Wuxi, China, manufactures metal tools and
parts for the internal Chinese market.  The Wuxi facility currently
employs 28 persons.  The Company’s Golden Bright Plastic Manufacturing
Company Limited subsidiary is primarily engaged in the business of the
manufacturing and supplying plastic parts and products.  The Golden
Bright facility employs approximately 100 persons.




The
Company currently manufactures and supplies a wide variety of high quality
metal, plastic and electric parts, components and products to its OEM clients,
which products are used by the Company’s customers in the manufacturing of
products such as photocopiers, laser printers, compact disc players, laser disc
players, cassette players, computer equipment, electrical components, electrical
connectors, cameras, clocks, automobile accessories, vacuum cleaners, light
fixtures, electro motors, wireless chimes, air pumps and dishwasher and other
washing machine components.  As part of its manufacturing operations,
the Company assists customers in the design and development of the tooling used
in the metal and plastic manufacturing process and provides a broad array of
other manufacturing and engineering services.  The metal manufacturing
services include metal stamping, 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, American and Chinesenationals; (ii) its
comparatively low labor and operating costs resulting from locating its
manufacturing operations in China; (iii) its ability to consistently manufacture
the type of high quality products required by the Company’s targeted customers;
(iv) its expertise in manufacturing these products in the required quality at a
reasonable cost; (v) the breadth of its manufacturing capabilities, and (vi) its
engineering design and development capabilities (which it uses to assist its
customers to design their products).


20




The
Company has continuously tried to strategically align its manufacturing
operations with the needs of its major customers to attract new OEM clients and
retain its existing clients.  For example, the Company is now capable
of manufacturing and assembling a wide variety of complex products that require
metal, plastics and electronics manufacturing capabilities.  In order
to distinguish itself from the many other smaller metal stamping operations with
which it used to compete in Shenzhen, the Company has adopted a plan to shift
its focus from smaller, simple metal stamping projects for which the Company
competes solely on price, to the manufacture of more complex parts, components
and entire products that utilize more of the Company’s vertically integrated
technologies.  Since the Company has the ability to design,
manufacture and assemble complete components containing metal, plastic and
electronics, and not just metal stamped parts, the Company’s new focus is on
manufacturing more customized products for global companies.  By
shifting to the manufacturing of larger, customized products that utilize more
of the Company’s vertically integrated and multi-disciplinary capabilities, the
Company believes that it will be able to increase its revenues while regaining
reasonable gross margins. The Company believes that its restructured strategy
will lead to additional business opportunities which will increase the
utilization ratios of its facilities.




Although
the Company has divested itself of its principal clock and watch manufacturing
business, the Company still manufactures a complete clock series on an OEM basis
for one internationally well known clock company.  The Company also
manufactures underwater digital camera casings and waterproof LED lights for
various OEM customers.  Neither the clock/watch sales, the camera
casing sales nor the LED product sales represent a material part of its current
business.




Industry
Overview




Management
believes that the third-party manufacturing industry has experienced major
increases over the past decade as manufacturers increasingly outsource the
manufacture of some or all of their component and/or product requirements to
independent manufacturers.  The benefits to OEMs of using contract
manufacturers include: access to manufacturers in regions with low labor and
overhead cost, reduced time to market, reduced capital investment, improved
inventory management, improved purchasing power and improved product
quality.  For the fiscal year ended March 31, 2009, approximately 97%
of the Company’s revenues were derived from the metal, plastics and electric OEM
manufacturing operations of the Company; the balance represented OEM sales of
clocks and camera products.




The
Company first commenced its metal stamping operations in China in
1991.  At that time, the Company gained a significant cost and
logistical advantage over other manufacturers by basing its manufacturing
facilities in Long Hua, Shenzhen, China, less than 50 kilometers from Hong
Kong.  During the past few years, however, many other manufacturers
have located their facilities in Shenzhen and in other similar low-cost areas in
China and Asia.  As a result, the Company now faces significantly more
competition as a manufacturer of OEM parts.  The Company has responded
to the increased competition by restructuring its operations and by trying to
move from manufacturing low margin, low-cost individual parts to manufacturing
higher margin, more expensive components, subassemblies and even complete units
for its OEM customers.


21




Historically,
the Company has manufactured high-quality metal parts, mostly for Japanese
customers.  Recently, however, the Company has focused on
manufacturing products for European (primarily German) companies.  The
Company also is actively attempting to expand its OEM business to U.S. based
companies, and has to date established a small, but active, customer base in the
U.S.




The
Company’s Strategy




The
Company’s future growth and profitability depend on its ability to compete as a
third party manufacturer.  The Company’s business strategy and focus
is to expand its operations as an integrated OEM manufacturer of metal, plastic
and electronic parts, components, subassemblies and competed products for blue
chip and international customers. The Company business strategy is to further
develop and leverage its multi-disciplinary manufacturing strengths, its cost
structure, its logistical advantages, its reputation as a high-quality
manufacturer, and its existing relationships with blue chip European and
Japanese customers to further expand its manufacturing operations.  In
addition, the Company is attempting to leverage these advantages by upgrading
its equipment and machinery, expanding its manufacturing capabilities, and
utilizing its cost and logistical advantages.




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




Capitalize on, and leverage its
manufacturing strength:  Unlike many of its metal parts
manufacturing competitors, primarily those in Shenzhen, China, the Company has a
vertically integrated manufacturing facility that can design, manufacture and
assemble more complex components and subassemblies.  In addition,
unlike some of its competitors in Shenzhen that are limited to either metal
stamping or to electronic and plastics manufacturing, the Company also has the
ability to combine metal stamping and electronics and plastics
manufacturing.  For  example, manufacturing stepping motors,
just to mention one of the Company’s products, utilizes all of the Company’s
capabilities, starting with mold and die making for the metal and plastic parts,
metal stamping, deep drawing and plastic injection molding, electric coil
winding, soldering, and assembling all the parts by using spot welding and
riveting technologies.  Accordingly, the Company’s strategy is to
focus on manufacturing more complex products that utilize the Company’s various
manufacturing strengths.  As the Company expands its manufacturing
capabilities into new and varied products, the Company has commenced promoting
the use of its assembly facilities to manufacture more of the end-product than
just some parts or components by emphasizing the efficiencies of assembling the
products by one manufacturer.  In addition, as more German and other
European companies seek to establish a manufacturing base in China, the Company
will provide manufacturing solutions for these European
companies.


22


Upgrading Equipment-Increased
Automation.  In order to attract major European and Japanese
OEM customers and in order to reduce its labor costs, the Company has during the
past few years upgraded the design and manufacturing equipment at its
facilities.  In the past few years, the Company made significant
investments in new tool making equipment, including the purchase of seven
state-of-art machines for use at the plastics manufacturing facilities at Golden
Bright and the purchase of new stamping machines, spectrum analyzers and robotic
equipment.   The new Golden Bright equipment included five
Computer Numerical Control (“CNC”) tooling machines, one CNC measurement
machine, and one electronic injection molding machine. Concurrently, the Company
entered into a cooperation agreement with Kyoei Engineering Co. Ltd., a Japanese
company, for the use and operation of this equipment.  Pursuant to the
cooperation agreement, the Company has agreed to permit Kyoei Engineering to
utilize the measurement equipment for up to 50 percent of the available
operating time, calculated weekly, during normal business hours, for its own
purposes and benefit, provided that Kyoei Engineering supplies a full-time
Japanese engineer to operate the machinery for both the Company and Kyoei
Engineering.  The Company also intends to purchase additional
equipment that will increase the automation of certain of its manufacturing
processes in order to reduce the effect that the recent increases in labor costs
and to reduce the Company’s dependence on short-term workers.




The
Company has also commenced using automation and robotics to replace certain
operations that have to date been performed manually by its
workers.  The Company designs and manufactures many of the
automated/robot machinery that it is now installing to replace some of the
repetitive functions performed by workers.  The Company’s goal is to
use automation/robotics to reduce it labor costs and to increase the quantity of
products that it manufactures at its work stations.  The newly
installed automated machinery has reduced the number of workers at the Company’s
facilities, which reduction is expected to continue in the future.




During
the fiscal years ended March 31, 2007, 2008 and 2009, the Company’s total
investment in new equipment and machinery was approximately $1,931,000,
$546,000, and $104,000 respectively.




Maintaining customers and increasing
market share through financial strength.  Many of the Company’s
largest customers are global companies that require that their OEM manufacturers
have the financial strength to survive during financial and economic
downturns.  The Company has traditionally maintained a strong balance
sheet that has enabled it to continue to supply its customers during economic
downturns.  The Company’s financial policies enabled it to operate
during the Asian financial crisis that commenced in 1998 and has, to date,
enabled the Company to continue to operate during the current worldwide economic
crisis.  Many of the Company’s local competitors have failed (an
estimated 20% of businesses in Shenzhen have gone out of business in the past 18
months, and many more are predicted to fail in the near future).  The
failure of some of these other companies has enabled the Company to strengthen
its relationships with its existing customers and to obtain additional orders
that may otherwise have been gone to competitors.




Expansion by acquisition, merger and
other means:  The Company believes it has the opportunity to
expand its business through acquisitions and through the establishment of
additional manufacturing facilities.  During the past three years, the
Company has purchased two existing manufacturing operations in Wuxi and in
Pinghu, China.  The Company continues to consider and evaluate other
possible acquisitions, both in China and elsewhere to gain technology know how,
additional management and technicians  and an increased customer
base.


23




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




Maintain production quality:
Management believes that maintaining close relations with the Company’s
customers is important to the success of the Company’s
business.  Understanding each customer’s needs and efficiently and
quickly addressing its needs is vital to maintaining a competitive
advantage.  Certain Japanese and German companies have built the
goodwill associated with their products and tradenames on a high level of
perceived quality.  By employing the type of high quality management
standards, production standards and quality control standards historically
utilized by many leading Japanese and German companies, the Company has been
able to satisfy the stringent requirements of its
customers.  Management believes that the Company’s commitment to high
level service, attention to detail and quality has the effect of providing
customers with a sense of confidence and security that their product
requirements will be met and their products will be delivered on time and at a
competitive price.




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




Manufacturing




The
Company’s manufacturing business consists of various stages: (i) tooling design
and production; (ii) manufacturing parts made by metal stamping and plastic
injection molding; (iii) mechanical and/or electric/electronic assemblies, and
(iv) finishing, packaging and shipping.




Tooling design and
production:  The metal manufacturing process generally begins
when a customer has completed the design of a new product and contacts the
Company to supply certain metal and plastic components to be used in the
product.  Generally, the Company must design and fabricate the tooling
necessary to manufacture these components in its tooling workshop.  In
some instances, however, the customer already possesses the tooling necessary to
manufacture the metal component and simply delivers the tools to the
Company.  Customers will sometimes also pay the Company to purchase
and install the equipment necessary to manufacture the customer’s
products.  The Company uses various computer controlled manufacturing
equipment to efficiently produce high quality tools designed to produce a high
quality product.  As many of the metal parts manufactured by the
Company make use of progressive, multi-stage stamping techniques, tools and
machines must be precisely fine tuned and aligned to achieve the required
quality standard and maximum efficiency.


24


The tool
making process for metal parts generally takes between 14 to 60 working days
depending on the size and complexity of the tool.  Customers typically
bear the cost of producing the tools and, as is customary in the industry, the
customers hold title to the tooling.  However, the Company maintains
and stores the tools at its factory for use in production and the Company
usually does not make tooling for customers unless they permit the Company to
store the tools on site and manufacture the related parts.




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




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




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




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




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




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


25




Raw
Material, Component Parts and Suppliers




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




During
the past few years, the price of metal and plastics raw materials has fluctuated
significantly, and there have been shortages for some
materials.   The Company estimates that the cost of some metal
and plastic products increased during the past few years by between 10% and
100%, which increases were followed in late 2008 by significant price decreases
in many of these raw materials.  The increase in raw materials prices
has also increased the price of packaging.  The increases in these
prices reduced the Company’s gross margins in the past few years on some of its
OEM manufacturing products, particularly on those products for which the Company
was unable to pass through the cost increases.  However, now that the
cost of some raw materials has decreased, the Company has benefited and has seen
its gross margins increase in fiscal 2009.  As a result of these
fluctuations in raw material prices, the Company now no longer enters into
longer-term, fixed price manufacturing agreements with its
customers.  Most new orders for products now are shorter-term orders
that are priced based on the recent market price of raw
materials.  The Company’s refusal to enter into longer-term fixed
price agreements has, at times, resulted in some reduction of new purchase
orders and strained relations with certain customers.  However, the
refusal to enter into certain longer term contracts has during fiscal 2009
protected the Company from incurring significant losses on those
contracts.




The
parts, components and products manufactured by the Company include various
plastic injected and metal stamped components, as well as integrated circuits,
electronic components and paper packaging products.  The Company
manufactures many of these products, but also purchases many other products that
it uses in its products.  These materials are subject to price
fluctuations, and the Company has, at times, been materially adversely affected
by price increases or shortages of supply.  As a result of the recent
worldwide economic crisis, many of the local providers of parts and components
used by the Company in its products have ceased operations.  As a
result, the Company could experience difficulties from time to time in obtaining
parts and components from its normal local suppliers.




Transportation




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


26




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




Customers
and Marketing




The
Company’s sales are generated from sales in Hong Kong/China, Europe, the United
States, and other Asian countries.  Net sales to customers by
geographic area are determined by reference to the physical locations of the
Company’s customers.  For example, if the products are delivered to
the customer in Hong Kong, the sales are recorded as generated in Hong Kong and
China; if the customer directs the Company to ship its products to Europe, the
sales are recorded as sold in Europe.  Payments are paid in Hong Kong
dollars, U.S. dollars and European Euros.  Net sales as a percentage
of net sales to customers by geographic area consisted of the following for the
years ended March 31, 2007, 2008 and 2009:




Year Ended March 312007
                      
                      
                      2008
                      
                      
                      2009GEOGRAPHIC AREAS:Hong
      Kong and China
                      
                      
                      53.3
                      %
                      
                      
                      49.6
                      %
                      
                      
                      42.4
                      %Europe
                      
                      
                      41.7
                      %
                      
                      
                      43.5
                      %
                      
                      
                      47.5
                      %Other
      Asian countries
                      
                      
                      0.6
                      %
                      
                      
                      0.7
                      %
                      
                      
                      0.6
                      %United
      States
                      
                      
                      4.0
                      %
                      
                      
                      5.9
                      %
                      
                      
                      8.7
                      %Others
                      
                      
                      0.4
                      %
                      
                      
                      0.3
                      %
                      
                      
                      0.8
                      %




During the year ended March 31, 2009,
there was a change in the internal financial reporting of information to the
Company's chief operating decision maker, leading to a change in the
Company's operating segments from four segments (Metal stamping and
mechanical OEM; Electric OEM; Cameras and underwater products; and Clocks and
watches) to two segments, consisting of its metal stamping and mechanical OEM
and its electric OEM operations (that include its plastic operations). Amounts
for fiscal years 2007 and 2008 have been restated to conform to the current
management view. The sales by segments for the years ended March 31, 2007, 2008,
and 2009 are as follows:.


Year Ended March 312007
                    
                    
                    2008
                    
                    
                    2009SEGMENT SALES:Metal
      Stamping and Mechanical OEM
                    
                    
                    71.4%
                    
                    
                    
                    70.4%
                    
                    
                    
                    66.2%Electric
      OEM
                    
                    
                    28.6%
                    
                    
                    
                    29.6%
                    
                    
                    
                    33.8%




Most of
the Company’s customers for its parts, components, and subassemblies generally
are themselves manufacturers.  The Company’s products are sold
primarily to Japanese and German owned companies that are finished goods
manufacturers or contract manufacturers in China.




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


27




Major
Customers




For the
fiscal year ended March 31, 2009, three customers each accounted for more than
10% of the Company’s net revenues (or 48% collectively of the Company’s
net sales).  During the past few years, the Company has relied to a
large extent on a few larger customers and has consciously reduced the number of
its smaller customers.  If the Company loses any of its major
customers who account for a material portion of total net sales, or if any of
those customer’s orders decrease substantially, the Company’s results of
operations and financial position would be materially and adversely affected if
the Company is unable to replace such major customers.




Customers
place manufacturing orders with the Company in the form of purchase orders which
are usually supported by a delivery schedule covering one to two months of
orders.  Customers usually do not provide long term contracts for
their purchases and are usually able to cancel or amend their orders at any time
without penalty.  In addition, certain customers enter into agreements
with the Company in which the parties agree upon their purchase and sale
procedures, but such agreements do not always contain any specific purchase
orders or purchase requirements.  Certain of the Company’s larger
customers provide the Company with non-binding forecasts of their anticipated
needs for the next year in order to enable the Company to plan for the
anticipated orders.  Orders from such customers are thereafter
received from time to time by customers based on the customers’ needs, not on
contractually fixed amounts or time periods.  Accordingly, backlog has
not been meaningful to the Company’s business.  Sales of manufactured
products to established existing clients are primarily on credit terms between
45 to 90 days, while the sale to new or lesser known customers are completed on
a wire transfer payment basis before shipment or other similar payment
terms.  Management constantly communicates with its credit sale
customers and closely monitors the status of payment in an effort to keep its
default rate low.  However, as a result of the concentration of sales
among a few of the Company’s larger customers, the Company is required to bear
significant credit risk with respect to these customers.  Typically,
metal part orders are spread over a three-month period and the Company is able
to withhold delivery or slow down shipments in the event of any delinquency in
payment for past shipments.  Parts are generally shipped 30-60 days
after an order has been placed unless the Company is required to manufacture new
tools which requires approximately 14-60 days to complete prior to commencing
manufacturing.  While the Company has not experienced material
difficulty in securing payment from its major customers, there can be no
assurance that the Company’s favorable collection experience will
continue.  The Company could be adversely affected if a major customer
was unable to pay for the Company’s products or services.




