United
        States
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 **FORM
        20-F**
 
 o
              REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934
 or
 x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 **For
        the fiscal year ended March 31, 2008.**
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 **For
        the transition period from ____________ to ____________.**
 
 o
              SHELL
                  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE
                  ACT OF 1934
 
 **Commission
        file number 0-28990**
 
 **HIGHWAY
        HOLDINGS LIMITED**
 (Exact
        name of Registrant as specified in its charter)
 
 **British
        Virgin Islands**
 (Jurisdiction
        of incorporation or organization)
 
 Suite
        810, Level 8, Landmark North
 39
        Lung
        Sum Avenue
 Sheung
        Shui
 New
        Territories, Hong Kong
 (Address
        of principal executive offices)
 
 Chief
        Financial Officer
 telephone:
        (852) 2344-4248
 fax:
        (852) 2343-4976
 po.fong@highwayholdings.com
 At
        the
        address of the Company set forth above
 
 (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:
        None**
 Title
        of each class
 Common
        Shares, $0.01 par value per share
 
 **Securities
        registered or to be registered pursuant to Section 12(g) of the Act:
        None**
 
 **Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act:
        None**
  
  **Indicate
        the number of outstanding shares of each of the issuer’s classes of capital or
        common stock as of the close of the period covered by the annual report.
        3,819,900 Common Shares were outstanding as of March 31,
        2008.**
  **Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes o** **No x**
  **If
        this report is an annual or transition report, indicate by check mark if
        the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of the Securities Exchange Act of 1934.**  **Yes
        o** **No x**
 
 **Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x** **No o**
 
 **Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
        (Check one):**
 
 **Large
                  accelerated filer o**
              
              **Accelerated
                  filer o**
              
              **Non-accelerated
                  filer x******
 
 **Indicate
        by check mark which basis of accounting the registration has used to prepare
        the
        financial statements included in this filing:**
 
 **U.S.
        GAAP x**
 
 **International
        Financial Reporting Standards as issued by the International Accounting
        Standards Board o**
 
 **Other
        o**
 
 **Indicate
        by check mark which financial statement item the registrant has elected to
        follow:**
 **Item
        17 o** **Item 18 x**
 
 **If
        this is an annual report, indicate by check mark whether the registrant is
        a
        shell company (as defined in Rule 12b-2 of the Exchange
        Act).**  **Yes
        o** **No x**
  
 
 **TABLE
        OF CONTENTS**
 
 
 **PART
                  I**
              
              1Item
                  1.
              Identity
                  of Directors, Senior Management and Advisers
              1Item
                  2.
              Offer
                  Statistics and Expected Timetable
              1Item
                  3.
              Key
                  Information
              2Item
                  4.
              Information
                  on the Company
              18Item
                  5.
              Operating
                  and Financial Review and Prospects
              33Item
                  6.
              Directors,
                  Senior Management and Employees
              46Item
                  7.
              Major
                  Shareholders and Related Party Transactions
              53Item
                  8.
              Financial
                  Information.
              54Item
                  9.
              The
                  Listing
              54Item
                  10.
              Additional
                  Information
              56Item
                  11.
              Quantitative
                  and Qualitative Disclosures About Market Risk.
              60Item
                  12.
              Description
                  of Securities Other Than Equity Securities
              61**PART
                  II**
              
              62Item
                  13.
              Defaults,
                  Dividend Arrearages and Delinquencies.
              62Item
                  14.
              Material
                  Modification to the Rights of Securities Holders and Use of
                  Proceeds.
              62Item
                  15.
              Controls
                  and Procedures.
              62Item
                  16.
              Not
                  applicable.
              63Item 16A.
              Audit
                  Committee Financial Expert
              63Item 16B.
              Code
                  of Ethics
              63Item 16C.
              Principal
                  Accountant Fees and Services
              64Item 16D.
              Exemptions
                  From the Listing Standards for Audit Committees
              64Item
                  16E.
              Purchases
                  of Equity Securities by the Issuer and Affiliated
                  Purchasers
              64**PART
                  III**
              
              64Item
                  17.
              Financial
                  statements.
              64Item
                  18.
              Financial
                  statements.
              64Item
                  19.
              Exhibits.
              65
  i
 
 **FORWARD
        - LOOKING STATEMENTS**
 
 Except
        for any historical information contained herein, the matters discussed in
        this
        Annual Report on Form 20-F contain certain “forward-looking statements” within
        the meaning of the Private Securities Litigation Reform Act of 1995 with
        respect
        to our financial condition, results of operation and business. Forward-looking
        statements relate to analyses and other information which are based on forecasts
        of future results and estimates of amounts not yet determinable, including
        statements about our future prospects, developments and business strategies.
        These forward-looking statements are identified by their use of terms and
        phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” and “predict” and similar terms and phrases, including
        references to assumptions. These forward-looking statements involve risks
        and
        uncertainties that may cause our actual future activities and results of
        operations to be materially different from those suggested or described in
        this
        Annual Report on Form 20-F. These risks include: product demand; customer
        satisfaction and quality issues; labor disputes; competition; health and
        economic factors affecting China and Hong Kong; political relations between
        the
        United States and China; changes in policies by the Chinese government; currency
        exchange rate fluctuations; increased price competition; our ability to achieve
        and execute internal business plans; worldwide political instability and
        economic growth; and the impact of any economic downturns and
        inflation.
 
 If
        one or
        more of these risks or uncertainties materializes, or if underlying assumptions
        prove incorrect, our actual results may vary materially from those expected,
        estimated or projected. Given these uncertainties, users of the information
        included in this Annual Report on Form 20-F, including investors and prospective
        investors are cautioned not to place undue reliance on such forward-looking
        statements. We do not intend to update the forward-looking statements
        included in this Annual Report .
 
 CONVENTIONS
 
 Highway
        Holdings Limited operates through various controlled subsidiaries. Unless
        the
        context indicates otherwise, all references herein to “the Company” refer
        collectively to Highway Holdings Limited and its subsidiaries. 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
  1
  **Item
        3.** **Key
        Information**
 
 Our
        historical Consolidated Financial Statements are prepared in accordance with
        accounting principles generally accepted in the United States (“GAAP”) and
        presented in United States dollars. The following selected statements of
        operations data for each of the three years in the period ended March 31,
        2008
        and the balance sheet data as of March 31, 2008 and 2007 are derived from
        our consolidated financial statements and notes thereto included in this
        Annual
        Report. The selected statements of operations data for each of the years
        ended
        March 31, 2005 and 2004 and the balance sheet data as of March 31,
        2004, 2005 and 2006 were derived from the Company’s audited financial
        statements, which are not included in this Annual Report. The selected
        information is qualified in its entirety by reference to, and should be read
        in
        conjunction with, such consolidated financial statements, related notes and
        “Operating and Financial Review and Prospects” included as Item 5 in this
        report.
 