Industrial
Property Rights




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


28


Competition




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




Seasonality




The first
calendar quarter (the last quarter of the Company’s March 31 fiscal year) is
typically the Company’s lowest sales period because, as is customary in China,
the Company’s manufacturing facilities in China are usually closed for one to
two weeks for the Chinese New Year holidays.  In addition, during the
one month before and the one month after the New Year holidays, the Company
normally experiences severe labor shortages, which further impact the operations
during this period.  The Company does not experience any other
significant seasonal fluctuations, nor does it consider any other issues with
respect to seasonality to be material.




Government
Regulation




As of the
date of this Annual Report, 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.


29




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




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




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




Research
and Development




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


30




Other
Activities




The Company continuously considers
changing, improving and expanding its operations and related
activities.  The Company currently is considering entering into a
joint venture with one or more European companies to design, develop and
manufacture automation equipment at the Company’s facilities.  Such
automation equipment would be sold to third party manufacturers who want high
quality automation equipment.  Since the Company currently
manufactures the automation equipment that it has been installing into its own
factories as part of the Company’s own automation plan, this new business would
merely expand and commercialize certain functions that the Company already
engages in.  The Company has not yet finalized any arrangements with
its possible joint venture partners, and no assurance can be given that the
Company will elect to design and manufacture automation equipment for sale to
third parties.




Organizational
Structure




Highway
Holdings Limited is a holding company that operates through its
subsidiaries.  As of March 31, 2009, Highway Holdings Limited owned
eleven subsidiaries, ten of which were wholly-owned by Highway Holdings Limited;
the Company owned 100% of the shares of, but only a 71% economic interest in,
Kayser (Wuxi) Metal Precision Manufacturing Limited.  The Company has
been consolidating the operations of certain of these
subsidiaries.  As a result of its recent reorganization efforts, the
Company currently conducts its business primarily through five
subsidiaries.  Details of these subsidiaries are as
follows:




Place of
                                          
                                          
                                          
                                          Date of
                                          
                                          
                                          
                                          Percentage of
                                            ownership at March
                                            31,incorporation
                                          
                                          Name of entity
                                          
                                          Incorporation
                                          
                                          Principal activities
                                          
                                          2008
                                          
                                          
                                          2009Hong
      Kong
                                          
                                          Hi-Lite
      Camera Company Limited
                                          
                                          November
      10, 1978
                                          
                                          Manufacturing
      OEM products
                                          
                                          100%
                                          
                                          
                                          100%Hong
      Kong
                                          
                                          Kayser
      Limited (formerly known as Kienzle Time (H.K.)
                                            Limited)
                                          
                                          August
      24, 1997
                                          
                                          Trading
      of OEM products
                                          
                                          100%
                                          
                                          
                                          100%Hong
      Kong
                                          
                                          Nissin
      Precision Metal Manufacturing Limited
                                          
                                          November
      21, 1980
                                          
                                          Metal
      stamping, tooling design and manufacturing and assembling OEM
      products
                                          
                                          100%
                                          
                                          
                                          100%Hong
      Kong
                                          
                                          Golden
      Bright Plastic Manufacturing Company Limited
                                          
                                          May
      19, 1992
                                          
                                          Manufacturing
      and trading of plastic injection products
                                          
                                          100%
                                          
                                          
                                          100%China
                                          
                                          Kayser
      Wuxi Precision Metal Manufacturing Limited
                                          
                                          December
      21, 2005
                                          
                                          Metal
      stamping and
                                            tooling
      design
                                          
                                          71%
                                          
                                          
                                          71%(1)




(1) The Company is currently completing the
acquisition of a 19% financial interest in Kayser Wuxi from one of the minority
shareholders. Upon the completion of the acquisition of the 19% interest, the
Company will own 90% of the Wuxi subsidiary. The other 10% of the Wuxi
subsidiary will continue to be owned by the remaining minority shareholder, who
is also the factory manager of the Wuxi facility.


31





British
Virgin Islands




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




Hong
Kong




The
Company leases Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
Shui, New Territories, Hong Kong as its administrative offices. These
premises, consisting of approximately 1,912 sq. ft., are leased under a lease
that expires in July 2011 and has a monthly rental cost of $4,558 per month.




The
Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong at a
rental cost of $2,272 per
month under an agreement that expires in December 2009.




China




The
Company currently leases a total of approximately 45,000 square meters of space
at the site of its factory complex located at Long Hua, Shenzhen, China from the
Shenzhen Land & Sun Industrial & Trade Co., Ltd. pursuant to five
related leases. The leased space consists of 37,800 square meters of
manufacturing space, with the balance representing dormitories for the Company’s
employees. This space is used predominately for the Company’s metal
manufacturing, OEM product assembly, camera and clock manufacturing, plastic
injection, tooling workshop and warehouse operations. There are also offices for
production management, production engineering, and production support
administration on the premises. The term of the leases expires on February 28,
2012. The utilization rate of these facilities during the fiscal year ended
March 31, 2009 did not exceed 60% of its maximum capacity. Accordingly, the
Company has sufficient manufacturing space for its current needs, and its
current facilities will continue to satisfy the Company’s space needs in the
near future.




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




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




Until
recently, the Company operated a light fixture manufacturing facility in He Yuan
City, China. However, the Company has decided to close its operations in He Yuan
and, accordingly, has vacated that site. The Company’s lease at the He Yuan
facility expired on June 1, 2009 without renewal.




32




As part
of its acquisition of Golden Bright Plastic Manufacturing Company Limited in
Pinghu, the Company assumed that company’s obligations under an operating
license agreement with Shenzhen City Longang District Foreign Economic
Development Limited that expires in 2020. In May, 2009, with the cooperation of
its landlord, the Company vacated approximately one-third of its prior leased
space in Pinghu. As a result, the Golden Bright facilities currently consist of
approximately 94,000 square feet of manufacturing facility and dormitory living
quarters that are leased under a lease that expires in June, 2012.




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




Item
4.A.Unresolved Staff
Comments




Not
applicable.




Item 5.Operating
and Financial Review and Prospects




Overview




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




Beginning
in early 2008 (at the beginning of the Company’s March 31, 2009 fiscal year),
the worldwide economy in general, and the manufacturing industry in particular,
began to experience a significant downturn, which directly affected, and
continues to have a material adverse affect on the Company’s business and
financial condition and its results of operations. The worldwide credit crisis
resulted in a sharp reduction in the demand for the products sold by the
Company’s customers, which has resulted in fewer purchase orders for the
Company’s products from the Company’s customers. In addition to lower demand for
the Company’s products, the economic downturn also resulted in increased pricing
pressures and lower prices. These factors have reduced the amount of revenues
that the Company anticipated to generated in fiscal 2009 and have lowered the
Company’s net income from the levels that it anticipated. Furthermore, the
Company believes that these factors will continue to negatively affect its
operations for most of the current year and that the negative effects of the
financial and economic crisis may, in fact, worsen in the short
term.




The
economic crisis has, however, also had a positive impact on the Company’s
business and operations. Because of the sudden and severe downturn in purchase
orders for most OEM manufacturers, many of the Company’s financially weaker
competitors have gone out of business or drastically reduced the scope of their
operations. As a result, competition has decreased, which has resulted in
additional purchase orders for those manufacturers, such as the Company, that
are still in business. Also, because of the industry-wide decrease in
manufacturing activities, the prices of many raw materials have significantly
decreased. Finally, because many manufacturers in the Company’s principal
operating region (Shenzhen, China) have gone out of business, unemployment has
risen sharply. The increase in unemployment has increased the pool of qualified
and motivated workers and has reduced the demand of these workers for higher
wages. The combination of these factors enabled the Company in fiscal 2009 to
maintain, or even increase, its revenues and some of its operating margins.
However, because the economic downturn is not expected to abate during the
remainder of 2009, the Company anticipates that revenues and profits will,
however, decline in the near future despite the benefit of lower raw material
costs and an improved labor market.


33




As
described in this Annual Report, prior to the recent economic downturn, the
Company initiated changes in its business that have, to date, softened the
impact of the financial and business crisis. In addition, as soon as the
downturn was realized, the Company took decisive steps to reduce costs and to
maintain its operating efficiencies. These steps include, among others, a sharp
reduction in the number of its workers, the closing of one of its four
manufacturing facilities (the facilities in He Yuan) in April 2009, reducing the
size of the Golden Bright factory by one-third, consolidating the administrative
functions of Golden Bright, and requiring price reductions from many of its
vendors and service provides.




The
Company’s cost cutting initiatives have, however, been partially offset by
higher rental payments that the Company has been required to make since it
renewed its leases at its main facility in Long Hua, Shenzen, in February 2008,
and by the continuing impact of the additional labor costs resulting from
China’s adoption of new labor laws. The rental payments the Company is now
required to make for its Long Hua facility are higher than the rates in effect
when the prior lease expired on February 28, 2008, and significantly higher than
current market rates, which have drastically dropped since the economic downturn
fully took effect in Shenzhen in mid-2008.




The
Company is not taxed in the British Virgin Islands, the state of its
incorporation. The location of the Company’s administrative offices for its
operating subsidiaries in Hong Kong enables the Company to pay low rates of
income tax due to Hong Kong’s tax structure. The Company’s income arising from
its Hong Kong operations or derived from its operations within Hong Kong is
subject to Hong Kong income tax. The Company has successfully claimed a tax
benefit from the Hong Kong Inland Revenue Department by providing support for
its position that more than half of its income is derived from its activities
outside of Hong Kong. The statutory tax rate in Hong Kong currently is 16.5%,
and there are no taxes on dividends or capital gains. However, because of the
Company’s multi-jurisdictional operations, the Company’s overall tax rate varies
from the current 16.5% rate.




Under the
BFDC Agreements that apply to the Company’s principal operations in Shenzhen,
the Company does not pay taxes in China based on the operations of the Shenzhen
facilities because it is not considered to be a tax resident in China under
current China law. The BFDC is responsible for paying its own taxes incurred as
a result of its operations under the BFDC Agreements (which taxes are indirectly
passed through to the Company). Arrangements such as the BFDC Agreements under
which the Company operates in China are common in southern China for Hong Kong
manufacturers. Management believes the Company will continue to benefit from a
low overall effective tax rate in the future, barring unforeseen changes in tax
laws. The Golden Bright operations that the Company commenced in fiscal 2007 are
conducted in a factory in Pinghu Lisu on a similar basis as in Shenzhen.
Therefore, the Company does not directly pay taxes on its Pinghu operations in
China. However, the Company is taxed on the operations of its wholly-owned
subsidiary in Wuxi. Because the Wuxi facilities are operated by a registered
company in China that pays domestic taxes on its operations, it is authorized to
manufacture and sell products for China domestic market.


34




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




Results
of Operations




General




During
the past three years discussed below, the Company’s revenues have been derived
primarily from the manufacture and sale of OEM manufacture of metal, plastic and
electronic parts and components. The Company also derives some revenues from the
manufacture and sale of clocks, clock movements, watches, cameras, camera
accessories and some LED lighting products, although such revenues have
constituted approximately 4%-5% of the Company’s annual net sales.




The
following table sets forth the percentages of net sales of certain income and
expense items of the Company for each of the three most recent fiscal
years.




Year Ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009Net
      Sales
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %Cost
      of sales
                  
                  
                  80.2
                  
                  
                  
                  84.7
                  
                  
                  
                  80.1Gross
      profit
                  
                  
                  19.8
                  
                  
                  
                  15.3
                  
                  
                  
                  19.9Operating
      income (loss)
                  
                  
                  1.2
                  
                  
                  
                  (6.9
                  )
                  
                  
                  2.6Non-operating
      income (loss) (1)
                  
                  
                  0.8
                  
                  
                  
                  1.0
                  
                  
                  
                  (0.6
                  )Income
      (loss) before income taxes before minority interest
                  
                  
                  2.0
                  
                  
                  
                  (5.9
                  )
                  
                  
                  2.0Income
      tax (expense) credit
                  
                  
                  (0.2
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  0.1Income
      (loss) before minority interest
                  
                  
                  1.8
                  
                  
                  
                  (6.0
                  )
                  
                  
                  2.1Minority
      interest
                  
                  
                  0
                  
                  
                  
                  0.2
                  
                  
                  
                  0.2Net
      income (loss)
                  
                  
                  1.8
                  
                  
                  
                  (5.8
                  )
                  
                  
                  2.3





Note:


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




35




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




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




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




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




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




36




The
Company’s interest expenses decreased in fiscal 2009 from $225,000 in fiscal
2008 to $141,000 in fiscal 2009 as a result of lower interest rates. The
Company’s interest income in fiscal 2009 also decreased from $100,000 in fiscal
2008 to $35,000 in fiscal 2009 due to the decrease in the interest rates. The
Company’s income in fiscal 2009 was further reduced by $330,000 of currency
exchange losses. The Company had a currency exchange rate gain of $283,000 in
fiscal 2008. The currency exchange gains and losses in fiscal 2008 and 2009 were
the result of fluctuations in the value of the Euro compared to the U.S. dollar.
During fiscal 2009, the U.S. dollar strengthened compared to the Euro. Since
sales to European customers increased from $14,426,000 in fiscal 2008 to
$16,031,000 in fiscal 2009, the Company was more exposed to adverse changes in
the value of the Euro compared to the U.S. dollar. Since the Company does not
undertake any currency hedging transactions, its financial results will continue
to be affected by the future fluctuations of currencies (the Company does,
however, have agreements with certain of its European customers that limit the
risk of currency fluctuations to 5%).




Due to
increased net sales (mostly in the first nine months of fiscal 2009), lower raw
material prices, and the Company’s effective cost control measures in fiscal
2009, the Company managed to generate net income of $768,000 in fiscal 2009,
compared to net loss of $1,921,000 in fiscal 2008. However, because the
worldwide economic downturn is continuing, and because the Company’s customers
have recently slowed down their orders for future deliveries, the Company
believes that its near-term future revenue growth is uncertain.




Year Ended March 31, 2008
Compared to Year Ended March 31, 2007




Net sales
for fiscal 2008 increased by $1,695,000, or 5.4%, from the year ended March 31,
2007 (“fiscal 2007”) due to a $889,000 increase in sales of OEM metal/plastic
product sales, and to a $1,268,000 increase in OEM electric product sales. The
Company’s metal/plastic and electric products constitute the Company’s largest
operations, representing approximately 96% of its net sales. The foregoing
increases in net sales were partially offset by a $462,000 decrease in sales of
clocks, watches and camera and underwater products. Because the Company
discontinued most of its manufacturing of clocks, watches and camera and
underwater products several years ago, sales of these products will remain small
in the future.




The
increase in net sales occurred despite the disruption in its operations caused
by the four labor strikes that occurred during fiscal 2008 and despite the other
production slow-downs that resulted from the labor issues that affected the
Company and certain of its suppliers in Southern China. In addition, the Company
also lost a number of purchase orders because the orders did not reflect the
Company’s increase in the cost of its labor and raw materials. As a result of
the turmoil caused by the labor laws that China enacted in 2008, by the
significant increase in the cost of raw materials that occurred during 2008, and
by the general increase in the cost of doing business in China (higher rents,
higher utility costs, more stringent environmental and safety regulations,
increased taxes and levies, etc.), a number of the Company’s competitors have
ceased operating. The Company, however, has continued its focus on providing
high quality products with high quality service to its customers at competitive
prices and, as a result, it currently had a significant backlog of
orders.


37


Despite a
$1,695,000 increase in net sales, the Company’s gross profits decreased by
$1,162,000 in fiscal 2008 from $6,236,000 in fiscal 2007 to $5,074,000 in fiscal
2008. The Company’s gross profits as a percentage of its net sales also
decreased, from 19.8% fiscal 2007 to 15.3% in fiscal 2008.  The
decrease in both the Company’s gross profits and in its gross profits as a
percentage of sales  was the result of the significant increases in
both the Company’s cost of labor and the cost of raw materials.  As
discussed elsewhere in this Annual Report, the Company’s cost of labor increased
due to the new labor laws that increased salaries, required the Company to
provide additional benefits, and required the Company to make other labor
related payments.  In addition to increased labor costs, the Company
also paid $188,000 (net after indemnification adjustments made at the Golden
Bright facility) to resolve its labor issues, which payments increased its cost
of goods sold.  During fiscal 2008, the cost of most raw material also
increased significantly, including significant increases in the cost of steel,
plastic and components.  Because the cost of labor and materials
increased so rapidly, the Company could not pass all of these cost through to
its customers, which resulted in lower gross margins and less gross profit in
fiscal 2008.  In addition, during fiscal 2008, the RMB increased
substantially in value compared to the U.S. dollar.




Selling,
general and administrative expenses for fiscal 2008 increased by $1,501,000, or 25.7%, over fiscal
2007.  The principal reasons for the increase include (1) substantial
increases in professional fees, including payments to is auditors and
attorneys,  (2) the additional general and administrative expenses
attributable to the newly acquired Golden Bright operations (Golden Bright was
acquired during fiscal 2007 and, therefore, only approximately one-half year’s
expenses were included in last fiscal year’s expenses), (3) increased charges
from local governmental agencies, (4) increased payroll expenses of its staff in
China, (5) increased transportation expenses, (6) and a rise in bad debt
expenses. In addition, the Company’s operating expenses also increased due to
the appreciation during fiscal 2008 of the Chinese renminbi against the U.S.
dollar.




As a
result of a decrease in gross profits and a significant increase in operating
costs, the Company incurred an operating loss of $2,277,000 in fiscal 2008
compared to operating income of $386,000 in fiscal 2007.  The
Company’s operating loss in fiscal 2008 was reduced by $331,000 of non-operating
income earned by the Company.




The
Company’s interest expenses decreased slightly in fiscal 2008 from $242,000 in
fiscal 2007 to $225,000 in fiscal 2008 due to the decrease in interest
rates.  However, the Company’s interest income in fiscal 2008 also
decreased by $61,000 due to the decrease in the interest rates.  As in
fiscal 2007, the Company in fiscal 2008 received income from currency exchange
gains.  The currency exchange gains in both fiscal 2007 and 2008 were
the result of the increase in the value of the Euro compared to the U.S. dollar,
which increased the value of payments the Company received in Euros from its
sales in Europe.  Sales to European customers who paid in Euros
represented approximately 18% of the Company’s net sales in fiscal 2008 and 20%
in fiscal 2007.




Fiscal
2008 was a difficult year for the Company as it incurred higher labor costs,
lost productivity due to strikes and labor slow-downs, rising raw material
prices, and higher operating costs.  As a result of these factors, the
Company incurred a net loss of $1,921,000.  Many of the Company’s
competitors in Southern China also were affected by these issues, and a number
of these competitors have moved out of China or otherwise ceased doing
business.  Despite the difficulties, the Company managed to retain its
high quality clients and to adjust its pricing structure so that it will be able
to further increase sale and return to profitability if no other unexpected
events occur.




38




Liquidity
and Capital Resources




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




Year Ended March 31,2007
                    
                    
                    2008
                    
                    
                    2009(In
      thousands)Net
      cash provided by operating activities
                    
                    $
                    1,655
                    
                    
                    $
                    75
                    
                    
                    $
                    2,005Net
      cash (used in) provided by investing activities
                    
                    
                    (1,518
                    )
                    
                    
                    (5
                    )
                    
                    
                    558Net
      cash used in financing activities
                    
                    
                    (1,244
                    )
                    
                    
                    (1,496
                    )
                    
                    
                    (663
                    )Net
      (decrease) increase in cash and cash equivalents
                    
                    
                    (1,107
                    )
                    
                    
                    (1,426
                    )
                    
                    
                    1,900Cash
      and cash equivalents at beginning of period
                    
                    
                    6,384
                    
                    
                    
                    5,299
                    
                    
                    
                    3,889Effect
      of exchange rate changes
                    
                    
                    22
                    
                    
                    
                    16
                    
                    
                    
                    20Cash
      and cash equivalents at end of period
                    
                    $
                    5,299
                    
                    
                    $
                    3,889
                    
                    
                    $
                    5,809




At March
31, 2009, the Company had working capital of $9,040,000, compared to working capital
of $7,556,000 at March 31, 2008.  The Company’s working capital
increased by $1,484,000 in fiscal 2009 due to the
net income the Company earned in fiscal 2009.




The
Company has historically generated sufficient funds from its operating
activities to finance its operations and there has been little need for external
financing other than capital leases which are used to finance equipment
acquisitions.  For the fiscal year ended March 31, 2009, the Company
had $2,005,000 of positive cash from its operating activities primarily because
of a $1,621,000 decrease in inventories, a $1,244,000 decrease in accounts
receivable, $754,000 of depreciation non-cash expense, and a $156,000 loss on
written off property, plant and equipment non-cash expense, which was partially
offset by a $1,591,000 decrease in accounts payable, a $615,000 decrease in
accrued payroll and employee benefits (which includes a $510,000 contingent
reserve for amounts potentially owing by the Company to its prior employees
pending the resolution of certain labor claims, which as of the date of this
Annual Report have been resolved), and a $707,000 decrease in other liabilities
and accrued expenses.




Because
of the Company’s international operations, the Company’s banking arrangements
provide the Company with credit facilities for letters of credit and import
loans.  The Company also uses these credit facilities to fund certain
of its capital requirements, to post the stand-by letters of credit required for
the governmentally imposed import deposits, and to finance some of its machinery
and equipment purchases.  The foregoing banking facilities have, in
the past, been provided to the Company through credit facilities extended to the
Company by the Hong Kong and Shanghai Banking Corporation Limited (HSBC), by DBS
Bank (Hong Kong) Limited, and by Overseas-Chinese Banking Corporation Limited
(OCBC).  During fiscal 2009, the Company decided not to renew the HSBC
credit facility, under which the Company had a maximum of $2,571,000 (subject to
various sub-limits) of available credit.  The DBS and OCBC credit
facilities currently are still in effect, and the Company believes that these
two credit facilities are sufficient for the Company’s current
needs.




39




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 $3,342,000 and
for an aggregate of $4,062,000 for capital expenditure/equipment
loans.  The interest rates under the DBS letter of credit facility is
1% over the best lending rate quoted by the bank from time to time for Hong Kong
dollar credits, and the bank’s standard bills rate for U.S. dollar
credits.  The DBS capital expenditure loans are repayable in monthly
installments ranging from 5 months to 48 months.  Interest rates under
the DBS capital expenditure facility are set at 0.25% below the prime rate
quoted by the bank from time to time.  The DBS facility is also
secured by a charge on various accounts maintained by the Company at that bank
and by cross guarantees indemnities by Highway Holdings Limited and the various
borrowing subsidiaries.




TheOCBCcredit facility, as of the date of this
Annual Report, provides for a maximum credit facility of $1,221,000(subject to various
sub-limits).  TheOCBCcredit facility consists of an import
loan facility that bears interest at 1.0% over the banks’ best lending rate as
in effect in Hong Kong from time to time, and is secured by a charge on certain
time deposits the Company maintains at the bank and cross guarantees and
indemnities among certain of the Company’s subsidiaries.




As of
March 31, 2009, the Company had borrowings of $1,850,000and a standby letter of credit of
$324,000outstanding under its credit facilities, and had a total of
$2,389,000 of available
credit remaining under its two remaining credit facilities.  The
Company’s long-term debt was $553,000 as of March 31, 2009.  The two
credit facilities currently are sufficient for the Company’s projected
needs.  However, should the Company be required to incur significant
unanticipated expenses (such as relocating its Long Hua facilities, posting
additional deposits/bonds with governmental agencies, or funding certain
operating expenses as a result of the worldwide economic slowdown) combined with
a reduction of  revenues, the current facilities may not be
sufficient.




Although
the Company’s rent at its largest facility increased effective February 2009,
the Company’s overall rental payments for all of its facilities in the current
fiscal year are expected to remain relatively unchanged from the amounts paid by
the Company in fiscal 2009, due to the closure of the He Yuan facility in April
2009 and the reduction in the Ping Hu facility.  Effective February
2009, the Company entered into a new three-year lease for the Long Hua,
Shenzhen, facility.  The new lease at the Company’s largest facility
increased the Company’s rent at this facility by approximately
one-third.  This increase will be partially offset by the closure of
the He Yuan facility effective as of May 2009, and by the reduction by
approximately one-third of the leased space at the Golden Bright
factory.




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.




40




Impact
of Inflation




The rapid
growth of China’s economy in general, and the growth in Shenzhen in particular,
has in the past few years resulted in increased rent, energy prices, fuel and
labor expenses.  These increased costs have adversely affected the
Company’s cost of operations.  As a result of the worldwide economic
slowdown, price inflation has moderated, and the Company does not currently
anticipate any additional inflation lead price increases in the near
future.  However, if inflation does continue, the Company’s costs will
likely further increase, and there can be no assurance that the Company will be
able to increase its prices to an extent that would offset the increase in
expenses.




Exchange
Rates




The
Company transacts its business with its vendors and customers primarily in U.S.
dollars, Hong Kong dollars and Euros.




The
Company makes its payments under the BFDC Agreements for its manufacturing
facilities and factory workers in Shenzhen in renminbi (RMB), as management fees
and other operating charges are based on RMB. The exchange rate between the U.S.
dollar and the RMB has changed during the past three years as the value of the
RMB compared to the U.S. dollar has increased by almost 18% during that
period.  Accordingly, the Company’s costs (in U.S. dollars) has
increased.




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




The
Company does not utilize any form of financial hedging or option instruments to
limit its exposure to exchange rate or material price fluctuations and has no
current intentions to engage in such activities in the
future.  Accordingly, material fluctuations in the exchange rates
between the U.S. dollar and other currencies, the Euro in particular, could have
a material impact on the Company’s future results.  In order to
mitigate the effects of significant fluctuations in the value of the Euro, the
Company has, however, entered into agreements with most of its European
customers that either limits the exposure to currency fluctuations to
approximately 5% or provides that the price charged by the Company will be
re-negotiated every three months to account for currency
fluctuations.




Trend
Information




As
discussed in greater detail elsewhere, there have been several significant
trends effecting the production and sales of the Company.  Most
notably, during fiscal 2009, there has been a worldwide economic slowdown and a
worldwide financial crisis that has affected the Company and its
customers.  Although the Company’s net sales increased during the
first nine months of fiscal 2009, due in part to a large backlog of orders that
carried over from fiscal 2008, new customer orders have slowed since the
beginning of 2009, and sales during the fourth quarter of fiscal 2009
decreased.  The Company currently anticipates that slower sales will
continue for the next few fiscal quarters.




41




Also, due
to the economic downturn and other global factors that occurred in fiscal 2009,
the cost of many of the raw materials used by the Company decreased in fiscal
2009.  The cost of raw materials continues to be low, but prices of
these raw materials have fluctuated widely during the past two
years.  Accordingly, the Company is unable to estimate the future
trend of its raw material prices.




Other
than as disclosed elsewhere in this Annual Report on Form 20-F, the Company is
not aware of any trends, uncertainties, demands, commitments or events for the
period from April 1, 2008 to March 31, 2009 that are reasonably likely to have a
material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial
conditions.




Off-Balance
Sheet Arrangements




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




Contractual
Obligations




The
following is a summary of the Company’s contractual obligations as of March 31,
2009 is as follows:




Payment due by Year Ending March 31,Contractual Obligations
                              
                              Total
                              
                              
                              2010
                              
                              
                              2011
                              
                              
                              2012
                              
                              
                              2013
                              
                              
                              2014 and
                                thereafter$’000
                              
                              
                              $’000
                              
                              
                              $’000
                              
                              
                              $’000
                              
                              
                              $’000
                              
                              
                              $’000Facility
      Leases
                              
                              
                              4,385
                              
                              
                              
                              1,414
                              
                              
                              
                              1,364
                              
                              
                              
                              1,239
                              
                              
                              
                              118
                              
                              
                              
                              250Finance
      Leases
                              
                              
                              553
                              
                              
                              
                              259
                              
                              
                              
                              251
                              
                              
                              
                              41
                              
                              
                              
                              2
                              
                              
                              
                              0Capital
      commitment on purchase of property, plant and equipment
                              
                              
                              45
                              
                              
                              
                              45
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0Purchase
      obligations
                              
                              
                              659
                              
                              
                              
                              659
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0Short
      term borrowing
                              
                              
                              1,850
                              
                              
                              
                              1,850
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0
                              
                              
                              
                              0Interest
      commitments
                              
                              
                              32
                              
                              
                              
                              22
                              
                              
                              
                              9
                              
                              
                              
                              1
                              
                              
                              
                              0
                              
                              
                              
                              0Total
                              
                              
                              7,524
                              
                              
                              
                              4,249
                              
                              
                              
                              1,624
                              
                              
                              
                              1,281
                              
                              
                              
                              120
                              
                              
                              
                              250




42




Critical
Accounting Policies and Estimates




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




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




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




43




Item
6.Directors, Senior Management and Employees




Directors
and Executive Officers




The
Directors and executive officers of the Company as of June 22, 2009 are listed
below.  The Directors hold office until the next annual meeting of
shareholders, which currently is scheduled to be held on August 18,
2009.




Name
                        
                        Age
                        
                        PositionsRoland
      W. Kohl
                        
                        60
                        
                        Chief
      Executive Officer, Director, Chairman of the BoardSatoru
      Saito
                        
                        60
                        
                        Sales
      Director, Metal Stamping Operations, DirectorFong
      Po Shan
                        
                        43
                        
                        Chief
      Financial Officer, SecretaryMay
      Tsang Shu Mui
                        
                        49
                        
                        Chief
      Administrative Officer, DirectorQuan
      Vinh Can (Joseph)
                        
                        60
                        
                        Chief
      Operating Officer, Metal Stamping OperationsTiko
      Aharonov (1)
      (2)
                        
                        62
                        
                        DirectorDirk
      Hermann
                        
                        45
                        
                        DirectorUri
      Bernhard Oppenheimer (1)
      (2)
                        
                        73
                        
                        DirectorShlomo
      Tamir (1)
      (2)
                        
                        62
                        
                        DirectorKevin
      Yang Kuang Yu(1)
                        
                        52
                        
                        DirectorIrene
      Wong Ping Yim(1)
                        
                        43
                        
                        DirectorBrian Geary (1)
      (2)
                        
                        52
                        
                        DirectorGeorge
      Leung Wing Chan (1)
                        
                        56
                        
                        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.




44




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




Tiko Aharonov. Mr. Aharonov
has been a Director of the Company since its inception in 1990 and was a General
Manager of the Company’s camera operations from 1998 to 2004.  Until
the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as
the General Manager of the Bulgarian operations. He was a bank manager for a
leading Israeli commercial and retail bank  from 1969 to 1989 and has operated his own real
estate and investment company for high net worth individuals desiring to invest
in real estate in Israel. Mr. Aharonovalsorepresentsinvestors in real estate in
Bulgaria.




May Tsang Shu
Mui.  Ms. Tsang has been the Company’s Factory Manager in
charge of camera manufacturing and a Director of the Company since
1990.  In 2001, Ms. Tsang became the Company’s Administration Manager,
and in 2005 became the Company’s Chief Administrative Officer.  Ms.
Tsang is a Chinese national and resides in Hong Kong.




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




Dirk
Hermann.Dr. Hermann was appointed to the Board
of Directors in January 2003.  Dr. Hermann has served since 2006 as a sales executive for
VKB AG, a leading insurance company in Germany.  Prior thereto, he
used to work for Allianz Versicherungs-AG as a regional marketing director for
southwest Germany.  He joined Allianz, the German insurance firm, in
1994 as a marketing executive assistant
based in Munich.
Previously, he held a marketing position with MSU Management Consulting
GmbH.  He began his marketing career with Gruber, Titze and Blank
GmbH, amanagementconsulting firm based in Germany.  Dr. Hermann graduated from the
University of Konstanz in Germany with a bachelor’s degree in business
administration. He also holds a master’s degree in business administration from
the University of St. Gallen in Switzerland. He earned a Ph.D. degree in
business administration from the University of Leipzig, in
Germany.




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




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




45




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




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




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




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




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




Compensation
of Directors and Officers




The
aggregate amount of compensation (including non-cash benefits) paid by the
Company and its subsidiaries during the year ending on March 31, 2009 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
$1,012,000.  Because of
the Company’s financial difficulties, Mr. Kohl, the Company’s Chief Executive
Officer, voluntarily accepted a 20% reduction in his salaryin fiscal
2008.  Mr. Kohl’s employment agreement was recently extended through
March 2014.  Since the current worldwide economic uncertainties are
continuing to have a material negative impact the Company’s operations, until
further notice Mr. Kohl has agreed to voluntarily reduce the amount of his
monthly salary by a total of 40%, and he is therefore currently only being paid
60% of his stated salary.




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, andGeorge Leung Wing Chan) an annualized director’s fee of
$10,000, and reimbursed them for their reasonable expenses incurred in
connection with their services as directors.  In addition, members of
any Board committee and the Chairman of the Audit Committee are paid an
additional fee of $1,660 per year for each committee on which they
serve.  Unlike prior fiscal years, the Company did not grant its
directors any stock options as additional equity compensation.




46




Options
of Directors and Senior Management




The
following table sets forth the number of options to purchase Common Shares that
each current Director and executive officer of the Company owns as of June 22,
2009, together with the exercise price of such options and the expiration date
of the options.




Name of Beneficial Owner Or
                                                Identity of Group
                                              
                                              Number of
                                                Common Shares
                                              
                                              Expiration Date
                                              
                                              Exercise PriceTiko
      Aharonov
                                              
                                              10,000
                                              
                                              June
      30, 2010
                                              
                                              $
                                              3.505,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03May
      Tsang Shu Mui
                                              
                                              10,000
                                              
                                              June
      30, 2010
                                              
                                              $
                                              3.505,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Satoru
      Saito
                                              
                                              10,000
                                              
                                              June
      30, 2010
                                              
                                              $
                                              3.505,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Dirk
      Hermann
                                              
                                              8,500
                                              
                                              June
      30, 2010
                                              
                                              $
                                              3.505,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Quan
      Vinh Can (Joseph)
                                              
                                              10,000
                                              
                                              June
      30, 2010
                                              
                                              $
                                              3.50Fong
      Po Shan
                                              
                                              10,000
                                              
                                              June
      30, 2010
                                              
                                              $
                                              3.505,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Kevin
      Yang Kuang Yu
                                              
                                              5,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Irene
      Wong Ping Yim
                                              
                                              5,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Shlomo
      Tamir
                                              
                                              5,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Brian
      Geary
                                              
                                              5,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03George
      Leung Wing Chan
                                              
                                              5,000
                                              
                                              June
      23, 2011
                                              
                                              $
                                              3.425,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03Uri
      Bernhard Oppenheimer
                                              
                                              5,000
                                              
                                              July
      2, 2012
                                              
                                              $
                                              4.03


_____________________




47




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, 2009, options granted under the
Option Plan to purchase a total of 167,500 Common Shares were still
outstanding.  The maximum term of options granted under the Option
Plan is five years.  The average weighted exercise price of all
options outstanding on March 31, 2009 was $3.6525 per share.




As part
of the Company’s prior employment agreement with Mr. Kohl, the Company’s Chief
Executive Officer, the Company had agreed to issue 29,154 Common Shares annually
to Mr. Kohl.  The employment agreement was renewed and now extends
through March 2014, but Mr. Kohl will no longer be issued 29,154 shares annually
as part of his new employment agreement.