 Selected
        Consolidated Financial Information (In thousands, except per share
        amounts):
  2004
              
              2005
              
              2006
              
              2007
              
              2008Statement
                  of OperationsNet
                  sales
              
              $
              25,356
              
              $
              27,678
              
              $
              25,843
              
              $
              31,469
              
              $
              33,164Gross
                  profit
              
              
              5,094
              
              
              5,130
              
              
              4,243
              
              
              6,236
              
              
              5,074Operating
                  income (loss)
              
              
              875
              
              
              (269
              )
              
              602
              
              
              386
              
              
              (2,277
              )Net
                  income (loss)
              
              
              982
              
              
              (152
              )
              
              42
              
              
              594
              
              
              (1,921
              )Dividend
                  declared and paid(1)
              
              
              237
              
              
              323
              
              
              1,389
              
              
              1,288
              
              
              132Per
                  share amountsNet
                  income (loss)-basic
              
              $
              0.32
              
              $
              (0.05
              )
              $
              0.01
              
              $
              0.16
              
              $
              (0.50
              )Net
                  income (loss)-diluted
              
              $
              0.30
              
              $
              (0.05
              )
              $
              0.01
              
              $
              0.16
              
              $
              (0.50
              )Dividend
                  declared & paid(1)
              
              
              0.08
              
              
              0.10
              
              
              0.40
              
              
              0.36
              
              
              0.035Weighted
                  average number of shares:Basic
              
              
              3,030
              
              
              3,260
              
              
              3,465
              
              
              3,636
              
              
              3,810Diluted
              
              
              3,258
              
              
              3,260
              
              
              3,544
              
              
              3,690
              
              
              3,810Balance
                  Sheet DataProperty,
                  plant and equipment, net
              
              $
              3,780
              
              $
              3,473
              
              $
              2,787
              
              $
              3,980
              
              $
              3,646Working
                  capital
              
              
              8,774
              
              
              9,850
              
              
              9,960
              
              
              8,944
              
              
              7,556Total
                  assets
              
              
              18,688
              
              
              20,100
              
              
              18,891
              
              
              22,414
              
              
              20,490Long
                  term debt
              
              
              385
              
              
              967
              
              
              803
              
              
              1,133
              
              
              833Shareholders’
                  equity
              
              
              12,842
              
              
              13,058
              
              
              12,274
              
              
              12,167
              
              
              10,394
 ____________
 (1)
              Dividends
                  declared for all periods were declared as cash
                  dividends.
 
 **RISK
        FACTORS**
 
 The
        Company’s business and operations involve numerous risks, some of which are
        beyond the Company’s control, that may affect future results and the market
        price of the Company’s Common Shares. The following discussion highlights some
        of the risks the Company faces.
  2
  *Risks
        Relating to Operating in China*
 
 *Dependence
        on Agreements with Chinese State-Owned Enterprises* .
        All of
        the Company’s operations are currently dependent on its manufacturing operations
        conducted at four facilities in China. The principal facility, at which over
        70%
        of the Company’s operations were conducted during the fiscal year ended March
        31, 2008, is located in Long Hua, Shenzhen, China. Pursuant to its six leases
        (the “Premises Leases”), the Company utilizes approximately 450,000 square feet
        of space for manufacturing operations and dormitory facilities at the site
        of
        its principal factory complex in Long Hua, Shenzhen. The Company’s operations in
        Long Hua, Shenzhen, are conducted pursuant to agreements entered into between
        certain China companies and the Shenzhen City Baoan District Foreign Economic
        Development Head Company and its designees (collectively, the “BFDC”) (the
        agreements, collectively the “BFDC Agreements”). The Premises Leases currently
        expire on February 28, 2009, and may be terminated by either the Company
        or the
        landlord upon six months notice to the other party. The Company currently
        is
        negotiating with its landlord to extend the term of the Premises Leases,
        but has
        not to date entered into any extension. The Company currently believes that
        it
        will be able to reach an agreement with its landlord to extend the term of
        the
        Premises Leases, although no assurance can be given that such an agreement
        will
        be reached or that any such agreement will be on terms favorable to the Company.
        However, in the event that the Company is unable to renew the Premises Lease
        or
        is unwilling to do so under the landlord’s new terms, the operations of the
        Company at its largest facility will have to be relocated to other, as yet
        unidentified, facilities. The Company believes that other suitable alternative
        facilities are available to the Company in or near Long Hua, Shenzhen, on
        terms
        that equal to, or better than the terms of the Premises Leases should the
        Company not be able extend the Premises Leases. However, any such relocation
        of
        the Company’s principal manufacturing facilities to alternative facilities would
        be costly, could materially disrupt the Company’s operations, would 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, unless the Company is able to renew or extend the
        Premises Leases, the expiration 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.
  3
  The
        Company also is a party to an agreement with the Shenzhen City Longang District
        Foreign Economic Development Limited regarding the operations of its Golden
        Bright Plastic Manufacturing Company Limited subsidiary in Pinghu Lisu, and
        an
        agreement with the He Yuan Foreign Trade & Economy Cooperation Bureau
        regarding the He Yuan facility that, in substance, is similar to the BFDC
        agreements. The Company’s agreement for the Pinghu Lisu facility expires in
        2020, and the agreement regarding He Yuan expires in 2009.
 
 The
        BFDC
        Agreements concerning the Long Hua facilities, the agreement with Shenzhen
        City
        Longang District Foreign Economic Development Limited regarding the Golden
        Bright operations in Pinghu Lisu, and the agreement with the He Yuan Foreign
        Trade & Economy Cooperation Bureau regarding the He Yuan facility
        (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.
 
 To
        date,
        the Company, the BFDC, Shenzhen City Longang District Foreign Economic
        Development Limited, and the He Yuan Foreign Trade & Economy Cooperation
        Bureau 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, Shenzhen City Longang District Foreign Economic
        Development Limited nor the He Yuan Foreign Trade & Economy Cooperation
        Bureau 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 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 recently
        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), environmental
        regulations, and safety regulations for buildings and workers. In addition,
        increased taxes (including higher customs duties and fees), significant
        increases in raw material prices, increases in the Company’s funds deposited
        with the government (which could increase up to $1 million in 2008), and
        the
        fluctuating exchange rate between the renminbi and the U.S. dollar have also
        contributed to a major increase in the cost of doing business in China. 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, 2008, 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.
  4
  *Internal
        Political and Other Risks* .
        As of
        the date of this Annual Report, all of the Company’s manufacturing facilities
        are located in China. As a result, the Company’s operations and assets are
        subject to significant political, economic, legal and other uncertainties
        associated with doing business in China. Changes in policies by the Chinese
        government resulting in changes in laws, regulations, or the interpretation
        thereof, confiscatory taxation, restrictions on imports and sources of supply,
        currency re-valuations or the expropriation of private enterprise could
        materially adversely affect the Company. The Chinese government has been
        pursuing economic reform policies, including the encouragement of private
        economic activity and greater economic decentralization. There can be no
        assurance, however, that the Chinese government will continue to pursue such
        policies, that such policies will be successfully pursued, that such policies
        will not be significantly altered from time to time, or that business operations
        in China would not become subject to the risk of nationalization, which could
        result in the total loss of investments in that country.
 
 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. All of these
        factors have increased the cost and risks of doing business in China and
        negatively affected the Company’s on-going operations.
 
 *Further
        Revaluation of Renminbi Yuan.* As a
        company whose operations are entirely based in China, it is exposed to
        fluctuations in the value of the renminbi yuan, or RMB, the local currency
        of
        China. The United States and certain European countries have been calling
        for
        the re-valuation of the RMB, which revaluation would result in the appreciation
        of the RMB. In response to the demand for a revaluation of the renminbi,
        the
        Chinese government has on several occasions since 2005 permitted the RMB
        to
        appreciate in value (over 15% of cumulative appreciation to date). 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.
  5
  *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 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 either 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 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 94 labor claims by employees against the Company
        (resulting in a possible aggregate liability to the Company of $510,000).
        Although the Company has established a $510,000 reserve for this potential
        liability in the financial statements for the year ended March 31, 2008,
        these
        claims have materially contributed to the net losses incurred during that
        fiscal
        year. No assurance can be given that the Company will not in the future be
        subject to additional strikes or that it will not have to make other payments
        to
        resolve future labor issues caused by the new laws.
 