Board
Practices




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




Audit
Committee  The members of the Audit Committee of the Board of
Directors currently are Uri Bernhard Oppenheimer, Shlomo Tamir, Kevin Yang Kuang
Yu, Irene Wong Ping Yim, Brian Geary, George Leung Wing Chan and Tiko
Aharonov.  The Audit Committee reviews, acts on and reports to the
Board of Directors on various auditing and accounting matters, including the
selection of the Company’s auditors, the scope of the annual audits, fees to be
paid to the auditors, the performance of the independent auditors, any
additional services to be provided by the auditors, and the Company’s accounting
practices.  Each of these individuals is a non-employee director and
is independent as defined under the Nasdaq Stock Market’s listing standards, and
each has significant knowledge of financial matters (one of the members has an
advanced degree in business administration).  Ms. Wong has been
designated by the Board as the “audit committee financial expert” as defined
under Item 401(h) (2) of Regulation S-K of the Securities Exchange Act of 1934,
as amended.  The Audit Committee met two times during fiscal
2009.  The Audit Committee operates under a formal charter that
governs its duties and conduct.




48




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




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




Employees




As of
March 31, 2009, the Company had a total of 854 persons were working on a
full-time basis for the Company.  Of these, 806workers in China were
employed by the Company under (i) the BFDC Agreements in Long Hua and (ii) the
Golden Bright’s agreement with Shenzhen City Longang District Foreign Economic
Development Limited in Pinghu Lisu.  The employees in Long Hua and
Pinghu Lisu are technically employed by the local authorities, not by the
Company.  However, since the Company’s Wuxi subsidiary is a registered
Chinese company, the employees at the Wuxi facility are employees of the
Company’s Wuxi subsidiary.  As of March 31, 2009, 48 employees in Hong
Kong were employees of the Company’s subsidiaries.  Of the foregoing
workers and employees, 61 were engaged in the administration of the Company,
728were engaged in
manufacturing (including research and development, design, engineering, quality
control, and shipping), 18 were engaged in marketing, and the balance (47
employees) were engaged in miscellaneous other supporting functions. The Company
requires most of its Hong Kong staff to regularly visit the Company’s China
facilities to oversee local management and provide technical
assistance.




The
number of workers employed by the Company fluctuates largely due to the
availability of workers and the time of year.  The seasonality is also
dependent, to a lesser extent, on orders held by the Company.  The
Company has experienced temporary shortages of labor and has taken action to
attract additional workers from other provinces of China to its factory
complexes in Shenzhen.  From time to time, labor supply has been
adversely affected primarily due to transportation difficulties in bringing
workers to Shenzhen due to flooding or other natural disasters as well as
seasonal demands on labor such as harvesting when the mainly rural-based
laborers are required to return to their village.  Due to the nature
of the labor force working at facilities such as the Company’s in Shenzhen, the
Company experiences high turnover of employees annually.




49




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




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




Share
Ownership




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




Item
7.Major Shareholders and Related Party
Transactions




Major
Shareholders.  The Company is not directly or indirectly owned
or controlled by any other corporation or any foreign government.  The
following table sets forth, as of June 19, 2009, certain information with
respect to the beneficial ownership of the Company’s Common Shares by each
person (i) who is an executive officer or director of the Company, or (ii) known
by the Company to own beneficially more than 5% of the outstanding Common Shares
outstanding as of such date.




50




Name of Beneficial Owner or Identify
                  of Group(1)
                
                Number of Common
                  Shares Beneficially
                  Owned
                
                
                Percent Beneficial
                  Owned(**)Roland
      W.
      Kohl
                
                595,567
                
                
                15.20%Tiko
      Aharonov
                
                261,000(2)
                
                
                6.66%Dirk
      Hermann
                
                119,500(3)
                
                
                3.05%Satoru
      Saito
                
                369,980(2)
                
                
                9.45%May
      Tsang Shu
      Mui
                
                89,171(2)
                
                
                2.28%George
      Leung Wing
      Chan
                
                10,000(4)
                
                
                *Brian
      Geary
                
                15,000(4)
                
                
                *Irene
      Wong Ping
      Yim
                
                10,000(4)
                
                
                *Kevin
      Yang Kung
      Yu
                
                18,244(4)
                
                
                *Shlomo
      Tamir
                
                10,000(4)
                
                
                *Uri
      Bernhard Oppenheimer
                
                10,000(5)
                
                
                *Cartwright
      Investments Limited
                
                346,830
                
                
                8.85%Fong
      Po
      Shan
                
                16,283(6)
                
                
                *Quan
      Vinh
      Can
                
                43,665(4)
                
                
                1.11%





*
            Less
      than 1%.


**
            Under
      the rules of the Securities and Exchange Commission, shares of Common
      Shares that an individual or group has a right to acquire within 60 days
      pursuant to the exercise of options or warrants are deemed to be
      outstanding for the purpose of computing the percentage ownership of such
      individual or group, but are not deemed to be outstanding for the purpose
      of computing the percentage ownership of any other person shown in the
      table.





(1)
              The
      address of each of the named holders is c/o Highway Holdings Limited,
      Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung Shui, New
      Territories, Hong Kong.


(2)
              Includes
      stock options to purchase 20,000 Common Shares which are currently
      exercisable.


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


(4)
              Includes
      stock options to purchase 10,000 Common Shares which are currently
      exercisable.


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


(6)
              Includes
      stock options to purchase 15,000 Common Shares which are currently
      exercisable.





Of our 47
record holders, 30 are residents of the United States.  Excluding
shares held in street name, the known U.S. resident stockholders own
approximately 18,000 Common Shares.  The foreign record holders own
approximately 1,060,000 Common Shares.  Based on the Company's records
of shares owned by record holders and in street name, the Company believes that
over 50% of the Company's outstanding shares are owned by foreign
shareholders.There have been no significant changes in the percentage ownership held
by any major shareholders during the past three years, and there are no
arrangements known to the Company, the operation of which may at a subsequent
date result in a change in control of the Company.  All holders of the
Common Shares have the same voting rights, and the Company’s major shareholders
do not have different voting rights.




Related Party
Transactions.




The
Company did not engage in any related party transactions during the fiscal year
ended March 31, 2009.




51




Item
8.Financial Information.




A.           Consolidated Statements and
Other Financial Information




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




B.           Significant
Changes




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




Dividend
Policy.  The Company attempts to pay a cash dividend annually
to all holders of its Common Shares, subject to its profitability and cash
position.  In fiscal years ended March 31, 2007 and March 31, 2008,
the Company made dividend payments to its shareholders of $0.36 and $0.035 per
share, respectively.  Because of the financial uncertainty concerning
the global economy and the effect that the slowdown in the global economy could
have on the Company, the Board did not declare or pay any dividends during the
fiscal year ended March 31, 2009.  Dividends are declared and paid at
the discretion of the Board of Directors and depend upon, among other things,
the Company’s net profit after taxes, the anticipated future earnings of the
Company, the success of the Company’s business activities, the Company’s capital
requirements, and the general financial conditions of the
Company.  Although it is the Company’s intention to pay dividends
during profitable fiscal years, no assurance can be given that the Company will
pay, in fact, pay any dividends in the future even if its has a profitable year
or is otherwise capable of doing so.




Legal
Proceedings.




During
the fiscal year ended March 31, 2008, the Company experienced labor strikes and
other labor related issues as a result of which it terminated the employment of
approximately 520 workers. Approximately 94 of the former employees filed labor
claims against the Company.  As of the date of this Annual Report, all
of these claims have been resolved.




The
Company occasionally becomes subject to legal proceedings and claims that arise
in the ordinary course of its business.  It is impossible to predict
with any certainty the outcome of any pending disputes, and the Company cannot
predict whether any liability arising from pending claims and litigation will be
material in relation to the Company’s consolidated financial position or results
of operations.  However, the Company does not believe that it
currently is subject to any pending legal proceedings that involve amounts that
are material to the Company’s financial condition even if  the outcome
is adverse to the Company.




Item
9.The Listing




A.           Offer and Listing
Details




The
Company’s Common Shares are currently traded on the Nasdaq Capital Market under
the symbol “HIHO” and are not listed for trading in any trading market outside
the United States.  On June 17, 2009, the last reported sale price of
our Common Shares on the Nasdaq Capital Market was $1.15 per
share.  As of June 17, 2009, there were 48 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.




52




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, 2009:




Year Ended
                  
                  High
                  
                  
                  LowMarch
      31, 2009
                  
                  $
                  2.01
                  
                  
                  $
                  0.55March
      31, 2008
                  
                  $
                  6.30
                  
                  
                  $
                  1.60March
      31, 2007
                  
                  $
                  6.46
                  
                  
                  $
                  2.80March
      31, 2006
                  
                  $
                  5.48
                  
                  
                  $
                  2.77March
      31, 2005
                  
                  $
                  5.80
                  
                  
                  $
                  3.09





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, 2009
                  
                  $
                  1.00
                  
                  
                  $
                  0.55December
      31, 2008
                  
                  $
                  1.65
                  
                  
                  $
                  0.59September
      30, 2008
                  
                  $
                  2.01
                  
                  
                  $
                  1.48June
      30, 2008
                  
                  $
                  2.00
                  
                  
                  $
                  1.60March
      31, 2008
                  
                  $
                  3.44
                  
                  
                  $
                  1.60December
      31, 2007
                  
                  $
                  6.30
                  
                  
                  $
                  3.53September
      30, 2007
                  
                  $
                  5.16
                  
                  
                  $
                  4.03June
      30, 2007
                  
                  $
                  4.83
                  
                  
                  $
                  3.93





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, 2009
                  
                  $
                  1.00
                  
                  
                  $
                  0.72April
      30, 2009
                  
                  $
                  0.89
                  
                  
                  $
                  0.60March
      31, 2009
                  
                  $
                  0.81
                  
                  
                  $
                  0.55February
      28, 2009
                  
                  $
                  0.99
                  
                  
                  $
                  0.68January
      31, 2009
                  
                  $
                  1.00
                  
                  
                  $
                  0.69December
      31, 2008
                  
                  $
                  0.81
                  
                  
                  $
                  0.59





B.           Plan of
Distribution




No
disclosure is required in response to this Item.




53




C.           Markets




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




D.           Selling
Shareholders




No
disclosure is required in response to this Item.




E.           Dilution




No
disclosure is required in response to this Item.




F.           Expenses of the
Issue




No
disclosure is required in response to this Item.




Item
10.Additional Information




Share
Capital




The
Company’s authorized capital consists of 20,000,000 Common Shares, $0.01 par
value per share.  As of March 31, 2009 and June 22, 2009, there were
3,720,520 and 3,749,674 Common Shares, respectively,
outstanding, net of 37,800 treasury shares, all of which were 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, 2009, no warrants to
purchase Common Shares were outstanding.   There have been no
events in the last three years which have changed the amount, the number of
classes, or voting rights, of our issued capital.




Memorandum
And Articles Of Association




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




Regulation
60 of the Company’s Articles of Association (the “Articles”) provides that a
favorable vote of a majority of the Company’s independent directors is required
as to any related party transaction between the Company and any 5% or more
members of the Company and/or officer or director of the Company.  It
also provides that the Company shall use its best efforts to at all times
maintain at least 2 independent directors.  However, a director may
vote or consent with respect to any contract or arrangement in which the
director is materially interested, if the material facts of the interest of each
director in the agreement or transaction and his interest in or relationship to
any other party to the agreement or transaction are disclosed in good faith or
are known by the other directors.  Regulation 88 of the Articles
allows the directors to vote compensation to themselves in respect of services
rendered to the Company.




54




There is
no provision in the Articles for the mandatory retirement of
directors.  Directors are not required to own shares of the Company in
order to serve as directors.




The
authorized share capital of the Company is $200,000 divided into 20,000,000
Common Shares with par value of $0.01 each.  Holders of our Common
Shares are entitled to one vote for each whole share on all matters to be voted
upon by members, including the election of directors.  Holders of our
Common Shares do not have cumulative voting rights in the election of
directors.  All of our Common Shares are equal to each other with
respect to liquidation and dividend rights.  Holders of our Common
Shares are entitled to receive dividends if and when declared by our Board of
Directors out of surplus in accordance with British Virgin Islands law. In the
event of our liquidation, all assets available for distribution to the holders
of our Common Shares are distributable among them according to their respective
holdings.  Holders of our Common Shares have no preemptive rights to
purchase any additional, unissued Common Shares.




Regulation
17 provides that the Company may purchase, redeem or otherwise acquire and hold
its own shares out of surplus or in exchange for newly issued shares of equal
value.  However, no purchase, redemption or other acquisition shall be
made unless, immediately after the purchase, redemption or other acquisition the
Company will be able to satisfy its liabilities as they become due in the
ordinary course of its business, and the Company will not be
insolvent.




Regulation
10 of the Articles provide that without prejudice to any special rights
previously conferred on the holders of any existing shares, the unissued shares
in the Company are at the disposal of the directors who may offer, allot, grant
options over or otherwise dispose of shares to such persons, at such times and
upon such terms and conditions as the Company may by resolution of the directors
determine.




Clause 10
of the Memorandum of Association provides that if at any time the authorized
share capital is divided into different classes or series of shares, the rights
attached to any class or series may be varied with the consent in writing of the
holders of not less than three fourths of the issued shares of that class or
series and of the holders of not less than three fourths of any other class or
series of shares which may be affected by such variation.




Clause 15
of the Memorandum of Association (which is subject to the provisions of
regulation 60 of the Articles) provide that the Memorandum and Articles of
Association of the Company may be amended by a resolution of members or a
resolution of directors.  Regulation 60 of the Articles provides that
any proposed change in the Memorandum and Articles of Association not otherwise
approved by the majority vote of the shares held by the Company’s non-management
members shall be approved by a majority of the Company’s directors and not
disapproved by a majority of the Company’s independent
directors.  Subject to the preceding sentence, our Board of Directors
without shareholder approval may amend our Memorandum and Articles of
Association.  This includes amendments to increase or reduce our
authorized capital stock.  The Company’s ability to amend its
Memorandum and Articles of Association without shareholder approval could have
the effect of delaying, deterring or preventing a change in control of the
Company, including a tender offer to purchase our Common Shares at a premium
over the then current market price.




55




Provisions
in respect of the holding of general meetings and extraordinary general meetings
are set out in Regulations 38 to 58 of the Articles and under the International
Business Companies Act.  The directors may convene meetings of the
members of the Company at such times and in such manner and places as the
directors consider necessary or desirable, and they shall convene such a meeting
upon the written request of members holding 10 percent or more of the
outstanding voting shares in the Company.  An annual meeting of
members is held for the election of directors of the Company and in the manner
provided in the Articles of Association.  Any other proper business
may be transacted at the annual meeting. If the annual meeting for election of
directors is not held on the date designated therefore, the directors shall
cause the meeting to be held as soon thereafter as convenient.  If the
Company fails to hold the annual meeting for a period of 30 days after the date
designated for the annual meeting, or if no date has been designated for a
period of 13 months after the Company’s last annual meeting, a court of
competent jurisdiction of the British Virgin Islands may summarily order a
meeting to be held upon the application of any member or director.




British
Virgin Islands law and the Company’s Memorandum and Articles of Association
impose no limitations on the right of nonresident or foreign owners to hold or
vote such securities of the Company.




There are
no provisions in the Memorandum of Association or Articles of Association
governing the ownership threshold above which shareholder ownership must be
disclosed.




The full
text of the Articles and Memorandum of the Company are attached to this Annual
Report on Form 20-F as Exhibit 1.1.




Material
Contracts




The
following is a summary of each material contract, other than contracts entered
into in the ordinary course of business, to which the Company or any member of
the group is a party, during the two years immediately preceding the filing of
this Annual Report:




On April
29, 2004, Kayser Technik Ltd., the Company’s metal manufacturing subsidiary,
entered into that certain General Business Agreement with Berger Lahr GmbH &
Co. KG for the manufacture by Kayser Technik Ltd. of motor coils and such other
products as the parties may subsequently agree upon.  The term of the
agreement expires in December 2010.




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




56




The
Company is subject to the information requirements of the Securities and
Exchange Act of 1934, and, in accordance with the Securities Exchange Act of
1934, the Company files annual reports on Form 20-F and submit other reports and
information under cover of Form 6-K with the SEC. You may read and copy this
information at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Recent filings and reports are also available free of
charge though the EDGAR electronic filing system at www.sec.gov.




Exchange
Controls




There are
no exchange control restrictions on payment of dividends on the Company’s Common
Shares or on the conduct of the Company’s operations either in Hong Kong, where
the Company’s administrative offices are located, or the British Virgin Islands,
where the Company is incorporated.  Other jurisdictions in which the
Company conducts operations may have various exchange
controls.  Taxation and repatriation of income regarding the Company’s
China operations are regulated by Chinese laws and regulations.  To
date, these controls have not had and are not expected to have a material impact
on the Company’s financial results.  However, while the Company has
been able to repatriate its income from the operations conducted in China by its
Hong Kong subsidiaries, it may not be able to do so with respect to its Kayser
(Wuxi) Metal Precision Manufacturing Limited subsidiary that owns and operates
the Wuxi facility. There are no material British Virgin Islands laws which
impose foreign exchange controls on the Company or that affect the payment of
dividends, interest or other payments to nonresident holders of the Company’s
securities.




Taxation




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




Under
current Hong Kong tax law, dividends, interest or royalties paid by the Company
to individuals and gains realized on the sale or disposition of shares are not
subject to tax.


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




57


Dividends
and Paying Agents




Until the
past fiscal year, the Company has, during each of the prior five years, paid
dividends to its shareholders.  Dividends are declared and paid at the
discretion of the Board of Directors and depend upon, among other things, the
Company’s net profit after taxes, the anticipated future earnings of the
Company, the success of the Company’s business activities, the Company’s capital
requirements, and the general financial conditions of the
Company.  Although it is the Company’s intention to pay dividends
during profitable fiscal years, no assurance can be given that the Company will,
in fact, pay any dividends in the future even if it has a profitable year or is
otherwise capable of doing so.  The Company has not set a date on
which annual, or other, dividends are paid.  To date, the Company has
used its transfer agent, Computershare, in Glendale, California, U.S.A. as its
dividend paying agent.