 *Uncertain
        Legal System and Application of Laws* .
        The
        legal system of China is often unclear and is continually evolving, and
        currently there can be no certainty as to the application of its laws and
        regulations in particular instances. While China has a comprehensive system
        of
        laws, the application of these laws by the existing regional and local
        authorities are often in conflict and subject to inconsistent interpretation,
        implementation and enforcement. New laws and changes to existing laws occur
        quickly and sometimes unpredictably. As is the case with all businesses
        operating in China, the Company often is also required to comply with informal
        laws and trade practices imposed by local and regional administrators. Local
        taxes and other charges are levied depending on the local needs for tax revenues
        and may not be predictable or evenly applied. These local and regional
        taxes/charges and governmentally imposed business practices often affect
        the
        Company’s cost of doing business and require the Company to constantly modify
        its business methods to both comply with these local rules and to lessen
        the
        financial impact and operational interference of such policies. For example,
        the
        Company and other companies have periodically been taxed on foreign currency
        bank transfers, which taxes can be substantial. In addition, it is often
        extremely burdensome for businesses to comply with some of the local and
        regional laws and regulations. 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 with the newly enforced rules and business
        practices, no assurance can be given that it will continue to be able to
        do so
        in the future. Should the local or regional governments or administrators
        impose
        new practices or levies that the Company cannot effectively respond to, or
        should the administrators continue to enforce more of those rules that they
        have
        not previously enforced, the Company’s operations and financial condition could
        be materially and adversely impacted. The Company’s ability to appeal many of
        the local and regionally imposed 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.
  6
  *Current
        Favorable Tax Policy Could Change* .
        Under
        the BFDC Agreements, the Company is not considered by local tax authorities
        to
        be doing business in China; therefore, the Company’s activities in China have
        not been subject to local taxes on its operations. The BFDC is responsible
        for
        paying its own taxes incurred as a result of its operations under the BFDC
        Agreements. Since the Company reimburses the BFDC for its expenses related
        to
        the Company’s activities in China, the Company effectively pays the taxes on its
        operations. There can be no assurances, however, that the Company will not
        be
        subject to direct taxation on its operations in the future. If China did
        impose
        a direct tax upon the Company, the tax could materially adversely affect
        the
        Company’s business and results of operations. See Note 4 of Consolidated
        Financial Statements for additional information on taxation.
 
 *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 currently qualifies for a two year tax holiday and is entitled
        to
        a 50% reduction for the next three years (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 any profit and has not been able to utilize these tax
        benefits.
 
 *Tax
        Risks of Operating in China* .
        Although the Company’s principal operations in Long Hua, Shenzhen, China are not
        taxed, the Company’s other operations are subject to certain locally imposed
        taxes. The imposition and amount of these taxes often is uncertain and
        unpredictable. For example, 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 subject to local taxation. However, during
        the past year the Company was told that its operations in He Yuan would,
        in
        fact, be taxed. Although the operations in He Yuan were not profitable, and
        therefore, should not have been taxed, the local authorities nevertheless
        imposed a tax based on their estimates of the Company’s He Yuan profits despite
        the fact that the Company paid the required He Yuan subcontract license fees.
        These unexpected taxes and levies could detrimentally affect the Company’s cost
        structure in China and its future results from operations.
  7
  In
        addition, the Company is not required to withhold taxes in China for its
        Hong
        Kong based employees who reside less than 183 days in China. While the Company
        carefully monitors the amount of time that its affected employees spend in
        China, an inadvertent violation of the employment restrictions in China by
        some
        of the Company’s employees could expose the Company to significant additional
        taxes in China.
 
 *Recent
        Turbulent Relations with the United States* .
        Relations between the U.S. and China have during the past few years been
        strained as a result of numerous events, including the controversies over
        the
        protection in China of intellectual property rights that have threatened
        the
        business relations between the countries. These strains on U.S./China relations
        could affect the ability of foreign companies operating in China, such as
        the
        Company, from engaging in business with, or selling to the U.S. or U.S.
        companies. Any disruption of the current trade relations with the U.S. could
        have a material adverse effect on the Company’s business. No assurance can be
        given that these and any other future controversies will not change the status
        quo involving peaceful trade relations between the U.S. and China, or that
        the
        Company’s business and operations in China will not be materially and adversely
        affected. Even if trade relations between the U.S. and China are not affected
        by
        political difficulties between the two countries, such political friction
        could
        adversely affect the prevailing market price for the Company’s Common
        Shares.
 
 *Labor
        Shortages and Employee Difficulties* .
        One of
        the principal economic advantages of locating the Company’s operations in China
        has been the availability of low cost labor. Due to the enormous growth in
        manufacturing in China and the effects of China’s one-child policy, the Company
        has recently experienced some difficulty in filling its labor needs. In addition
        to the recently developing tight labor market, the Company has also been
        affected by cyclical trends and other shortages in labor supply. For
        approximately two months each year, there are severe labor shortages in China
        as
        a result of the Chinese New Year during which time the Company follows the
        customary practice at its factory complex to grant its employees home leave
        and
        to, therefore, temporarily discontinuing operations. 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, permitted 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, partly in order to intimidate other companies into
        compliance. The strict enforcement of the labor laws, combined with the
        shortages in the available labor pool, have increased the Company’s costs of
        finding, hiring, paying, and otherwise providing for employees.
  8
  *Risks
        Related to Operations*
 
 *Significant
        Financial and Operational Risks Related To Opening Additional Facilities
        in
        China.* As a
        result of the acquisition of one company and the establishment of two other
        facilities, the Company now has operations in four separate locations in
        China.
        The cost of acquiring, establishing, refurbishing, upgrading and integrating
        these new facilities has been substantial and has negatively affected the
        Company’s earnings and financial condition for the fiscal years ended March 31,
        2007 and 2008. 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, during the March 31, 2008
        fiscal year, the Golden Bright employees disrupted the Company’s operations with
        work slow downs and general strikes, and  made
        demands  for
        the
        Company to terminate their existing employment agreements and rehire them
        under
        new employment agreements that would have resulted in large severance payments
        mainly based on their prior years’ of employment. The Company made payments of
        approximately $290,000 to settle these demands. While the Company was able
        to
        charge a majority of the unexpected expenses back to the previous owners
        of
        Golden Bright by reducing the purchase price, such work disputes led to a
        loss
        of sales turnover, which eventually resulted in a majority of the Company’s
        previous customers moving their business away from the Company, effectively
        reducing the sales volume to less than half of the sales prior
        acquisition.
 
 The
        acquisition and establishment of the other operations during 2006 (such as
        the
        tool making equipment the Company purchased from Kyoei Bright) have likewise
        negatively affected the Company’s earnings and cash position. While the Company
        believes that the acquisition of Golden Bright and the Kyoei Bright equipment
        have significantly enhanced the economic value and operating capabilities
        of the
        Company’s plastics operations, and that these acquisitions will significantly
        contribute to the future growth of the Company and the expansion of the
        Company’s growing plastics manufacturing operations, to date, these acquisitions
        have negatively affected the Company’s net income and financial condition.
        Although the Company believes that these new acquisitions are on a path to
        profitability, no assurance can be given that these new acquisitions will,
        in
        fact, become profitable or will otherwise improve the Company’s overall
        operations, business or future profitability. The Company may, in the future,
        acquire additional businesses, or may establish additional facilities, which
        additional facilities may likewise have a negative impact on the Company’s
        short-term cash position and on its results of operations.
 
 *The
        Company Is Highly Dependent Upon Its Executive Officers And Its Other
        Managers* .
        The
        Company is highly dependent upon Roland Kohl, the Company’s Chief Executive
        Officer, and its other officers and managers, 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 either 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 2009. 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 either of its officers
        or
        key managers.
  9
  *Dependence
        on Credit Facilities.* The
        Company currently obtains financing through credit facilities provided by
        the
        Hong Kong and Shanghai Banking Corporation Limited (HSBC), by DBS Bank (Hong
        Kong) Limited, and by Overseas-Chinese Banking Corporation Limited. These
        credit
        facilities in the aggregate provide the Company with up to $7,134,000 of
        financial resources. Although the Company, to date, has financed its working
        capital needs primarily through cash generated from its operations and from
        its
        internal financial resources, as a result of its recent operating losses,
        the
        increasing amount of customs and other deposits the Company is required to
        maintain with governmental agencies, the faster payment demands of its vendors
        and the slower payment made by its customers, the Company expects to utilize
        more of its credit facilities in the future and is more dependent upon those
        credit facilities. Should these credit facilities not be available to the
        Company, or should the amounts be reduced or otherwise restricted, the Company’s
        ability to fund its working capital and other needs would negatively impacted,
        which could materially and adversely affect its operations and business.
        No
        assurance can be given that the Company’s 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.
 