Statement
by Experts




No
disclosure is required in response to this Item.




Documents
On Display




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




Subsidiary
Information




No
disclosure is required in response to this Item.




Item
11.Quantitative and Qualitative Disclosures About Market
Risk.




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




To the
extent that the Company has to convert U.S. dollars into renminbi for its
operations, an appreciation in the value of the renminbi compared to the U.S.
dollar reduces the amount of renminbi the Company receives upon
conversion.  Accordingly, an appreciation of the renminbi’s value
requires the Company to pay more U.S. dollars to fund its renminbi operating
expenses, thereby making its operations in China more
expensive.  During the past two years, the exchange rate between the
renminbi and the U.S. dollar changed by approximately 12.2% as the renminbi has
appreciated in value compared to the U.S. dollar.  The amount of
payments made by the Company in renminbi is continuing to increase, thereby
increasing the Company’s costs of operations that are paid in
RMB.  During the fiscal year ended March 31, 2009, the Company made
payments of approximately 57,402,000 in RMB (or approximately U.S. $8,413,000
based on the exchange rate as of March 31, 2009).  If the renminbi had
been 1% and 5% more valuable against the U.S. dollars as of March 31, 2009, the
amount of such RMB payments would have increased the Company’s expenses by
$84,000 and $421,000, respectively.  Should the Chinese government
allow the renminbi to continue to appreciate, or should the Company’s operating
expenses in renminbi significantly increase in the future, the Company’s cost
structure and pricing could change and have a material negative effect on its
operations, sales and financial results.




58




The
Company believes that its most significant foreign exchange risk results from
material sales made in Euro. Approximately 22% of the Company’s net sales were
made in Euros in fiscal year ended March 31, 2009.  In the fiscal year
ended March 31, 2009, the value of the Euro decreased by approximately 20% in
value compared to the U.S. dollar.  Accordingly, the payments that the
Company received in Euros were exchanged into fewer dollars, resulting in lower
sales.  To illustrate the effect of the exchange rate fluctuation on
the Company’s net sales, if the Euro had been 10% and 5% less valuable against
the U.S. dollars than the actual rate as of March 31, 2009, the Company’s
net sales, as presented in U.S. dollars, would have been approximately reduced
by $753,000 and $377,000, respectively. Conversely, if the Euro had been 10% and
5% more valuable against the U.S. dollars as of that date, then the Company’s
net sales would have increased by $753,000 and $377,000,
respectively.




The
Company has not engaged in currency hedging transactions to offset the risks
associated with variations in currency exchange rates.  Consequently,
significant foreign currency fluctuations and other foreign exchange risks may
have a material adverse effect on the Company’s business, financial condition
and results of operations.  The Company does not currently own any
market risk sensitive instruments.  The Company does not hedge its
currency exchange risks and, therefore, will continue to experience certain
gains or losses due to changes in foreign currency exchange
rates.  The Company does, however, attempt to limit its currency
exchange rate exposure in certain of its OEM contracts through contractual
provisions, which may limit, though not eliminate, these currency
risks.




The
Company is also exposed to interest rate fluctuations as a result of the
short-term investments that it makes and the borrowings it
incurs.  The Company maintains its excess cash in short-term
borrowings that are subject to interest rate fluctuations.  The
Company had $1,850,000 of short-term borrowings that are subject to interest
rate changes and $553,000 of long-term borrowings outstanding as of March 31,
2009.  However, taking into consideration that the Company had cash
and cash equivalents of $5,809,000 available as of March 31, 2009, the Company
believes that its interest rate risk on these borrowing was
acceptable.




Item
12.Description of Securities Other Than Equity
Securities




Not
applicable.




PART
II




Item
13.Defaults, Dividend Arrearages and
Delinquencies.




Not
applicable.




59




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




Not
applicable.




Item
15.Controls and Procedures.




Disclosure
Controls and Procedures




Based on
their evaluation as of March 31, 2009, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the “Act”)) are effective to ensure that the information
required to be disclosed by the Company in reports that it files or submits
under the Act is:




·
            recorded,
      processed, summarized and reported within the time periods specified in
      the Commission’s rules and forms regarding required disclosure;
      and




·
            accumulated
      and communicated to the Company’s management, including the Chief
      Executive and Chief Financial officer, to allow timely decisions regarding
      required disclosure.




Management’s
Annual Report on Internal Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company.  The Company’s system of internal
controls is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements in accordance
with U.S. GAAP.




Management
recognizes that effective internal control over financial reporting may
nonetheless not prevent or detect all possible misstatements or
frauds.




60




Our
management has assessed the effectiveness of our internal control over financial
reporting as of March 31, 2009. In conducting this assessment of the Company’s
internal control over financial reporting, our management has developed a
framework using internal reviews at the department and operations level,
supported by random sample reviews by Company management.




No
material weakness in internal controls over financial reporting was identified
from the assessment of the operations in Long Hua, Pinghu Lisu or He
Yuan.  Based on management’s assessment of the effectiveness of the
Company’s internal control over financial reporting at its smaller operations in
Wuxi, management concluded that the Company’s internal control over financial
reporting at that facility was not fully effective because some persons involved
in the Company’s financial reporting activities have limited experience with the
financial reporting system required by the SEC’s rules. The Company’s operations
at Wuxi account for less than 2% of the Company’s sales.




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




Changes
in Internal Control Over Financial Reporting




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




Item
16. Not applicable.




Item 16A.  
Audit Committee Financial Expert




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




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




Item 16B.  
Code of Ethics




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




61




Highway
Holdings Limited


Suite
810, Level 8, Landmark North


39 Lung
Sum Avenue


Sheung
Shui


New
Territories, Hong Kong




Attn:  Chief
Financial Officer




Item 16C.    
Principal Accountant Fees and Services




The
Company’s independent public accountant for each of the fiscal years in the
three-year period ended March 31, 2009 has been Deloitte Touche
Tohmatsu.




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, 2008 and 2009.




2008
                    
                    
                    2009Audit
      Fees (1)
                    
                    $
                    334,200
                    
                    
                    $
                    299,500Audit-Related
      Fees (2)
                    
                    
                    -
                    
                    
                    
                    -Tax
      Fees (3)
                    
                    $
                    17,300
                    
                    
                    $
                    32,100All
      Other Fees
                    
                    $
                    14,000
                    
                    
                    $
                    8,900Total
                    
                    $
                    365,500
                    
                    
                    $
                    340,500





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


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


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





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




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




Not
applicable




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




Not
applicable




62




Item
16F. Change in Registrant’s Certifying Accountant




According
to the Instructions to Item 16-F of Form 20-F, this Item is not applicable to
the Company until its Annual Report on Form 20-F for the year ending March 31,
2010.




Item
16G. Corporate Governance




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




PART
III




Item
17.Financial statements.




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




Item
18.Financial statements.




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




Item
19.  Exhibits.




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




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




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




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




4.1
            1996
      Stock Option Plan (incorporated by reference to Exhibit 10.32 of the
      registrant’s Registration Statement on Form F-1, Reg. No. 333-05980, filed
      with the SEC on November 8, 1996.)




4.2
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No. WJ-003,
      dated October 10, 2003, between the Company and Shenzhen Land & Sun
      Industrial & Trade Co., Ltd. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2004).




63




4.3
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No. WJ-004,
      dated November 28, 2003, between the Company and Shenzhen Land & Sun
      Industrial & Trade Co., Ltd. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2004).




4.4
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No. WJ-005,
      dated December 11, 2003, between the Company and Shenzhen Land & Sun
      Industrial & Trade Co., Ltd. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2004).




4.5
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No.
      HTHT-006, dated December 12, 2003, between the Company and Shenzhen Land
      & Sun Industrial & Trade Co., Ltd. (incorporated by reference to
      the registrant’s Annual Report on Form 20-F for the fiscal year ended
      March 31, 2004).




4.6
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract, dated
      December 29, 2003, between the Company and Shenzhen Land & Sun
      Industrial & Trade Co., Ltd. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2004).




4.7
            Tenancy
      Agreement, dated October 30, 2003, between Nissin Precision Metal
      Manufacturing Limited and SHK Sheung Shui Landmark Investment Limited, as
      amended February 23, 2004 (incorporated by reference to the registrant’s
      Annual Report on Form 20-F for the fiscal year ended March 31,
      2005).




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




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




4.10
            City
      Gao Xin District Factory Lease Contract, dated May 23, 2005, between He
      Yuan City Advanced Technological Development District Co. Ltd. and Hi-Lite
      Camera Co. Ltd. (incorporated by reference to the registrant’s Annual
      Report on Form 20-F for the fiscal year ended March 31,
    2005)




4.11
            City
      Gao Xin District Dormitory Facilities Lease Contract, dated May 23, 2005,
      between He Yuan City Advanced Technological Development District Co. Ltd.
      and Hi-Lite Camera Co. Ltd. (incorporated by reference to the registrant’s
      Annual Report on Form 20-F for the fiscal year ended March 31,
      2005)




4.12
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No. WJ-002,
      dated July 4, 2003, between the Company and Shenzhen Land & Sun
      Industrial & Trade Co., Ltd. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2006)




64




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




4.14
            Share
      Purchase Agreement, dated as of September 16, 2006, between Kienzle Time
      (H.K.) Limited and Highway Holdings Limited, on the one hand, and Wong Wai
      Chung, Peter, Wong Yuk, Paul,  Wong Wai Yung,
      Augustine,  and Wan Chi Cheong on the other hand, regarding the
      purchase of Golden Bright Plastic Manufacturing Company Limited.
      (incorporated by reference to the registrant’s Annual Report on Form 20-F
      for the fiscal year ended March 31,
2007)




4.15
            Rental
      Contract between Huayu Clothes & Costumes Manufacturing Factory of Wu
      Xi, Zhuang Wenhua,  and Miao Guokang as Lessors,
      and  Kayser (WuXi) Metal Precision Manufacturing Limited, dated
      January 28, 2007 regarding the rental of the Wuxi facilities.
      (incorporated by reference to the registrant’s Annual Report on Form 20-F
      for the fiscal year ended March 31,
2007)




4.16
            Rental
      Contract between Ping Hu City Xin Nan Li Yuan Xia Economic Corporation and
      Ping Hu Golden Bright Plastic Manufacturing Ltd., dated June 15, 2002,
      regarding the rental of Golden Bright’s facilities. (incorporated by
      reference to the registrant’s Annual Report on Form 20-F for the fiscal
      year ended March 31, 2007)




4.17
            Agreement
      on Imported Material for Processing, dated February 17, 1993, between
      Golden Bright Plastic Manufacturing Co. Ltd. Shenzhen Long Gong City Ping
      Hu Golden Bright Factory. (incorporated by reference to the registrant’s
      Annual Report on Form 20-F for the fiscal year ended March 31,
      2007)




4.18
            Supplementary
      Agreement on Imported Material for Processing, dated February 17, 1993,
      between Golden Bright Plastic Manufacturing Co. Ltd. Shenzhen Long Gong
      City Ping Hu Golden Bright Factory. (incorporated by reference to the
      registrant’s Annual Report on Form 20-F for the fiscal year ended March
      31, 2007)




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




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




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




65




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




4.23
            Form
      of Longcheng Industrial Area Common Property Tenancy Contract No. WJ-002,
      dated July 4, 2008, between the Company and Shenzhen Land & Sun
      Industrial & Trade Co., Ltd.




8.1
            List
      of all of registrant’s subsidiaries, their jurisdictions of incorporation,
      and the names under which they do
business.




11.1
            Code
      of Ethics (incorporated by reference to the registrant’s Annual Report on
      Form 20-F for the fiscal year ended March 31,
  2005)




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




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




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




23.1
            Consent
      of Independent Registered Public Accounting
Firm




66


SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused this Annual Report to be signed on its
behalf.




HIGHWAY
      HOLDINGS LIMITEDBy
              /s/ PO S. FONGPo
      S. FongChief
      Financial Officer andSecretaryDate:
              June
      22, 2009




67


HIGHWAY HOLDINGS
LIMITED





Consolidated Financial
Statements


For each of the three years in the
period ended March 31, 2009


and Report of Independent Registered
Public Accounting Firm





HIGHWAY
HOLDINGS LIMITED





INDEX





PageCONSOLIDATED
      FINANCIAL STATEMENTSReport
      of Independent Registered Public Accounting Firm
                
                
                F -
      2Consolidated
      Statements of Operations for each of the three years in the period ended
      March 31, 2009
                
                
                F -
      3Consolidated
      Balance Sheets as of March 31, 2008 and 2009
                
                
                F -
      4Consolidated
      Statements of Shareholders' Equity and Comprehensive Income (Loss) for
      each of the three years in the period ended March 31, 2009
                
                
                F -
      5Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      March 31, 2009
                
                
                F -
      6Notes
      to Consolidated Financial Statements
                
                
                F -
      8




F -
1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





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





We have
audited the accompanying consolidated balance sheets of Highway Holdings Limited
and its subsidiaries (the "Company") as of March 31, 2008 and 2009, 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, 2009.  These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 2008 and 2009,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.





Deloitte
Touche Tohmatsu


Hong
Kong


June 20,
2009


F -
2


HIGHWAY
HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF OPERATIONS


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





Year ended March 31,2007
                    
                    
                    2008
                    
                    
                    2009$
                    
                    
                    $
                    
                    
                    $Net
      sales
                    
                    
                    31,469
                    
                    
                    
                    33,164
                    
                    
                    
                    33,729Cost
      of sales
                    
                    
                    (25,233
                    )
                    
                    
                    (28,090
                    )
                    
                    
                    (27,025
                    )Gross
      profit
                    
                    
                    6,236
                    
                    
                    
                    5,074
                    
                    
                    
                    6,704Selling,
      general and administrative expenses
                    
                    
                    (5,850
                    )
                    
                    
                    (7,351
                    )
                    
                    
                    (5,823
                    )Operating
      income (loss)
                    
                    
                    386
                    
                    
                    
                    (2,277
                    )
                    
                    
                    881Non-operating
      income (expense):Exchange
      gain (loss), net
                    
                    
                    245
                    
                    
                    
                    283
                    
                    
                    
                    (330
                    )Interest
      expense
                    
                    
                    (242
                    )
                    
                    
                    (225
                    )
                    
                    
                    (141
                    )Interest
      income
                    
                    
                    161
                    
                    
                    
                    100
                    
                    
                    
                    35Other
      income
                    
                    
                    92
                    
                    
                    
                    60
                    
                    
                    
                    230Gain
      on disposal of partial interest in a subsidiary (note 1)
                    
                    
                    -
                    
                    
                    
                    111
                    
                    
                    
                    -Gain
      on disposal of investment securities
                    
                    
                    -
                    
                    
                    
                    2
                    
                    
                    
                    -Total
      non-operating income (expense)
                    
                    
                    256
                    
                    
                    
                    331
                    
                    
                    
                    (206
                    )Income
      (loss) before income taxes and minority interests
                    
                    
                    642
                    
                    
                    
                    (1,946
                    )
                    
                    
                    675Income
      taxes (note 3)
                    
                    
                    (48
                    )
                    
                    
                    (28
                    )
                    
                    
                    35Income
      (loss) before minority interests
                    
                    
                    594
                    
                    
                    
                    (1,974
                    )
                    
                    
                    710Minority
      interests
                    
                    
                    -
                    
                    
                    
                    53
                    
                    
                    
                    58Net
      income (loss)
                    
                    
                    594
                    
                    
                    
                    (1,921
                    )
                    
                    
                    768Net
      income (loss) per share - basic
                    
                    
                    0.16
                    
                    
                    
                    (0.50
                    )
                    
                    
                    0.21Net
      income (loss) per share - diluted
                    
                    
                    0.16
                    
                    
                    
                    (0.50
                    )
                    
                    
                    0.20Weighted
      average number of shares outstanding-
      basic
                    
                    
                    3,635,517
                    
                    
                    
                    3,809,888
                    
                    
                    
                    3,744,423Weighted
      average number of shares outstanding-
      diluted
                    
                    
                    3,690,174
                    
                    
                    
                    3,809,888
                    
                    
                    
                    3,773,677




See
accompanying notes to consolidated financial statements.


F -
3


HIGHWAY
HOLDINGS LIMITED





CONSOLIDATED
BALANCE SHEETS


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





As of March 31,2008
                
                
                2009$
                
                
                $ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                
                3,889
                
                
                
                5,809Restricted
      cash (note 8)
                
                
                1,671
                
                
                
                1,028Accounts
      receivable, net of allowances for doubtful accounts of $108 and $101 at
      March 31, 2008 and 2009, respectively
                
                
                4,766
                
                
                
                3,426Inventories
      (note 4)
                
                
                5,775
                
                
                
                4,010Prepaid
      expenses and other current assets
                
                
                689
                
                
                
                672Total
      current assets
                
                
                16,790
                
                
                
                14,945Property,
      plant and equipment, net (note 5)
                
                
                3,646
                
                
                
                2,840Intangible
      assets, net (note 6)
                
                
                52
                
                
                
                24Investments
      in affiliates (note 7)
                
                
                2
                
                
                
                2Total
      assets
                
                
                20,490
                
                
                
                17,811LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                
                3,757
                
                
                
                2,166Short-term
      borrowings (note 8)
                
                
                2,214
                
                
                
                1,850Obligations
      under capital leases - current portion (note 9)
                
                
                311
                
                
                
                259Accrued
      expenses and other liabilities (note 10)
                
                
                2,952
                
                
                
                1,630Total
      current liabilities
                
                
                9,234
                
                
                
                5,905Obligations
      under capital leases - net of current portion (note 9)
                
                
                522
                
                
                
                294Deferred
      income taxes (note 3)
                
                
                189
                
                
                
                163Total
      liabilities
                
                
                9,945
                
                
                
                6,362Commitments
      and contingencies (note 11)Minority
      interests
                
                
                151
                
                
                
                93Shareholders'
      equity:Common
      shares, $0.01 par value (Authorized: 20,000,000 shares; 3,819,900 shares
      and 3,720,520 shares issued and outstanding as of March 31, 2008 and 2009,
      respectively)
                
                
                38
                
                
                
                37Additional
      paid-in capital
                
                
                11,562
                
                
                
                11,224Accumulated
      (deficit) profits
                
                
                (614
                )
                
                
                154Accumulated
      other comprehensive loss
                
                
                (26
                )
                
                
                (6
                )Treasury
      shares, at cost - 166,334 shares and 37,800 shares as of March 31, 2008
      and 2009, respectively (note 13)
                
                
                (566
                )
                
                
                (53
                )Total
      shareholders' equity
                
                
                10,394
                
                
                
                11,356Total
      liabilities and shareholders' equity
                
                
                20,490
                
                
                
                17,811





See
accompanying notes to consolidated financial statements.


F -
4


HIGHWAY
HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


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





Common
      shares,
                                      
                                      
                                      
                                      
                                      
                                      Accumulated
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      Compre-issued
      and
                                      
                                      Additional
                                      
                                      Accumulated
                                      
                                      other
                                      
                                      
                                      
                                      Treasury
                                      
                                      
                                      Total
                                      
                                      
                                      hensiveoutstanding
                                      
                                      paid-in
                                      
                                      profits
                                      
                                      comprehensive
                                      
                                      Subscription
                                      
                                      shares,
                                      
                                      
                                      shareholders'
                                      
                                      
                                      incomeShares
                                      
                                      Amount
                                      
                                      capital
                                      
                                      (deficit)
                                      
                                      loss
                                      
                                      receivable
                                      
                                      at
      cost
                                      
                                      
                                      equity
                                      
                                      
                                      (loss)Number
                                      
                                      $
                                      
                                      $
                                      
                                      $
                                      
                                      $
                                      
                                      $
                                      
                                      $
                                      
                                      
                                      $
                                      
                                      
                                      $(in
      thousands)Balance
      at March 31, 2006
                                      
                                      
                                      3,525
                                      
                                      
                                      35
                                      
                                      
                                      10,245
                                      
                                      
                                      2,133
                                      
                                      
                                      (86
                                      )
                                      
                                      -
                                      
                                      
                                      (53
                                      )
                                      
                                      
                                      12,274Issued
      during the year
                                      
                                      
                                      225
                                      
                                      
                                      3
                                      
                                      
                                      861
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (513
                                      )
                                      
                                      -
                                      
                                      
                                      
                                      351Net
      income
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      594
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      594
                                      
                                      
                                      
                                      594Director's
      stock compensation
                                      
                                      
                                      29
                                      
                                      
                                      -
                                      
                                      
                                      160
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      160Employee's
      share-based compensation
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      38
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      38Unrealized
      holding gain on investment securities
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      16
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      16
                                      
                                      
                                      
                                      16Translation
      adjustments
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      22
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      22
                                      
                                      
                                      
                                      22Cash
      dividends ($0.36 per share)
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (1,288
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,288
                                      )Balance
      at March 31, 2007
                                      
                                      
                                      3,779
                                      
                                      
                                      38
                                      
                                      
                                      11,304
                                      
                                      
                                      1,439
                                      
                                      
                                      (48
                                      )
                                      
                                      (513
                                      )
                                      
                                      (53
                                      )
                                      
                                      
                                      12,167
                                      
                                      
                                      
                                      632Issued
      during the year
                                      
                                      
                                      11
                                      
                                      
                                      -
                                      
                                      
                                      38
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      38Net
      loss
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (1,921
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,921
                                      )
                                      
                                      
                                      (1,921
                                      )Director's
      stock compensation
                                      
                                      
                                      29
                                      
                                      
                                      -
                                      
                                      
                                      160
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      160Employee's
      share-based compensation
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      60
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      60Escrow
      shares returned to treasury (note 13)
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      513
                                      
                                      
                                      (513
                                      )
                                      
                                      
                                      -Reversal
      of unrealized holding gain on investment securities sold
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      6
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6Translation
      adjustments
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      16
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      16
                                      
                                      
                                      
                                      16Cash
      dividends ($0.035 per share)
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (132
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (132
                                      )Balance
      at March 31, 2008
                                      
                                      
                                      3,819
                                      
                                      
                                      38
                                      
                                      
                                      11,562
                                      
                                      
                                      (614
                                      )
                                      
                                      (26
                                      )
                                      
                                      -
                                      
                                      
                                      (566
                                      )
                                      
                                      
                                      10,394
                                      
                                      
                                      
                                      (1,905
                                      )Net
      income
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      768
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      768
                                      
                                      
                                      
                                      768Director's
      stock compensation
                                      
                                      
                                      29
                                      
                                      
                                      -
                                      
                                      
                                      160
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      160Employee's
      share-based compensation
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      14
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      14Translation
      adjustments
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      20
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      
                                      20
                                      
                                      
                                      
                                      20Escrow
      shares cancelled (note 13)
                                      
                                      
                                      (128
                                      )
                                      
                                      (1
                                      )
                                      
                                      (512
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      513
                                      
                                      
                                      
                                      -Balance
      at March 31, 2009
                                      
                                      
                                      3,720
                                      
                                      
                                      37
                                      
                                      
                                      11,224
                                      
                                      
                                      154
                                      
                                      
                                      (6
                                      )
                                      
                                      -
                                      
                                      
                                      (53
                                      )
                                      
                                      
                                      11,356
                                      
                                      
                                      
                                      788





See
accompanying notes to consolidated financial statements.


F -
5


HIGHWAY
HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF CASH FLOWS


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





Year ended March 31,2007
                
                
                2008
                
                
                2009$
                
                
                $
                
                
                $Cash
      flows from operating activities:Net
      income (loss)
                
                
                594
                
                
                
                (1,921
                )
                
                
                768Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Loss
      on disposal of property, plant and equipment
                
                
                13
                
                
                
                51
                
                
                
                156Gain
      on disposal of investment securities
                
                
                -
                
                
                
                (2
                )
                
                
                -Gain
      on disposal of partial interest in a subsidiary
                
                
                -
                
                
                
                (111
                )
                
                
                -Write
      down of inventories
                
                
                94
                
                
                
                145
                
                
                
                144Allowances
      for doubtful accounts
                
                
                4
                
                
                
                102
                
                
                
                96Depreciation
      of property, plant and equipment
                
                
                926
                
                
                
                812
                
                
                
                754Amortization
      of intangible assets
                
                
                13
                
                
                
                18
                
                
                
                28Minority
      interests
                
                
                -
                
                
                
                (53
                )
                
                
                (58
                )Directors'
      stock compensation
                
                
                160
                
                
                
                160
                
                
                
                160Deferred
      income taxes
                
                
                21
                
                
                
                15
                
                
                
                (26
                )Employee's
      share-based compensation
                
                
                38
                
                
                
                60
                
                
                
                14Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                582
                
                
                
                (126
                )
                
                
                1,244Inventories
                
                
                (1,355
                )
                
                
                184
                
                
                
                1,621Prepaid
      expenses and other current assets
                
                
                (97
                )
                
                
                (125
                )
                
                
                17Accounts
      payable
                
                
                391
                
                
                
                (233
                )
                
                
                (1,591
                )Accrued
      expenses and other liabilities
                
                
                271
                
                
                
                1,099
                
                
                
                (1,322
                )Net
      cash provided by operating activities
                
                
                1,655
                
                
                
                75
                
                
                
                2,005Investing
      activities:Acquisition
      of a subsidiary
                
                
                (331
                )
                
                
                -
                
                
                
                -Purchase
      of property, plant and equipment
                
                
                (934
                )
                
                
                (211
                )
                
                
                (85
                )Proceeds
      from disposal of partial interest in a subsidiary
                
                
                -
                
                
                
                315
                
                
                
                -Proceeds
      from disposal of property, plant and equipment
                
                
                3
                
                
                
                17
                
                
                
                -Proceeds
      from disposal of investment securities
                
                
                -
                
                
                
                324
                
                
                
                -(Increase)
      decrease in restricted cash
                
                
                (256
                )
                
                
                (450
                )
                
                
                643Net
      cash (used in) provided by investing activities
                
                
                (1,518
                )
                
                
                (5
                )
                
                
                558




See
accompanying notes to consolidated financial statements.


F -
6


HIGHWAY
HOLDINGS LIMITED





CONSOLIDATED
STATEMENTS OF CASH FLOWS - continued


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





Year ended March 31,2007
                    
                    
                    2008
                    
                    
                    2009$
                    
                    
                    $
                    
                    
                    $Financing
      activities:Cash
      dividends paid
                    
                    
                    (1,288
                    )
                    
                    
                    (132
                    )
                    
                    
                    -Repayment
      of long-term debt
                    
                    
                    (535
                    )
                    
                    
                    (519
                    )
                    
                    
                    (299
                    )Increase
      (decrease) in short-term borrowings
                    
                    
                    375
                    
                    
                    
                    (883
                    )
                    
                    
                    (364
                    )Proceeds
      from shares issued on exercise of options
                    
                    
                    204
                    
                    
                    
                    38
                    
                    
                    
                    -Net
      cash used in financing activities
                    
                    
                    (1,244
                    )
                    
                    
                    (1,496
                    )
                    
                    
                    (663
                    )Net
      (decrease) increase in cash and cash equivalents
                    
                    
                    (1,107
                    )
                    
                    
                    (1,426
                    )
                    
                    
                    1,900Cash
      and cash equivalents, beginning of year
                    
                    
                    6,384
                    
                    
                    
                    5,299
                    
                    
                    
                    3,889Effect
      of exchange rate changes
                    
                    
                    22
                    
                    
                    
                    16
                    
                    
                    
                    20Cash
      and cash equivalents, end of year
                    
                    
                    5,299
                    
                    
                    
                    3,889
                    
                    
                    
                    5,809Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    
                    242
                    
                    
                    
                    225
                    
                    
                    
                    141Income
      taxes (paid) refunded
                    
                    
                    (32
                    )
                    
                    
                    11
                    
                    
                    
                    18





Supplemental
disclosure of non-cash transactions:


Property,
      plant and equipment amounting to $766, $219 and $19 in the years ended
      March 31, 2007, 2008 and 2009, respectively, were acquired under capital
      lease arrangements.





During
the year ended March 31, 2007, 30,000 shares valued at $147 were issued to
acquire certain machinery and equipment.  The purchase price of this
machinery and equipment was based on the fair value of the shares on the
transaction date.





See
accompanying notes to consolidated financial statements.


F -
7


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


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





1.
            ORGANIZATION
      AND BASIS OF FINANCIAL STATEMENTS





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





The
      Company operates in two principal business segments - metal stamping and
      mechanical original equipment manufacturing ("OEM") and electric
      OEM.  The Company's manufacturing activities are principally
      conducted in Shenzhen, He Yuan and Wuxi and its selling activities are
      principally conducted in Hong Kong and
Wuxi.





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





On
September 19, 2006 the Company acquired 100% equity interest in Golden Bright
Plastic Manufacturing Company Limited ("Golden Bright") for a cash consideration
of $514.  Golden Bright, a company incorporated in Hong Kong, is
engaged in the manufacturing and trading of plastic injection
products.  In accordance with the purchase agreement, additional
consideration of $1,028 will be payable, contingent on the former substantial
shareholders of Golden Bright continuing as employees for a requisite service
period of three years and on the acquired subsidiary achieving a certain level
of specified revenue and earnings targets.





$514 will
vest on a straight-line basis over the requisite service period and as a result
approximately $171 will become payable for each completed year of
service.  The remaining $514 will vest after completion of the
employment period by the former substantial shareholders and upon Golden Bright
achieving the revenue and earning targets.





Golden
Bright has been accounted for as a subsidiary using the purchase
method.  The contingent payments represent compensation for post
combination services and accordingly $85, $171 and $171 have been accrued as
compensation expense in the years ended March 31, 2007, 2008 and 2009,
respectively.  As of March 31, 2009, it is not probable that Golden
Bright will meet the revenue and earning targets for the contingent payment of
the final $514.





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


F -
8


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Principles of consolidation- The consolidated financial statements include the financial
      statements of Highway Holdings Limited and all its majority-owned
      subsidiaries.  Highway Holdings Limited does not have variable
      interests in any variable interest entity during the periods
      presented.  All significant intercompany transactions and
      balances have been eliminated on consolidation.  The results of
      subsidiaries acquired have been consolidated from the date of
      acquisition.  The excess of fair value over purchase
      consideration has been allocated to reduce the amounts otherwise assigned
      to the eligible acquired assets.





Affiliated
      companies (20% to 50% owned companies) in which the Company has
      significant influence but does not have a controlling interest are
      accounted for using the equity
method.





Cash and cash
      equivalents - Cash and cash equivalents include cash on hand, cash
      accounts, interest bearing savings accounts and certificates of time
      deposit, which are unrestricted as to withdrawal and use, and have
      maturity of three months or less at the time of
  purchase.





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





Property, plant and
      equipment - Property, plant and equipment are stated at cost less
      accumulated depreciation.  Depreciation is computed on a
      straight line basis over the estimated useful lives of 10 years for
      machinery and equipment and 2 to 5 years for other property, plant and
      equipment.  Assets held under capital leases are depreciated
      over the shorter of their lease period or estimated useful lives on the
      same basis as owned assets, unless the ownership of these assets transfers
      to the Company by the end of the lease term over the estimated useful
      lives.





Intangible assets -
      Identifiable intangibles acquired in a business combination are determined
      separately from goodwill based on their fair values, as determined with
      assistance of a valuation expert.  In particular, an intangible
      that is acquired in a business combination is recognized as an asset
      separate from goodwill if it satisfies either the "contractual-legal" or
      "reparability" criterion.  The intangible assets are carried at
      cost less accumulated amortization and are reviewed for impairment if
      indicators of impairment arise.  Amortization is computed using
      the straight line method over the intangible assets' estimated useful
      lives.


F -
9


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





Separately
      identifiable intangible assets and their respective weighted average
      estimated useful lives are as
follows:


Estimateduseful lifeCustomer
      relationship
                7
      yearsContract
      backlog
                0.25 yearsNon-compete
      agreement
                4
      years





Impairment or disposal of long-lived
assets - Long-lived assets are included in impairment evaluations when
events and circumstances exist that indicate the carrying amount of these assets
may not be recoverable.  The Company reviews its long-lived assets for
potential impairment based on a review of projected undiscounted cash flows
associated with these assets in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 144 "Accounting For the Impairment or
Disposal of Long-Lived Assets".  Measurement of impairment
losses for long-lived assets that the Company expects to hold and use is based
on the estimated fair value of the assets.





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





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





Concentration of credit
      risk - Financial instruments that potentially expose the Company to
      concentrations of credit risk consist primarily of cash and cash
      equivalents, and accounts receivable.  The Company places its
      cash and cash equivalents with financial institutions with high-credit
      ratings and quality.





The
      Company conducts credit evaluations of customers and generally does not
      require collateral or other security from its customers.  The
      Company establishes an allowance for doubtful accounts primarily based
      upon the age of the receivables and factors surrounding the credit risk of
      specific customers.


F -
10


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





Revenue recognition -
      The Company recognizes revenue from the sale of products, when all of the
      following conditions are met:





·
            Persuasive
      evidence of an arrangement exists;


·
            Delivery
      has occurred;


·
            Price
      to the customer is fixed or determinable;
and


·
            Collectibility
      is reasonably assured.





Revenue
      from sales of products is recognized when the title is passed to customers
      upon shipment and when collectibility is reasonably assured. The Company
      does not provide its customers with the right of return (except for
      quality) or price protection. There are no customer acceptance provisions
      associated with the Company's products. All sales are based on firm
      customer orders with fixed terms and conditions, which generally cannot be
      modified.





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





Foreign currency- The
      Company uses the United States dollar as its reporting
      currency.  Assets and liabilities of subsidiaries whose
      functional currencies are other than United States dollar are translated
      at year-end exchange rates, while revenues and expenses are translated at
      average currency exchange rates during the year.  Unrealized
      gains or losses arising from such translation are reported as accumulated
      other comprehensive income (loss).  Foreign currency
      transactions are translated into the functional currency at exchange rates
      prevailing on the transaction date.  Foreign currency
      denominated monetary assets and liabilities are translated into the
      functional currency using exchange rates prevailing on the balance sheet
      date.  Gains or losses from foreign currency transactions are
      included in net income (loss).





Income taxes - Deferred
      income taxes are provided using the asset and liability method. Under this
      method, deferred income taxes are recognized for all significant temporary
      differences and classified as current or non-current based upon the
      classification of the related asset or liability in the financial
      statements.  Deferred tax assets and liabilities are measured
      using the enacted rates applicable to the taxable income in the years in
      which the temporary differences are expected to be recovered or
      settled.  Changes in net deferred tax asset or liability are
      included in determination of net income.  A valuation allowance
      is recorded to reduce the amount of deferred tax assets if it is
      considered more likely than not that some portion of, or all, the deferred
      tax asset will not be realized.





Effective
      April 1, 2007, the Company adopted the Financial Accounting Standard Board
      ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
      48"), which clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise's financial statements.  The
      interpretation prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return.  FIN 48
      also provides accounting guidance on de-recognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition.  There was no material impact of FIN 48 on the
      Company's consolidated financial
statements.


F -
11


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





Use of estimates -The
      preparation of financial statements in conformity with U.S. GAAP requires
      management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosures of contingent assets and
      liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting
      period.  Significant items subject to such estimates and
      assumptions include the useful lives of property, plant and equipment;
      valuation allowances for doubtful receivables; impairment of long-lived
      assets; write down of inventories; provision for income tax expenses;
      valuation allowances of deferred tax assets; and amounts recorded for
      contingencies. These estimates are often based on complex judgments and
      assumptions that management believe to be reasonable but are inherently
      uncertain and unpredictable. Actual results may differ from those
      estimates.