 *The
        Company is Increasingly Financially Dependent Upon a Few Major Customer.* Historically,
        a substantial percentage of the Company’s sales has been to small number of
        customers. The Company’s current business plan calls for reducing the number of
        smaller clients and shifting the Company’s sales and operations to a fewer,
        large customers. During the years ended March 31, 2006, 2007 and 2008, the
        Company’s sales to its three largest customers for such periods accounted for
        approximately 51.3%, 46.9% and 46.1% of net sales respectively. See
“Business — Major
        Customers.” The Company’s success will depend to a significant extent on
        maintaining its major customers and on the success achieved by its major
        customers. The Company could be materially adversely affected if it loses
        any
        major customers or if the business and operations of its major customers
        decreases. While the Company has in the past been able to replace major
        customers, no assurance can be given that the Company will be able to do
        so in
        the future. Since most of the Company’s sales transactions with its customers
        are based on purchase orders received by the Company from time to time, the
        Company is to a large extent dependent upon continuously receiving new purchase
        orders for its future sales. As a result, most of the Company’s revenues are
        dependent upon periodic orders and the amount of sales to its customers
        fluctuate from time to time. In addition, with fewer, larger customers, the
        Company’s operations have become more dependent upon fewer customers and would
        be more significantly impacted by a delay or reduction of any anticipated
        purchase orders or by the loss of any one or more of its major customers.
  10
  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, 2006, 2007 and 2008, accounts receivable from
        the
        five customers with the largest receivable balances at year-end represented
        76.6%, 44.9% and 61.0% of the total outstanding receivables, and the largest
        customer’s accounts receivable represented 33.1% of the Company’s total
        receivables as of March 31, 2008.
 
 *The
        Company Faces Significant Competition From Numerous Larger, Better Capitalized,
        and International Competitors.* The
        Company competes against numerous manufacturers for all of its current products.
        Such competition arises from both third party manufacturers (such as the
        Company) and from the in – house
        manufacturing capabilities of existing customers. To a large extent, the
        Company
        competes in its OEM business on the basis of quality, price, service, and
        the
        ability to deliver products on a reliable basis. Due to intense price
        competition, the Company has at times during the past few years had to reduce
        its price and its operating margins. In addition, because of significant
        competition and the availability of alternate OEM suppliers for the Company’s
        customers, the Company has, at times, been unable to pass through significant
        materials cost increases. This has led to lower gross margins and even to
        net
        losses in some product lines. During the past few years, the Company has
        at
        times lost manufacturing contracts because of its price increases, which
        has
        negatively affected the Company’s net sales and lowered its market share. As a
        result of these factors, the Company will have to continue to operate at
        narrow
        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 its cost of operations in Shenzhen,
        the availability of a large labor pool, its favorable tax status, and its
        convenient access to Hong Kong’s shipping port and business/banking facilities.
        However, since the Company first moved to Shenzhen as one of the first
        manufacturers in that locality, many other manufacturers have re-located
        or
        established new facilities in Shenzhen, and the Company’s competitive advantage
        has been significantly diminished. In addition, many of the larger,
        international companies that have established competing facilities in Shenzhen
        have also established manufacturing facilities in other low-cost manufacturing
        locations, many located sites outside of China, which have given those
        competitors the ability to shift their manufacturing to those locations whenever
        costs at those other locations was cheaper than in Shenzhen. Accordingly,
        the
        Company has indirectly been competing against both the competitors in Shenzhen
        as well as the other facilities outside of China. 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.
  11
  *Continuing
        Dependence on the Long Hua, Shenzhen, Factory Complex* .
        Until
        July 2005, all of the Company’s operations in China were based at a single
        facility in Long Hua, Shenzhen. In July 2005 the Company opened a second,
        smaller manufacturing facility, in He Yuan, China. In 2006, the Company also
        commenced operations at a small manufacturing facility in Wuxi, China, and
        purchased a plastic products manufacturer in Pinghu, approximately 15 kilometers
        from the Company’s main facility in Long Hua. As a result, at March 31, 2008,
        the Company was operating at four locations. However, despite these new sites,
        over 70% of the Company’s estimated operations for the current fiscal year
        ending March 31, 2008 are expected to be generated from the Long Hua, Shenzhen
        facility. Accordingly, the Company is still dependent upon its principal
        Shenzhen facility and will remain so despite the new facilities. The Company’s
        leases for its Long Hua facilities under the Premises Leases that expire
        in
        February 2009. Unless the Premises Leases are renewed or extended, the Company
        could be forced to relocate these facilities in 2009. The Company is currently
        in negotiations to extend or renew the Premises Leases, although no assurance
        can be given that the Company will be able to reach an agreement with its
        landlord. Although the Company believes that other suitable facilities are
        available near the current Long Hua facilities that it could lease on terms
        that
        are equal to, or more favorable to the Company than the Premises Leases,
        the
        relocation of its largest facility would be costly, could materially disrupt
        the
        Company’s 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. Although the Company has
        diversified its operations with the new He Yuan, Wuxi and Pinghu facilities,
        the
        Company will continue to be principally dependent upon the Long Hua in the
        near
        future.
 
 *The
        Company’s Operations May be Significantly Disrupted and Negatively Affected if
        The Company Relocates its Manufacturing Facilities.* The
        Company’s facilities leases in Long Hua, Shenzhen, expire in February 2009, and
        it is uncertain whether the Company will be able to obtain a new lease from
        its
        landlord. The Company has investigated relocating its facilities to a new
        facility, either elsewhere in, or outside of Long Hua, Shenzhen if the Premises
        Leases are not extended or renewed and believes that suitable alternate
        facilities are available. However, if the Company does relocate its facilities
        in 2009 (voluntarily or otherwise), its entire operations, including its
        business, its manufacturing operations, and its relationships with clients
        and
        local government offices and landlords, will be adversely affected while
        the
        Company disassembles, moves and reinstalls its equipment and manufacturing
        capabilities. Any such disruption could affect the Company’s relationship with
        its vendors and customers. In addition, the Company will incur significant
        expenses in relocating its entire facilities and, in all likelihood, will
        have
        to significantly increase the amount of customs deposits it has be keep with
        the
        governmental authorities. All of the foregoing factors related to any relocation
        are expected to negatively impact the Company’s revenues and financial position
        during the fiscal year in which the relocation occurs and for an unknown
        period
        thereafter.
  12
  *The
        cost of purchasing components has been increasing and could increase further,
        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. Recently, the cost of many components has
        increased substantially. 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. Although 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, a decrease
        in
        the value of the Euro could result in a future currency exchange loss.
        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.
 
 *Significant
        Worldwide Political, Economic, Legal And Other Risks Related To International
        Operations.* The
        Company is incorporated in the British Virgin Islands, has its executive
        and
        administrative offices 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.
  13
  *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 the we may
        be
        fined. Although the Company is attempting to comply with all of the new rules,
        and it is requiring that its parts suppliers comply with the new rules, no
        assurance can be given that the Company will be fully compliant or that its
        suppliers will correctly certify that the materials that they supply to the
        Company are compliant. Manufacturing products in compliance with RoHS will
        require the Company to incur additional manufacturing and administrative
        costs.
        However, failure to comply with the RoHS rules could result in the loss of
        sales, the loss of customers, and financial penalties. Since these rules
        have
        not yet been fully implemented, the costs and additional burdens on our business
        and operations of the RoHS rules and regulations are uncertain, but could
        be
        substantial.
 
 *Future
        acquisitions or strategic investments may not be successful and may harm
        the
        Company’s operating results* .
        As part
        of its strategy, the Company 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. While the Company believes that its
        recent
        acquisition of Golden Bright Plastic Manufacturing Company Limited will in
        the
        longer term substantially contribute to the Company’s overall sales,
        profitability and development, to date that acquisition been a drain on the
        Company’s financial and other resources. To date, the Company has had to invest
        substantially more than it anticipated in restructuring Golden Bright and
        in
        resolving that subsidiary’s numerous employee, managerial and operational
        problems. 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.
                  For
                  example, the Company could become subject to penalties due to the
                  prior
                  non-compliant practices of an acquired business under law, rules
                  and
                  regulations that most companies operating under agreements with
                  the BFDC
                  did not follow with the tacit approval of the local authorities.
                  Many of
                  the Company’s employee related problems during the past fiscal year were
                  the result of labor issues related to its acquisition of Golden
                  Bright.
 
 ·
              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.
  14
  ·
              The
                  Company’s operating results could be impaired as a result of restructuring
                  or impairment charges related to amortization expenses associated
                  with
                  intangible assets.
 
 ·
              The
                  Company could experience significant difficulties in successfully
                  integrating any acquired operations, technologies, customers products
                  and
                  businesses with its operations.
 
 ·
              Future
                  acquisitions could divert the Company’s capital and management’s attention
                  to other business concerns.
 
 ·
              The
                  Company many not be able to hire the key employees necessary to
                  manage or
                  staff the acquired enterprise
                  operations.
 
 *Risks
        Relating to Hong Kong*
 
 *Political
        and Economic Developments Affecting Hong Kong* .
        The
        Company’s registered offices and sales offices and several of its principal
        customers and suppliers are located in Hong Kong. Accordingly, the Company
        may
        be materially adversely affected by factors affecting Hong Kong’s political
        situation and its economy or its international, political and economic
        relations. Pursuant to a Joint Declaration (the “Joint Declaration”) signed
        between the governments of China and Britain on December 19, 1984, China
        recovered sovereignty over Hong Kong on July 1, 1997. 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.
 
 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.
  15
  *Certain
        Legal Consequences of Incorporation in the British Virgin
        Islands*
 
 The
        Company is incorporated under the laws of the British Virgin Islands, and
        its
        corporate affairs are governed by its Memorandum of Association and Articles
        of
        Association and by the International Business Companies Act of the British
        Virgin Islands. Principles of law relating to such matters as the validity
        of
        corporate procedures, the fiduciary duties of the Company’s management,
        directors and controlling shareholders and the rights of the Company’s
        shareholders differ from those that would apply if the Company were incorporated
        in a jurisdiction within the U.S. Further, the rights of shareholders under
        British Virgin Islands law are not as clearly established as the rights of
        shareholders under legislation or judicial precedent in existence in most
        U.S.
        jurisdictions. Thus, the public shareholders of the Company may have more
        difficulty in protecting their interests in the face of actions of the
        management, directors or controlling shareholders than they might have as
        shareholders of a corporation incorporated in a U.S. jurisdiction. In addition,
        there is doubt that the courts of the British Virgin Islands would enforce,
        either in original action or in an action for enforcement of judgments of
        U.S.
        courts, liabilities that are predicated upon the securities laws of the
        U.S.
 
 Further,
        pursuant to the Company’s Memorandum and Articles of Association and pursuant to
        the laws of the British Virgin Islands, the Company Memorandum and Articles
        of
        Association may be amended by the board of directors without shareholder
        approval (provided that a majority of the Company’s independent directors do not
        vote against such amendment). Amendments which may be made by the board of
        directors without shareholder approval include amendments increasing or reducing
        the authorized capital stock of the Company and increasing or reducing the
        par
        value of its securities.
 
 *Risks
        Associated With An Investment in the Company’s Securities*
 
 *Volatility
        Of Market Price Of the Company’s Shares.* The
        markets for equity securities have been volatile and the price of the Company’s
        Common Shares has been and could continue to be subject to material fluctuations
        in response to quarter to quarter variations in operating results, news
        announcements, trading volume, sales of Common Shares by officers, directors
        and
        principal shareholders of the Company, news issued from competing companies,
        customers, suppliers or other publicly traded companies, general market trends
        both domestically and internationally, currency movements and interest rate
        fluctuations. Certain events, such as the issuance of Common Shares upon
        the
        exercise of outstanding stock options of the Company could also adversely
        affect
        the prevailing market prices of the Company’s securities.
 
 *Exemptions
        Under The Exchange Act As A Foreign Private Issuer* .
        The
        Company is a foreign private issuer within the meaning of rules promulgated
        under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). As such,
        and though its Common Shares are registered under Section 12(b) of the Exchange
        Act, it is exempt from certain provisions of the Exchange Act applicable
        to
        United States public companies including: the rules under the Exchange Act
        requiring the filing with the Commission of quarterly reports on Form 10-Q
        or
        current reports on Form 8-K; the sections of the Exchange Act regulating
        the
        solicitation of proxies, consents or authorizations with respect to a security
        registered under the Exchange Act; the sections of the Exchange Act requiring
        insiders to file public reports of their stock ownership and trading activities
        and establishing insider liability for profits realized from any “short-swing”
trading transaction (i.e., a purchase and sale, or sale and purchase, of
        the
        issuer’s equity securities within six months or less), and the provisions of
        Regulation FD aimed at preventing issuers from making selective disclosures
        of material information. In addition, certain provisions of the Sarbanes-Oxley
        Act of 2002 either do not apply to the Company or the implementation of the
        provisions has been deferred. Because of the exemptions under the Exchange
        Act
        and Sarbanes-Oxley Act applicable to foreign private issuers, shareholders
        of
        the Company are not afforded the same protections or information generally
        available to investors in public companies organized in the United
        States.
  16
  *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 March **** 31,
        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 significantly
        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, 2009.
  17
  **Item
        4.** **Information
        on the Company**
 
 **History
        and Development of the Company.**
 
 Highway
        Holdings Limited is a holding corporation that was incorporated on July 20,
        1990
        as a limited liability International Business Company under the laws of the
        British Virgin Islands. The Company’s corporate administrative matters are
        conducted in the British Virgin Islands through its registered agent: HWR
        Services Limited, P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British
        Virgin Islands. The Company’s principal executive offices are located in Hong
        Kong at Suite No. 810, Level 8, Landmark North, Sheung Shui, New Territories,
        Hong Kong. Highway Holdings Limited currently operates through seven active
        controlled subsidiaries.
 
 The
        Company began its operations in 1990 in Hong Kong as a metal stamping company.
        In 1991, the Company transferred the metal stamping operations to a factory
        in
        Long Hua, Shenzhen, China, where the metal stamping and the Company’s other
        operations have been conducted pursuant to agreements entered into between
        certain China companies set up by the local government and the Shenzhen City
        Baoan District Foreign Economic Development Head Company and its designees
        (collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”).
        As a result of the BFDC Agreements, the Company’s Long Hua operations are
        provided with manufacturing facilities and labor by affiliates of local
        government instrumentalities, for which the Company pays management fees,
        based
        on a negotiated sum per factory worker, and other charges, as well as rent
        for
        the factory complex.
 
 Since
        its
        organization in 1990, the Company has primarily been a manufacturer of high
        quality metal parts for major Japanese and German OEMs. The Company’s metal
        stamping capabilities have, however, over the years been supplemented with
        additional manufacturing and assembly capabilities, such as the ability to
        manufacture and assemble plastic, electronic and electrical parts and products.
        As a result, the Company has evolved from a company that was only engaged
        in
        manufacturing simple metal parts to a company that has the capabilities to
        manufacture and assemble larger complex components, subsystems, subassemblies
        and even entire products for its OEM clients. The metal manufacturing operations
        have, since the formation of the Company, always been the largest segment
        of the
        Company’s business and have generated most of the revenues for the
        Company.
 