Stock-based compensation- The Company has a stock-based employee compensation plan, as more
      fully described in note 17.  The Company measures the cost of
      employee services received in exchange for an award of equity instruments
      based on the grant-date fair value of the award.  That cost is
      recognized over the period during which an employee is required to provide
      service, the requisite service period (usually the vesting period), in
      exchange for the award.  The grant-date fair value of employee
      stock options and similar instruments are estimated using Black-Scholes
      option-pricing model.





Net income (loss) per share- Basic net income (loss) per share is computed by dividing net
      income (loss) attributable to common shareholders by the weighted average
      of common shares outstanding for the period.  Diluted earnings
      per share gives effect to all dilutive potential common shares outstanding
      during the year.  The weighted average number of common shares
      outstanding is adjusted to include the number of additional common shares
      that would have been outstanding if the dilutive potential common shares
      had been issued.





Comprehensive income
      (loss) -
      Comprehensive income (loss) is defined to include all changes in equity
      except those resulting from investments by owners and distributions to
      owners.  Comprehensive income (loss) for the years, which
      comprises foreign currency translation adjustments, unrealized holding
      gain (loss) on investment securities and net income (loss), has been
      disclosed within the consolidated statements of shareholders' equity and
      comprehensive income (loss).


F -
12


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





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





In
September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements"
("SFAS 157").  SFAS 157 defines fair value, establishes a framework
for measuring fair value, and enhances fair value measurement disclosure. In
October 2008, the FASB issued FASB Staff Position ("FSP") 157-3 "Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active" ("FSP SFAS
157-3"). FSP SFAS 157-3 clarifies the application of SFAS 157 in a market that
is not active, and provides guidance on the key considerations in determining
the fair value of a financial asset when the market for that financial asset is
not active.  Effective April 1, 2008, the Company adopted the
measurement and disclosure requirements related to financial assets and
financial liabilities.  The adoption of SFAS 157 for financial assets
and financial liabilities did not have a material impact on the Company's
results of operations or the fair values of its financial assets and
liabilities.





FSP SFAS
157-2, "Effective Date of FASB
Statement No. 157" ("FSP SFAS 157-2") delayed the effective date of SFAS
157 for all nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until the fiscal year beginning after
November 15, 2008.  The Company is currently assessing the impact that
the application of SFAS 157 to nonfinancial assets and liabilities will have on
its results of operations and financial position.





As of
March 31, 2008 and 2009, the Company did not have any nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements, at least annually, on a recurring basis.


F -
13


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





Recent changes in accounting
standards -In December 2007, FASB issued SFAS No. 141 (revised
2007), "Business
Combinations"("SFAS
141R").  The objective of SFAS 141R is to improve the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects.  SFAS 141R is effective for business combinations for
which the acquisition date is on or after the beginning of the entity’s first
fiscal year that begins on or after December 15, 2008.  The Company is
evaluating the impact, if any, of the adoption of SFAS 141R.





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51"
("SFAS 160").  This Statement amends Accounting Research Bulletin No.
51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary.  It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity held by owners
other than the subsidiary’s parent and should be reported as equity on the
financial statements.  SFAS 160 requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest.  Furthermore, disclosure of the amounts
of consolidated net income attributable to the parent and to the noncontrolling
interest is required on the face of the financial statements.  SFAS
160 is effective as of the beginning of an entity's first fiscal year that
begins after December 15, 2008.  The Company is evaluating the
impact, if any, of the adoption of SFAS 160.  It is not expected to
have a material impact on the Company's financial position, results of
operations and cash flows.





In April
2008, the FASB issued FSP SFAS 142-3, "Determination of the Useful Life of
Intangible Assets".  This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets".  This FSP is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years.  The guidance for determining the useful life of a recognized
intangible asset in this FSP shall be applied prospectively to intangible assets
acquired after the effective date.  The Company is evaluating the
impact, if any, of the adoption of FSP SFAS 142-3.  It is not expected
to have a material impact on the Company's financial position, results of
operations and cash flows.


F -
14


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES -
continued





In April
2009, the FASB issued FSP SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value
of Financial Instruments" ("FSP SFAS 107-1"). FSP 107-1 amends SFAS No.
107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair value
of financial instruments not measured on the balance sheet at fair value in
interim financial statements as well as in annual financial
statements.  Prior to the FSP, fair values for these assets and
liabilities were only disclosed annually.  FSP 1 SFAS 07-1 applies to
all financial instruments within the scope of SFAS No. 107 and requires all
entities to disclose the method(s) and significant assumptions used to estimate
the fair value of financial instruments.  FSP 107-1 shall be effective
for interim periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009.  FSP SFAS 107-1
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption.  In periods after initial adoption, FSP
SFAS 107-1 requires comparative disclosures only for periods ending after
initial adoption.  The Company is currently evaluating the disclosure
requirements of FSP SFAS 107-1.





In May
2009, the FASB issued SFAS No.165, "Subsequent Events" ("SFAS
165"). SFAS 165 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. Entities are required to
disclose the date through which subsequent events were evaluated, as well as
whether that date is the date financial statements were issued or were available
to be issued.  SFAS 165 is effective for interim and annual periods
ending after June 15, 2009.  The Company is evaluating the impact, if
any, of the adoption of SFAS 165.  It is not expected to have a
material impact on the Company's financial position, results of
operations and cash flows.


F -
15


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





3.
            INCOME
      TAXES





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





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





Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $Hong
      Kong
                  
                  
                  1,113
                  
                  
                  
                  (1,743
                  )
                  
                  
                  911China
                  
                  
                  (320
                  )
                  
                  
                  (272
                  )
                  
                  
                  (199
                  )Europe
                  
                  
                  (151
                  )
                  
                  
                  69
                  
                  
                  
                  (37
                  )642
                  
                  
                  
                  (1,946
                  )
                  
                  
                  675




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





The
      Company is not taxed in the British Virgin
  Islands.





The
      Company's operating subsidiaries, other than Kayser Wuxi and Kayser
      Restaurant (Shenzhen) Company Limited, are all incorporated in Hong Kong
      and are subject to Hong Kong taxation on their activities conducted in
      Hong Kong.





On June
26, 2008, the Hong Kong Legislative Council passed the Revenue Bill 2008 which
reduced corporate profits tax rate from 17.5% to 16.5% effective from the year
of assessment 2008/2009. Therefore, Hong Kong Profits Tax is calculated at 16.5%
(2008: 17.5%) of the estimated assessable profit for the year.





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





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





In
      connection with the establishment of its new facility in China during
      fiscal year 2006, the Company entered into an agreement with the He Yuan
      Foreign Trade & Economy Cooperation Bureau that is similar to the
      Operating Agreements.





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


F -
16


HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





3.
            INCOME
      TAXES - continued





As
      the Company's manufacturing operations are carried out in China under the
      Operating Agreements, in accordance with the Hong Kong Inland Revenue
      Departmental Interpretation and Practice Note No. 21, 50% of the related
      income for the year arising in Hong Kong has been determined as not
      subject to Hong Kong profits tax.  The calculation of Hong Kong
      Profits Tax has been based on such tax
relief.





The
      provision for income taxes consists of the
  following:


Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $Hong
      KongCurrent
      tax
                  
                  
                  27
                  
                  
                  
                  13
                  
                  
                  
                  (9
                  )Deferred
      tax
                  
                  
                  21
                  
                  
                  
                  15
                  
                  
                  
                  (26
                  )48
                  
                  
                  
                  28
                  
                  
                  
                  (35
                  )





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 31,2007
                  
                  
                  2008
                  
                  
                  2009%
                  
                  
                  %
                  
                  
                  %Profits
      tax rate in Hong Kong
                  
                  
                  17.5
                  
                  
                  
                  17.5
                  
                  
                  
                  16.5Non-deductible
      items/non-taxable income
                  
                  
                  19.8
                  
                  
                  
                  (14.0
                  )
                  
                  
                  36.3Changes
      in valuation allowances
                  
                  
                  (38.8
                  )
                  
                  
                  (4.6
                  )
                  
                  
                  (42.7
                  )Effect
      of different tax rate of subsidiaries operating in other
      jurisdictions
                  
                  
                  2.2
                  
                  
                  
                  0.4
                  
                  
                  
                  (2.1
                  )Effect
      of change in tax rate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12.2
                  )Under/Overprovision
      of income in previous years
                  
                  
                  0.3
                  
                  
                  
                  (0.2
                  )
                  
                  
                  (1.2
                  )Other
                  
                  
                  6.5
                  
                  
                  
                  (0.5
                  )
                  
                  
                  0.2Effective
      tax rate
                  
                  
                  7.5
                  
                  
                  
                  (1.4
                  )
                  
                  
                  (5.2
                  )




F -
17




HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





3.
            INCOME
      TAXES - continued





Deferred
      income tax (assets) liabilities are as
follows:


March 31,2008
                      
                      
                      2009$
                      
                      
                      $Deferred
      tax liability:Property,
      plant and equipment
                      
                      
                      265
                      
                      
                      
                      200Deferred
      tax asset:Tax
      loss carryforwards
                      
                      
                      (1,753
                      )
                      
                      
                      (1,329
                      )Valuation
      allowance
                      
                      
                      1,677
                      
                      
                      
                      1,292Total
      net deferred tax asset
                      
                      
                      (76
                      )
                      
                      
                      (37
                      )Net
      deferred tax liability
                      
                      
                      189
                      
                      
                      
                      163





Movement
      of valuation allowances are as
follows:


Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $At
      the beginning of the year
                  
                  
                  1,836
                  
                  
                  
                  1,587
                  
                  
                  
                  1,677Current
      year (reduction) addition
                  
                  
                  (249
                  )
                  
                  
                  90
                  
                  
                  
                  (288
                  )Change
      in tax rate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (72
                  )De-registration
      of a subsidiary
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (25
                  )At
      the end of the year
                  
                  
                  1,587
                  
                  
                  
                  1,677
                  
                  
                  
                  1,292





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





At
      March 31, 2008 and 2009, tax losses amounting to approximately $7,741 and
      $5,522, respectively may be carried forward indefinitely, subject to the
      agreement of the Hong Kong Inland Revenue
  Department.





At
      March 31, 2008 and 2009, the tax losses of a subsidiary in Germany
      amounting to approximately $1,389 and 1,131, respectively, may be carried
      forward indefinitely.





F -
18




HIGHWAY
HOLDINGS LIMITED





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - continued


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





3.           INCOME
TAXES - continued





At March
31, 2008 and 2009, the Company's China subsidiaries had tax losses of
approximately of $418 and $447, respectively that will expire five years from
respective financial years incurring the losses.





As at
March 31, 2009, the tax losses will expire in following years:


$2012
                  
                  
                  872013
                  
                  
                  1652014
                  
                  
                  195447





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





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





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





The
Company classifies interest and/or penalties related to unrecognized tax
benefits as a component of income tax provisions; however, as of March 31, 2008
and 2009, there is no interest and penalties related to uncertain tax positions,
and the Company has no material unrecognized tax benefit which would favourably
affect the effective income tax rate in future periods.  The Company
does not anticipate any significant increases or decreases to its liability for
unrecognized tax benefit within the next twelve months. The fiscal years 2003 to
2009 remain subject to examination by the Hong Kong tax authority.





F -
19





HIGHWAY
HOLDINGS LIMITED


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





4.
            INVENTORIES





Inventories
by major categories are summarized as follows:


March 31,2008
                  
                  
                  2009$
                  
                  
                  $Raw
      materials
                  
                  
                  3,570
                  
                  
                  
                  2,449Work
      in progress
                  
                  
                  844
                  
                  
                  
                  669Finished
      goods
                  
                  
                  1,361
                  
                  
                  
                  8925,775
                  
                  
                  
                  4,010





Inventories
amounting to $94, $145 and $144 were written off during the years ended March
31, 2007, 2008 and 2009, respectively.





5.
            PROPERTY,
      PLANT AND EQUIPMENT, NET





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


March 31,2008
                  
                  
                  2009$
                  
                  
                  $At
      cost:Machinery
      and equipment
                  
                  
                  11,662
                  
                  
                  
                  11,301Furniture
      and fixtures
                  
                  
                  27
                  
                  
                  
                  48Leasehold
      improvements
                  
                  
                  1,108
                  
                  
                  
                  620Motor
      vehicles
                  
                  
                  76
                  
                  
                  
                  103Total
                  
                  
                  12,873
                  
                  
                  
                  12,072Less:
      Accumulated depreciation
                  
                  
                  (9,227
                  )
                  
                  
                  (9,232
                  )Net
      book value
                  
                  
                  3,646
                  
                  
                  
                  2,840





Depreciation
expense incurred for the years ended March 31, 2007, 2008 and 2009 were $926,
$812 and $754, respectively.





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





March 31,2008
                  
                  
                  2009$
                  
                  
                  $Machinery
      and equipment, at cost
                  
                  
                  1,549
                  
                  
                  
                  1,157Less:
      Accumulated depreciation
                  
                  
                  (288
                  )
                  
                  
                  (287
                  )Net
      book value
                  
                  
                  1,261
                  
                  
                  
                  870





Depreciation
of machinery and equipment held under capital leases, which is included in
depreciation expense were $257, $149 and $116 for the years ended March 31,
2007, 2008 and 2009, respectively.





F -
20





HIGHWAY
HOLDINGS LIMITED


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





6.
            INTANGIBLE
      ASSETS, NET


March 31,2008
                  
                  
                  2009$
                  
                  
                  $At
      cost:Customer
      relationship
                  
                  
                  14
                  
                  
                  
                  14Contract
      backlog
                  
                  
                  4
                  
                  
                  
                  4Non-compete
      agreement
                  
                  
                  65
                  
                  
                  
                  65Total
                  
                  
                  83
                  
                  
                  
                  83Less:
      Accumulated amortization
                  
                  
                  (31
                  )
                  
                  
                  (59
                  )Net
      book value
                  
                  
                  52
                  
                  
                  
                  24





Amortization
expense incurred for the years ended March 31, 2007, 2008 and 2009 were $13, $18
and $28, respectively.





The
Company expects to record amortization expense of $16 and $8 for the years
ending 2010 and 2011, respectively.





7.
            INVESTMENTS
      IN 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 to sell clocks, with each party owning 50% of its common
      shares. 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.)), a company incorporated
      in the Republic of Panama, for cash consideration of $5.  Kayser
      Technik (Overseas) is engaged in the trading of camera batteries, films
      and disposable cameras.





F -
21





HIGHWAY
HOLDINGS LIMITED


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





8.
            SHORT-TERM
      BORROWINGS





Short-term
borrowings include import loans obtained from various banks in Hong Kong
amounting to $2,214 and $1,850 as of March 31, 2008 and 2009,
respectively.





March 31,2008
                            
                            
                            2009$
                            
                            
                            $Maximum
      credit facilities available to the Company
                            
                            
                            7,134
                            
                            
                            
                            4,563Weighted
      average interest rate on borrowings at end of year
                            
                            
                            8.5%
                            
                            
                            
                            5.1%




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





The
banking facilities are secured by certain bank deposits and guarantees given by
the Company  and certain subsidiaries.  At March 31, 2008
and 2009, the Company pledged bank deposits of $1,671 and $1,028, respectively,
to banks to secure banking facilities granted.  There are no
restrictive financial covenants associated with these bank
facilities.





9.
            OBLIGATIONS
      UNDER CAPITAL LEASES





Long-term
debt consists of obligations under capital leases on certain property, plant and
equipment for the Company's operations with lease terms expiring in the next 4
years.





Future
      minimum lease payments as at March 31, 2009 are as
  follows:





Year
      ending March 31


$2010
                  
                  
                  2592011
                  
                  
                  2512012
                  
                  
                  412013
                  
                  
                  2553





The
capital lease commitment amounts above exclude implicit interest of $22, $9 and
$1 payable in the years ending March 31, 2010, 2011 and 2012,
respectively.





F -
22





HIGHWAY
HOLDINGS LIMITED


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





10.
            ACCRUED
      EXPENSES AND OTHER CURRENT
      LIABILITIES





Accrued
expenses and other current liabilities consisted of the following:





March 31,2008
                  
                  
                  2009$
                  
                  
                  $Accrued
      mould charges
                  
                  
                  260
                  
                  
                  
                  17Accrued
      payroll and employee benefits
                  
                  
                  988
                  
                  
                  
                  373Deposits
      received from customers
                  
                  
                  485
                  
                  
                  
                  112Accrued
      audit fee
                  
                  
                  341
                  
                  
                  
                  299Accrued
      contingent payments on acquisition of Golden Bright
                  
                  
                  256
                  
                  
                  
                  376Accrued
      commission expense
                  
                  
                  68
                  
                  
                  
                  39Accrual
      rental expense
                  
                  
                  58
                  
                  
                  
                  20Other
      taxes payable
                  
                  
                  120
                  
                  
                  
                  119Others
                  
                  
                  376
                  
                  
                  
                  2752,952
                  
                  
                  
                  1,630





11.
            COMMITMENTS
      AND CONTINGENCIES





(a)
            The
      Company leases premises under various operating leases which do not
      contain any renewal or escalation clauses.  Rental expense under
      operating leases was $1,040, $1,199 and $1,373 in fiscal years 2007, 2008
      and 2009, respectively.





At
      March 31, 2009, the Company is committed under operating leases requiring
      minimum lease payments as follows:


$Year
      ending March 31,2010
                        
                        
                        1,4142011
                        
                        
                        1,3642012
                        
                        
                        1,2392013
                        
                        
                        1182014
                        
                        
                        852015
      and thereafter
                        
                        
                        1654,385





(b)
            The
      Company had a total capital commitment of $13 and $45 for the purchase of
      property, plant and equipment as of March 31, 2008 and
      2009.  The capital commitment at March 31, 2009 is expected to
      be disbursed during the year ending March 31,
  2010.