 After
        establishing its metal manufacturing operations, the Company in 1991 began
        a
        camera manufacturing business by acquiring the Hi-Lite Camera Company, a
        Hong
        Kong camera company. The Company’s camera operations consisted primarily of
        manufacturing 35mm cameras and recycling single-use cameras. The Company
        mainly
        manufactured cameras for distribution in Europe, the United States and Hong
        Kong. As a result of the advent and massive proliferation 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.
  18
  In
        1997,
        the Company purchased substantially all the assets of Kienzle Uhrenfabrik
        GmbH
        (“Kienzle Uhren”), a clock and watch manufacturer that traces its origin back to
        1822 in Germany, that was at the time in receivership. The purchase included
        the
        trademark to the “Kienzle” name and the equipment, machinery, tools, patents and
        furniture and office equipment of Kienzle Uhren. Subsequent to purchasing
        the
        equipment, the assets of Kienzle Uhren were dismantled, packed and shipped
        from
        Germany to the Company’s facilities in Hong Kong and China. Thereafter, the
        Company commenced manufacturing clocks for third parties for sale under various
        brand names (such as Braun, Swatch, and Casio), as well as clocks for the
        Company’s own account (which clocks were sold under the Company’s own “Kienzle”
brand name). During the fiscal years ended March 31, 2003 and 2004, the Company
        has also licensed the “Kienzle” mark for use with various other products in
        Europe, which products were manufactured by others. The Company also
        manufactured and sold watches, both under its “Kienzle” brand name and for sale
        under other labels. However, as with the camera operations, 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.
 
 **Revised
        Business Strategy—Increase In Manufacturing Capabilities and
        Facilities**
 
 During
        the fiscal year ended March 31, 2006, the Company completed a major
        restructuring and reorganization of its operations, which reorganization
        resulted in the termination of virtually all of the Company’s camera and
        clock/watch manufacturing operations as well as selling off the “Kienzle”
trademark and related manufacturing and trading operations. In connection
        the
        restructuring, the Company wound down its marketing office in Germany (the
        office in Germany is being formally closed this year).
 
 The
        principal goal and outcome of the reorganization was to terminate the Company’s
        unprofitable camera and clock/watch manufacturing and marketing operations,
        and
        to shift the Company’s resources and focus primarily to its OEM manufacturing
        and ODM design operations. As an integrated OEM manufacturer of metal, plastic
        and electric parts, components, subassemblies and competed products, the
        Company’s manufacturing capabilities have improved and evolved over the past few
        years, and it is now able to manufacture complete subassemblies and products
        for
        its customers. Unlike most of its smaller competitors in Shenzhen that can
        either (i) only manufacture metal parts or (ii) only manufacture plastic
        and
        electric parts, the Company has the ability to manufacture and assemble high
        quality components, subassemblies and products that require all of the foregoing
        metal, plastic and electric manufacturing capabilities. The Company business
        strategy is to further develop and leverage its multi-disciplinary manufacturing
        strengths, its cost structure, its logistical advantages, its reputation
        as a
        high-quality manufacturer, and its existing relationships with blue chip
        European and Japanese customers to further expand its manufacturing operations.
        In addition, the Company is attempting to leverage these advantages by upgrading
        its equipment and machinery, expanding its manufacturing capabilities, and
        diversifying is manufacturing locations to take advantage of cost and logistical
        advantages. During the past three years, the Company has taken the following
        steps to achieve these goals:
  19
  1.  Additional
        Facilities .
        In
        addition to its principal manufacturing facility in Long Hua, Shenzhen, the
        Company has established three new manufacturing facilities in China in He
        Yuan,
        Wuxi and Pinghu.
 
 He
        Yuan .
        In July
        2005, the Company established a new, smaller facility in He Yuan, China,
        which
        commenced operations in November 2005 and currently employs about 94 employees
        in its light fixture manufacturing operations. The He Yuan facility was
        established in order to evaluate the costs, benefits and difficulties of
        operating a large facility at He Yuan. The Company is currently leasing its
        3,500 square meter facilities in He Yuan. He Yuan is located about 180
        kilometers from the Company’s Long Hua, Shenzhen, facility. The Company’s
        operations in He Yuan have, to date, produced mixed results. While the Company
        still is not certain whether it should commit to maintaining the He Yuan
        facility, the economic benefits of the He Yuan facility have recently adversely
        changed as a result of He Yuan’s determination to tax the Company’s operations
        in He Yuan in addition to the subcontract license fee the Company is paying.
 
 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 and business of an existing
        local manufacturing operation. During the fiscal year ended March 31, 2008,
        the
        Company completed the terms of the acquisition by transferring rights equivalent
        to a 29% stake in its Kayser Wuxi subsidiary to two shareholders. However,
        because of the substantial difficulties and exceptionally high costs involved
        in
        evaluating non-cash investments, the Company has not yet formally transferred
        29% of the stock of the Wuxi subsidiary to the two shareholders, and the
        Company
        currently officially still owns 100% of the shares of the Wuxi local foreign
        invested company. Accordingly, the Company, currently owns a 71% financial
        interest in the Wuxi subsidiary and the two others hold a 29% financial
        interest. The Wuxi facility currently employs approximately 44 employees.
        Kayser
        Wuxi has, to date, operated at a negative cash flow. As a result, the Company
        is
        considering alternatives for increasing the amount of operations conducted
        at
        that facility, is planning on increasing marketing efforts for that facility,
        and is evaluating other alternatives if the operations do not
        improve.
 
 Pinghu .
        In
        September 2006, the Company acquired all of the shares of Golden Bright Plastic
        Manufacturing Company Limited, a company primarily engaged in the business
        of
        the manufacture and supply of plastic parts and products. Golden Bright Plastic
        Manufacturing specializes in tool making, plastic injection molding, silk
        screen
        printing, spray painting and mechanic and electronic assembly. Golden Bright
        produces components, subassemblies and finished products for its OEM customers.
        Golden Bright is located in Pinghu, approximately 15 kilometers from the
        Company’s principal facilities in Long Hua, Shenzhen. The Golden Bright facility
        currently employs approximately 237 employees at a 14,600 square
        meter facility. The Company purchased the shares of Golden Bright for an
        initial
        cash payment of $514,000 (HK $4,000,000) and subsequent additional payments
        of
        up to approximately $1.0 million, subject to certain performance measures,
        payable over a three-year period. The purchase price payments are as follows:
        (i) $514,000 (HK $4,000,000) was paid at the closing in September 2006; (ii)
        Subject to the satisfaction of certain conditions, the Company is obligated
        to
        make three equal additional payments of $171,333 totaling $514,000 (HK
        $4,000,000) in September 2007, September 2008 and September 2009; and (iii)
        A
        final contingent purchase price payment of $514,000 (HK $4,000,000) is due
        in
        September 2009 if certain additional contingencies are met. As security for
        the
        obligation of the Company to make the foregoing final contingent $514,000
        (HK
        $4,000,000) purchase price payment, the Company issued 128,534 of its common
        shares to the sellers, which shares were to be held in escrow by an escrow
        agent. The operations of Golden Bright were severely affected by the labor
        strikes that affected the Company during the fiscal year ended March 31,
        2008,
        and the Company incurred more than $100,000 of costs related to these
        undisclosed employee liabilities. As a result, the previous owners of Golden
        Bright were not able to meet all of the conditions required to earn the
        September 2009 purchase price payment, and the third payment secured by 128,534
        escrowed common shares will not become payable (the 128,534 shares that were
        held in escrow by an escrow agent have been returned to the Company and will
        be
        cancelled). The undisclosed liabilities that the Company assumed in the Golden
        Bright acquisition also triggered Golden Bright’s previous owners’
responsibility  for
        these
        undisclosed liabilities pursuant to the terms of the acquisition.
  20
  2.  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 been upgrading the design and
        manufacturing equipment at its facilities. During the past two 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
        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.
 
 During
        the fiscal years ended March 31, 2007 and 2008 the Company’s total investment in
        new equipment and machinery was approximately $2,137,000 and $330,000,
        respectively, and the Company currently anticipates investing an additional
        $500,000 in new equipment and machinery this fiscal year ending March 31,
        2009.
 
 As
        its
        manufacturing capabilities and the quality of its products have improved,
        the
        Company has received additional product orders from its larger customers
        and has
        attracted new clients, including new customers from the U.S. The Company
        has
        also been improving its operating capabilities, has been improving and upgrading
        its manufacturing facilities, and has taken steps to improve its image as
        a
        manufacturer to such clients. The Company has received and actively maintains
        its ISO 9001 quality management system certification and its ISO 14001
        environmental management systems certification.
  21
  3.  Increased
        Capabilities .
        As part
        of offering its major European and Japanese customers additional facilities
        and
        modern, upgraded manufacturing equipment, the Company has also been enhancing
        its manufacturing capabilities. In order to become a one-stop manufacturing
        facility for the design, development and manufacture of components,
        subassemblies and complete products that require metal, plastic and electronics
        capabilities, the Company has been improving its plastics manufacturing and
        assembly capabilities. As indicated above, the Company has purchased Golden
        Bright to expand its plastics operations, and has complemented those operations
        with the state of the art equipment it purchased for that facility. In addition,
        by utilizing the expertise that it developed from prior its electronic clock
        making and camera operations, the Company has organically been growing and
        improving its electronic manufacturing abilities.
 
 As
        a
        result of the foregoing strategic changes, the Company’s OEM manufacturing
        business and operations have expanded significantly beyond merely manufacturing
        and assembling metal parts used in subsystems or other products. Under its
        revised business strategy, the Company now manufactures a wider variety of
        parts
        and components for its European OEM customers, including, for example, ballast
        casings for fluorescent lighting, stepping motors, dishwasher and washing
        machines water control assemblies, turbines for vacuum cleaners, air pumps,
        wireless chimes, coils for induction generators, complete lighting fixtures,
        ventilation units, LED lights, waterproof camera housings as well as various
        functional units such as hinges, and stands and spring pack assemblies for
        photocopiers, laptop computers and flat panel monitors.
 
 **Business
        Overview**
 
 The
        Company is primarily a fully integrated manufacturer of high quality metal,
        plastic, electric and electronic components, subassemblies and finished products
        for major Japanese, German and United States OEMs and contract manufacturers.
        All of the Company’s manufacturing activities are currently conducted in four
        locations in China. The Company’s principal, and oldest factory complex is
        located in Long Hua, in Shenzhen, China, at which the Company currently employs
        approximately 1,030 employees in all areas of its operations. In July 2005,
        the
        Company established a new, smaller facility in He Yuan, China, which commenced
        operations in November 2005 and currently employs about 94 employees in its
        light fixture manufacturing operations. In 2006, the Company commenced
        operations at its new Kayser (Wuxi) Metal Precision Manufacturing Limited
        subsidiary in Wuxi, China, to manufacture metal tools and parts for the internal
        Chinese market. The Wuxi facility currently employs 44 persons. In September
        2006, the Company acquired Golden Bright Plastic Manufacturing Company Limited,
        a company primarily engaged in the business of the manufacture and supply
        of
        plastic parts and products. The Golden Bright facility employs approximately
        237
        persons.
  22
  The
        Company currently manufactures and supplies a wide variety of high quality
        metal, plastic and electric parts, components and products to its OEM clients,
        which products are used by the Company’s customers in the manufacturing of such
        products as photocopiers, laser printers, compact disc players, laser disc
        players, cassette players, computer equipment, electrical components, electrical
        connectors, cameras, clocks, automobile accessories, vacuum cleaners, light
        fixtures 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 Chinese  nationals;
        (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).
 
 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.
  23
  **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, 2008, approximately 96% of its revenues were
        derived
        from the metal, plastics and electric OEM manufacturing operations of the
        Company; the balance represented OEM sales of clocks and cameral
        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.
 
 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**
 
 Management
        believes that the Company’s future growth and profitability depend on its
        ability to compete as a third party manufacturer.
 
 *Capitalize
        on, and leverage its manufacturing strength* :
        Unlike
        many of its metal 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.
        Management believes that the Company’s close relationships with its customers
        can increase the number of parts and services the Company provides to its
        customers. In addition, as more German and other European companies seek
        to
        establish a manufacturing base in China, the Company will provide manufacturing
        solutions for these European companies.
  24
  *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 established a new
        manufacturing facility in He Yuan and has purchased two existing manufacturing
        operations in Wuxi and in Pinghu, China. The Company continues to consider
        and
        evaluate other possible acquisitions, both in China and elsewhere to gain
        technology know how, additional management and technicians and an increased
        customer base.
 
 In
        addition to expanding its manufacturing capabilities in China through
        acquisition, merger, etc., the Company may also acquire and/or establish
        additional manufacturing facilities in other countries. However, no such
        other
        locations have been selected, and no assurance can be given that the Company
        will be able to duplicate its China business in other countries.
 
 *Maintain
        production quality* :
        Management believes that maintaining close relations with the Company’s
        customers is important to the success of the Company’s business. Understanding
        each customer’s needs and efficiently and quickly addressing its needs is vital
        to maintaining a competitive advantage. Certain Japanese and German companies
        have built the goodwill associated with their products and tradenames on
        a high
        level of perceived quality. By employing the type of high quality management
        standards, production standards and quality control standards historically
        utilized by many leading Japanese and German companies, the Company has been
        able to satisfy the stringent requirements of its customers which ordinarily
        cannot be written into a specification or contract. Management believes that
        the
        Company’s commitment to high level service, attention to detail and quality has
        the effect of providing customers with a sense of confidence and security
        that
        their product requirement will be met and their products will be delivered
        on
        time and a competitive price.
 
 The
        Company conducts most of its manufacturing operations in accordance with
        typical
        Japanese and German manufacturing standards, paying particular attention
        to
        cleanliness, incoming material control, in process quality control, finished
        goods quality control and final quality audit. The Company’s metal factory
        complex has received and maintained its ISO 9001 quality management system
        certification and an ISO 14001 environmental management systems certification.
        The Company’s quality system helps to minimize defects and customer returns and
        create a higher confidence level among customers. Management believes that
        these
        factors increase demand for the Company’s services and products.
 
 **Manufacturing**
 
 The
        Company’s manufacturing business consists of various stages: (i) tooling design
        and production; (ii) manufacturing parts made by metal stamping and plastic
        injection molding; (iii) mechanical and/or electric/electronic assemblies,
        and
        (iv) finishing, packaging and shipping.
  25
  *Tooling
        design and production* :
        The
        metal manufacturing process generally begins when a customer has completed
        the
        design of a new product and contacts the Company to supply certain metal
        and
        plastic components to be used in the product. Generally, the Company must
        design
        and fabricate the tooling necessary to manufacture these components in its
        tooling workshop. In some instances, however, the customer already possesses
        the
        tooling necessary to manufacture the metal component and simply delivers
        the
        tools to the Company. Customer will sometimes also pay the Company to purchase
        and install the equipment necessary to manufacture the customer’s products. The
        Company uses various computer controlled manufacturing equipment to efficiently
        produce high quality tools designed to produce a high quality product. As
        many
        of the metal parts manufactured by the Company make use of progressive,
        multi-stage stamping techniques, tools and machines must be precisely fine
        tuned
        and aligned to achieve the required quality standard and maximum
        efficiency.
 
 The
        tool
        making process for metal parts generally takes between 14 to 60 working days
        depending on the size and complexity of the tool. Customers typically bear
        the
        cost of producing the tools and, as is customary in the industry, the customers
        hold title to the tooling. However, the Company maintains and stores the
        tools
        at its factory for use in production and the Company usually does not make
        tooling for customers unless they permit the Company to store the tools on
        site
        and manufacture the related parts.
 
 The
        Company also makes highly sophisticated plastic injection molds based on
        its
        customers’ orders and requirements in a manner similar to the Company’s metal
        tool manufacturing process.
 
 *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.
  26
  *Finishing,
        Packaging and Shipping* :
        After
        pressing, the metal parts are degreased, inspected for defects and checked
        with
        custom-built test gauges. Some components are then sprayed in the Company’s
        dedicated spray-paint facilities. After being painted, the parts are baked
        at
        high temperatures in drying ovens before final inspection and packaging.
        Some
        parts are also screen printed by the Company. In addition, for certain metal
        products, the Company assembles metal components and these parts are delivered
        to the assembly department for spot welding, threading, riveting other
        sub-assembly processed. Each of the parts, assemblies and products is then
        inspected, packaged to the customer’s specific requirement and delivered to the
        final quality audit department for final quality inspection which is conducted
        on a random sample basis. All parts, assemblies and products are shipped
        by
        truck directly from the factory to the customer’s factory in China or elsewhere
        through the port of Shenzhen and/or Hong Kong.
 