F -
23





HIGHWAY
HOLDINGS LIMITED


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





11.
            COMMITMENTS
      AND CONTINGENCIES - continued





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





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





In
connection with its recent establishment of its new facility in China in 2006,
the Company entered into an agreement with the He Yuan Foreign Trade &
Economy Cooperation Bureau that is similar to the Operating
Agreements.





(d)
            In
      fiscal year 2008, several of the employees of Golden Bright and other
      subsidiaries made claims for additional compensation against the Company
      to the labor tribunal in China (the "Labor Claims"). The Company made
      payments of $330 and $187 to settle the Labor Claims in fiscal years 2008
      and 2009, respectively.  In fiscal year 2009, several of the
      employees appealed against the labor tribunal decision, which has been
      dismissed by the court subsequently as of the date of this report. As at
      March 31, 2009, the Company has accrued an amount of $11 to settle
      remaining claims made by employees of subsidiaries, other than Golden
      Bright.





$284
      of the $330 and $30 of the $187 were paid to settle labor
      claims related to Golden Bright during the years ended March 31, 2008 and
      2009, respectively.  In accordance with the terms of purchase
      agreement, liabilities arising subsequent to the acquisition date which
      related to the pre-acquisition period and exceed a certain amount are
      recoverable from the former shareholder of Golden
  Bright.





F -
24





HIGHWAY
HOLDINGS LIMITED


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





12.
            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.  As of March 31, 2008 and 2009, 37,800 shares were
      purchased for a total cash consideration of $53.  These shares
      were held in treasury and are not eligible to vote or receive
      dividends.





In
      September 2006, the Company issued 128,534 shares of common shares and
      delivered such shares to a professional legal practice as security for the
      Company’s obligation to pay the second contingent payment of $513
      (equivalent to HK$4 million) relating to the acquisition of Golden
      Bright.  The shares were returned to the Company during the year
      ended March 31, 2008 and cancelled during the year ended March 31,
      2009.  Details are more fully described in note
    13.




13.
            SUBSCRIPTION
      RECEIVABLE





The
Company issued 128,534 shares under escrow as security for its obligation for
the remaining consideration of $513 in relation to the acquisition of Golden
Bright, payment of which is contingent upon certain conditions described in
note 1.





During
the year ended March 31, 2008, as described in note 11 (d), the former
shareholder of Golden Bright breached certain conditions as set out in the
purchase agreement.  In accordance with the purchase and the escrow
agreements, the Company requested the escrow agent to return all the escrow
shares to the Company for cancellation.  As of March 31, 2008, all the
escrow shares were returned to the Company and classified as treasury
shares.  As of March 31, 2009, all of these 128,534 escrow shares have
been cancelled.





F -
25





HIGHWAY
HOLDINGS LIMITED


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





14.
            CONCENTRATIONS
      OF CREDIT RISK AND MAJOR CUSTOMERS





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





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





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





Accounts
receivable from the three customers with the largest receivable balances at
March 31, 2008 and 2009 are as follows:


Percentage of accounts receivable2008
                  
                  
                  2009%
                  
                  
                  %Customer
      A
                  
                  
                  8.5
                  
                  
                  
                  11.0Customer
      B
                  
                  
                  33.1
                  
                  
                  
                  23.0Customer
      C
                  
                  
                  N/A
                  
                  
                  
                  15.3Customer
      D
                  
                  
                  9.9
                  
                  
                  
                  N/AThree
      largest receivable balances
                  
                  
                  51.5
                  
                  
                  
                  49.3





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





March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $At
      beginning of year
                  
                  
                  31
                  
                  
                  
                  13
                  
                  
                  
                  108Allowances
      for the year
                  
                  
                  4
                  
                  
                  
                  102
                  
                  
                  
                  96Amounts
      recovered
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20
                  )Amounts
      written off
                  
                  
                  (22
                  )
                  
                  
                  (7
                  )
                  
                  
                  (83
                  )At
      end of year
                  
                  
                  13
                  
                  
                  
                  108
                  
                  
                  
                  101





A
substantial percentage of the Company's sales are made to three customers and
are typically on an open account basis.  Customers accounting for 10%
or more of total net sales in any of the years ended March 31, 2007, 2008 and
2009 are as follows:


Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009%
                  
                  
                  %
                  
                  
                  %Customer
      A (note a)
                  
                  
                  24.8
                  
                  
                  
                  22.4
                  
                  
                  
                  24.2Customer
      B (note b)
                  
                  
                  10.7
                  
                  
                  
                  13.2
                  
                  
                  
                  10.7Customer
      C (note b)
                  
                  
                  11.4
                  
                  
                  
                  10.5
                  
                  
                  
                  13.3












F -
26





HIGHWAY
HOLDINGS LIMITED


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





15.
            NET
      INCOME (LOSS) PER SHARE







The
      following table sets forth the computation of basic and diluted net income
      (loss) per share for the years
indicated:


Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $Net
      income (loss), basic and diluted
                  
                  
                  594
                  
                  
                  
                  (1,921
                  )
                  
                  
                  768Shares:Weighted average common shares
      used in computing basicnet income (loss)
      per share
                  
                  
                  3,635,517
                  
                  
                  
                  3,809,888
                  
                  
                  
                  3,744,423Effect
      of dilutive securities:Weighted
      average shares from assumed exercise of stock options and issuance of
      common shares
                  
                  
                  54,657
                  
                  
                  
                  -
                  
                  
                  
                  29,254Weighted
      average common shares used in computing diluted net income (loss) per
      share
                  
                  
                  3,690,174
                  
                  
                  
                  3,809,888
                  
                  
                  
                  3,773,677Net
      income (loss) per share, basic
                  
                  
                  0.16
                  
                  
                  
                  (0.50
                  )
                  
                  
                  0.21Net
      income (loss) per share, diluted
                  
                  
                  0.16
                  
                  
                  
                  (0.50
                  )
                  
                  
                  0.20




8,000
      options to purchase common shares were excluded in the computation of 2007
      diluted net income per share as their effects were
      anti-dilutive.




184,250
options to purchase common shares and 29,154 common shares have been granted to
a director (note 18), which are potentially dilutive, but have been excluded in
the computation of 2008 diluted net loss per share as their effects were
anti-dilutive.




181,250
options to purchase common shares were excluded in the computation of 2009
diluted net income per share as their effects were anti-dilutive.





16.
            STAFF
      RETIREMENT PLANS




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




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




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




The
      cost of the Company's contribution to the staff retirement plans in Hong
      Kong and China amounted to $68, $87 and $117 for the years ended March 31,
      2007, 2008 and 2009, respectively.





F -
27





HIGHWAY
HOLDINGS LIMITED


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





17.
            STOCK
      OPTIONS





The
      Company has adopted the 1996 Stock Option Plan (the "Option
      Plan").  The Option Plan provides for the grant of options to
      purchase common shares to employees, officers, directors and consultants
      of the Company.  The Option Plan is administered by the
      Compensation Committee appointed by the Board of Directors, which
      determines the terms of the options granted, including the exercise price
      (provided, however, that the option price shall not be less than fair
      market value or less than the par value per share on the date the options
      granted), the number of common shares subject to the option and the
      option's exercisability.  The maximum exercisable period of
      options granted under the Option Plan is five
  years.





No
      options were granted by the Company in fiscal year 2009.  The
      fair value of options granted to employees and directors in fiscal years
      2007 and 2008 was $1.00 and $1.12 per stock option, respectively,
      determined using the Black-Scholes option-pricing model based on the
      following assumptions:


2007
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  5.27%
                  
                  
                  
                  4.86%Expected
      life
                  
                  2
      years
                  
                  
                  2
      yearsExpected
      volatility
                  
                  
                  60%
                  
                  
                  
                  65%Expected
      dividend yield
                  
                  
                  6.00%
                  
                  
                  
                  8.70%





The
Company used a blended volatility rate using a combination of historical stock
price volatility and market implied volatility.  The risk-free
interest rate assumption is based upon the average daily closing rates during
the preceding quarter for U.S. treasury notes that have a life which
approximates the expected life of the option.  The dividend yield
assumption is based on the Company's history and expectation of dividend
payouts.  The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding.  The expected life assumptions are established through
the review of annual historical employee exercise behavior of option grants with
similar vesting periods.





The
      options vest in accordance with the terms of the agreements entered into
      by the Company and the grantee of the
options.





The
options granted under the Option Plan resulted in a compensation expense of $38,
$60 and $14 for the year ended March 31, 2007, 2008 and 2009, respectively,
which is included in selling, general and administrative
expenses.  Options awards granted in 2008 are generally with an
exercise price equal to the market price of the Company's stock at the date of
grant; those option awards generally have a vesting period of 1
year.





As of
March 31, 2008, there was $14 of unrecognized compensation cost related to
non-vested stock options granted under the Option Plan.  The cost was
expected to be recognized over a weighted-average period of 91
days.





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





F -
28





HIGHWAY
HOLDINGS LIMITED


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





17.
            STOCK
      OPTIONS - continued





A summary
of stock option activity during the three years ended March 31, 2009 is as
follows:





Weighted
                  
                  
                  WeightedWeighted
                  
                  
                  average
                  
                  
                  averageNumber of
                  
                  
                  average
                  
                  
                  fair value
                  
                  
                  remainingstock
                  
                  
                  exercise
                  
                  
                  per stock
                  
                  
                  contractualoptions
                  
                  
                  price
                  
                  
                  option
                  
                  
                  life (years)$
                  
                  
                  $Outstanding
      at April 1, 2006
                  
                  
                  161,750
                  
                  
                  
                  3.25
                  
                  
                  
                  1.17Granted
                  
                  
                  50,000
                  
                  
                  
                  3.42
                  
                  
                  
                  1.00Exercised
                  
                  
                  (66,500
                  )
                  
                  
                  3.06
                  
                  
                  
                  1.18Lapsed/
      cancelled
                  
                  
                  (5,000
                  )
                  
                  
                  3.50
                  
                  
                  
                  1.16Outstanding
      at March 31, 2007
                  
                  
                  140,250
                  
                  
                  
                  3.61
                  
                  
                  
                  1.11
                  
                  
                  
                  3.61Granted
                  
                  
                  55,000
                  
                  
                  
                  4.03
                  
                  
                  
                  1.12Exercised
                  
                  
                  (11,000
                  )
                  
                  
                  3.43
                  
                  
                  
                  1.09Outstanding
      at March 31, 2008
                  
                  
                  184,250
                  
                  
                  
                  3.58
                  
                  
                  
                  1.11
                  
                  
                  
                  2.93Lapsed
                  
                  
                  (16,750
                  )
                  
                  
                  2.87
                  
                  
                  
                  1.21Outstanding
      at March 31, 2009
                  
                  
                  167,500
                  
                  
                  
                  3.65
                  
                  
                  
                  1.10
                  
                  
                  
                  2.14Exercisable
      at March 31, 2009
                  
                  
                  167,500
                  
                  
                  
                  3.65
                  
                  
                  
                  1.10
                  
                  
                  
                  2.14





As of
March 31, 2009, there were no intrinsic values for the
outstanding  and exercisable stock options.





The
aggregate intrinsic values of the stock options exercised during the year ended
March 31, 2008 were $9.  No stock options were exercised during the
year ended March 31, 2009.





18.
            STOCK
      COMPENSATION





The
      Company entered into an employment contract with a director on April 1,
      2004, which entitles the director to an annual bonus of 29,154 common
      shares upon completion of his service with the Company for the years ended
      from March 31, 2004 to 2009.  The grant date of the share award
      was determined to be April 1, 2004.





The
      shares were issued to the director in 2007, 2008 and 2009 and the Company
      recorded a compensation expense of $160 for each of the years ended March
      31, 2007, 2008 and 2009, based on the fair value of the shares granted as
      of April 1, 2004, which is included in selling, general and administrative
      expenses.





F -
29





HIGHWAY
HOLDINGS LIMITED


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





19.
            SEGMENT
      INFORMATION





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





During
the year ended March 31, 2009, there was a change to the internal financial
reporting information to the Company’s chief operating decision maker leading to
a change in the Company's operating segments from four segments (Metal
stamping and mechanical OEM; Electric OEM; Cameras and underwater products; and
Clocks and watches) to two segments (Metal stamping and mechanical OEM; and
Electric OEM).  Amounts for fiscal years 2007 and 2008 have been
restated to conform to current management view.  Intersegment sales
arise from transfer of goods between subsidiaries.  These sales are
generally at price consistent with what the Company would change third parties
for similar goods.  A summary of the net sales, profitability
information and asset information by segment and geographical areas is shown
below:





Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $Net
      sales:Metal
      stamping and Mechanical OEM:Unaffiliated
      customers
                  
                  
                  22,474
                  
                  
                  
                  23,363
                  
                  
                  
                  22,332Intersegment
      sales
                  
                  
                  2,448
                  
                  
                  
                  3,278
                  
                  
                  
                  5,19924,922
                  
                  
                  
                  26,641
                  
                  
                  
                  27,531Electric
      OEM:Unaffiliated
      customers
                  
                  
                  8,995
                  
                  
                  
                  9,801
                  
                  
                  
                  11,397Intersegment
      sales
                  
                  
                  1,210
                  
                  
                  
                  1,382
                  
                  
                  
                  9,38010,205
                  
                  
                  
                  11,183
                  
                  
                  
                  20,777Corporate:Intersegment
      sales
                  
                  
                  285
                  
                  
                  
                  344
                  
                  
                  
                  -Intersegment
      eliminations
                  
                  
                  (3,943
                  )
                  
                  
                  (5,004
                  )
                  
                  
                  (14,579
                  )Total
      net sales
                  
                  
                  31,469
                  
                  
                  
                  33,164
                  
                  
                  
                  33,729




F -
30





HIGHWAY
HOLDINGS LIMITED


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





19.
            SEGMENT
      INFORMATION - continued


Year ended March 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $Operating
      income (loss):Metal
      stamping and Mechanical OEM
                  
                  
                  353
                  
                  
                  
                  (932
                  )
                  
                  
                  889Electric
      OEM
                  
                  
                  379
                  
                  
                  
                  (902
                  )
                  
                  
                  234Corporate
                  
                  
                  (346
                  )
                  
                  
                  (443
                  )
                  
                  
                  (242
                  )Total
      operating income (loss)
                  
                  
                  386
                  
                  
                  
                  (2,277
                  )
                  
                  
                  881Interest
      expense:Metal
      stamping and Mechanical OEM
                  
                  
                  210
                  
                  
                  
                  210
                  
                  
                  
                  126Electric
      OEM
                  
                  
                  32
                  
                  
                  
                  15
                  
                  
                  
                  15Total
      interest expense
                  
                  
                  242
                  
                  
                  
                  225
                  
                  
                  
                  141Depreciation
      and amortization expense:Metal
      stamping and Mechanical OEM
                  
                  
                  601
                  
                  
                  
                  553
                  
                  
                  
                  529Electric
      OEM
                  
                  
                  313
                  
                  
                  
                  249
                  
                  
                  
                  225Corporate
                  
                  
                  25
                  
                  
                  
                  28
                  
                  
                  
                  28Total
      depreciation and amortization
                  
                  
                  939
                  
                  
                  
                  830
                  
                  
                  
                  782Capital
      expenditure:Metal
      stamping and Mechanical OEM
                  
                  
                  1,276
                  
                  
                  
                  472
                  
                  
                  
                  84Electric
      OEM
                  
                  
                  588
                  
                  
                  
                  71
                  
                  
                  
                  20Corporate
                  
                  
                  67
                  
                  
                  
                  3
                  
                  
                  
                  -Total
      capital expenditure
                  
                  
                  1,931
                  
                  
                  
                  546
                  
                  
                  
                  104




As of March 31,2008
                  
                  
                  2009$
                  
                  
                  $Total
      assets:Metal
      stamping and Mechanical OEM
                  
                  
                  13,262
                  
                  
                  
                  11,157Electric
      OEM
                  
                  
                  7,109
                  
                  
                  
                  6,628Corporate
                  
                  
                  119
                  
                  
                  
                  26Total
      assets
                  
                  
                  20,490
                  
                  
                  
                  17,811





As of March 31,2008
                  
                  
                  2009$
                  
                  
                  $Long-lived
      assets:Metal
      stamping and Mechanical OEM
                  
                  
                  2,298
                  
                  
                  
                  1,591Electric
      OEM
                  
                  
                  1,312
                  
                  
                  
                  1,249Corporate
                  
                  
                  36
                  
                  
                  
                  -Total
      long-lived assets
                  
                  
                  3,646
                  
                  
                  
                  2,840




F -
31





HIGHWAY
HOLDINGS LIMITED


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





19.
            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 31,2007
                  
                  
                  2008
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $Net
      sales:Hong
      Kong and China
                  
                  
                  16,754
                  
                  
                  
                  16,457
                  
                  
                  
                  14,290Other
      Asian countries
                  
                  
                  204
                  
                  
                  
                  238
                  
                  
                  
                  194Europe
                  
                  
                  13,118
                  
                  
                  
                  14,426
                  
                  
                  
                  16,031United
      States of America
                  
                  
                  1,261
                  
                  
                  
                  1,960
                  
                  
                  
                  2,949Others
                  
                  
                  132
                  
                  
                  
                  83
                  
                  
                  
                  26531,469
                  
                  
                  
                  33,164
                  
                  
                  
                  33,729





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


March 31,2008
                  
                  
                  2009$
                  
                  
                  $Hong
      Kong and China
                  
                  
                  3,645
                  
                  
                  
                  2,840Europe
                  
                  
                  1
                  
                  
                  
                  -3,646
                  
                  
                  
                  2,840




20.
              SUBSEQUENT
  EVENT




On June
2, 2009, the Company entered into an agreement with a minority shareholder of
Kayser Wuxi to acquire an additional 19% economic interest in Kayser Wuxi
through the disposal of several plants and machineries amounting to
approximately $194.


*   *   *   *   *   *





F -
32