 **Raw
        Material, Component Parts and Suppliers**
 
 The
        primary raw materials used by the Company to manufacture its metal stamped
        parts
        are various types of steel including pre-painted steel sheet, electrolytic
        zinc
        plated steel sheet, PVC laminated steel sheet and cold roll steel sheet.
        The
        Company selects suppliers based on the price they charge and the quality
        and
        availability of their materials. Often, the customer requires the Company
        to use
        specific suppliers. Many of the Company’s suppliers of steel operate through
        Hong Kong or China-based companies which deliver the materials directly to
        the
        site of the Company’s operations in China.
 
 During
        the past few years, the price of metal and plastics raw materials has increased
        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% on some materials. For example, during
        the last six months of the fiscal year ending March 31, 2008, certain steel
        prices increased by as much as 50%. The increase in raw materials prices
        has
        also increased the price of packaging. The increases in these prices has
        reduced
        the Company’s gross margins on some of its OEM manufacturing products. As a
        result of the significant, and mostly unexpected, increase in raw material
        prices, the Company has tried to pass on these price increases to its customers
        and the Company has refused to enter into certain longer-term, fixed price
        manufacturing agreements. The Company’s increases in the price it charges its
        customers, and its 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 limited the Company’s losses. Furthermore, because the
        Company’s competitors have also been forced to increase prices and likely also
        have refused long term price agreements, the Company has been able to maintain
        its basic business and relationships with most of its customers.
 
 The
        parts, components and products manufactured by the Company include various
        plastic injected and metal stamped components, as well as integrated circuits,
        electronic components and paper packaging products. The Company manufactures
        many of these products, but also purchases many other products that it uses
        in
        its products. These materials are subject to price fluctuations, and the
        Company
        has, at times, been materially adversely affected by price increases or
        shortages of supply. Under many of its prior OEM agreements, the Company
        did not
        have the right to change the price it charges its customers, despite increases
        in the Company’s cost of raw materials or the price of parts that the Company
        has to purchase. Nevertheless, many of the Company’s customers have, when cost
        increases are significant, after some delay, permitted the Company to change
        its
        pricing.
  27
  **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. To
        date the Company has not been materially affected by any transportation problems
        as it uses subcontract trucking services which have been readily available
        in
        the past. The Company’s transportation costs have, however, increased recently
        as a result of the world-wide increase in fuel costs. Similarly, recent
        improvements in the roads and highways in China have facilitated intra-China
        transportation. The Hong Kong and China customs departments have opened
        additional border crossings, extended their operating hours, and have been
        working continually to improve the flow of cross-border goods. In addition,
        the
        Company’s customers have recently elected to use the Shenzhen sea port rather
        than the port of Hong Kong. In considering establishing new manufacturing
        facilities for the Company, the Company may move away from Shenzhen and Hong
        Kong. However, any new facility that the Company considers must have good
        transportation connections to Hong Kong and other key delivery sites, although
        transportation costs may increase due to the additional distance to the delivery
        sites.
 
 The
        Company’s new Golden Bright facilities in Pinghu are located near Hong Kong, and
        its new facility in He Yuan has easy access by highway or rail to Hong Kong
        and
        the other major markets and sea ports. Similarly, the new Wuxi subsidiary
        has
        good access to the Shanghai ports by highway and railroads. However, unlike
        its
        other facilities, it is expected that most of Wuxi’s products will be provided
        to local customers and not to sold to foreign markets.
 
 **Customers
        and Marketing**
 
 The
        Company’s sales are generated from sales in Hong Kong/China, Europe, the United
        States, and other Asian countries. Net sales to customers by geographic area
        are
        determined by reference to the physical locations of the Company’s customers.
        For example, if the products are delivered to the customer in China, the
        sales
        are recorded as generated in Hong Kong; if the customer directs the Company
        to
        ship its products to Europe, the sales are recorded as sold in Europe. Payments
        are paid in Hong Kong dollars, United States dollars and European Euros.
        Net
        sales as a percentage of net sales to customers by geographic area consisted
        of
        the following for the years ended March 31, 2006, 2007 and 2008:
 Year
                  Ended March 312006
              
              2007
              
              2008GEOGRAPHIC
                  AREAS:Hong
                  Kong & China
              
              
              54.1
              %
              
              53.3
              %
              
              49.6
              %Europe
              
              
              39.9
              %
              
              41.7
              %
              
              43.5
              %Other
                  Asian countries
              
              
              2.0
              %
              
              0.6
              %
              
              0.7
              %United
                  States
              
              
              3.8
              %
              
              4.0
              %
              
              5.9
              %Others
              
              
              0.2
              %
              
              0.4
              %
              
              0.3
              %
  28
  The
        Company’s customers for its parts, components, and subassemblies generally are
        themselves manufacturers. The Company’s products are sold primarily to Japanese
        and German owned companies that are finished goods manufacturers or contract
        manufacturers in China.
 
 Until
        recently, the Company has marketed its metal stamping products and services
        to
        existing customers primarily through direct contact with the Company’s
        management and senior purchasing officers of the customers. Historically,
        metal
        pressing sales were primarily conducted by the managing director of the metal
        stamping company, Nissin, Mr. Satoru Saito, a Japanese national, and Mr.
        Roland
        Kohl, a German national, who serves as the Chief Executive Officer, using
        existing contacts, word-of-mouth referrals and references from associated
        or
        related companies of the customers. During the past few years, the Company
        has
        gradually increased the number of foreign sales person to complement the
        activities of Mr. Kohl and Saito. Due to the international nature of senior
        management, the Company believes that it has been able to set itself apart
        from
        its competitions and bridge the cultural, language and quality gaps that
        most
        Japanese and German companies fear when dealing in China.
 
 **Major
        Customers**
 
 For
        the
        fiscal year ended March 31, 2008, three customers each accounted for more
        than
        10% of the Company’s net revenues (or 46 %
        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 on many smaller
        customers. If the Company loses any of its major customers who account for
        a
        material portion of total net sales, or if any of those customer’s order
        decrease substantially, the Company’s results of operations and financial
        position would be materially and adversely affected if the Company is unable
        to
        replace any of its major customers.
 
 Customers
        place manufacturing orders with the Company in the form of purchase orders
        which
        are usually supported by a delivery schedule covering one to two months of
        orders. Customers usually do not provide long term contracts for their purchases
        and are able to cancel or amend their orders at any time without penalty.
        In
        addition, certain customers enter into agreements with the Company in which
        the
        parties agree upon their purchase and sale procedures, but such agreements
        do
        not always contain any specific purchase orders or purchase requirements.
        However, customers often provide the Company with non-binding forecasts of
        their
        anticipated needs for the next year. Orders from such customers are thereafter
        received from time to time by customers based on the customers’ needs, not on
        contractually fixed amounts or time periods. Accordingly, until recently,
        backlog has not been meaningful to the Company’s business. As a result of the
        labor strikes and work slow-downs that the Company experienced during the
        past
        year, as of March 31, 2008 the Company had a significant backlog of unfilled
        orders, which orders it expects to satisfy during the first quarter of the
        current fiscal year. Sales of manufactured products to established existing
        clients are primarily on credit terms between 45 to 90 days with payment
        in Hong
        Kong dollars, while the sale to new or lesser known customers are completed
        on a
        wire transfer payment basis before shipment or other similar payment terms.
        Management constantly communicates with its credit sale customers and closely
        monitors the status of payment in an effort to keep its default rate low.
        However, as a result of the concentration of sales among a few of the Company’s
        larger customers, the Company is required to bear significant credit risk
        with
        respect to these customers. Typically, metal part orders are spread over
        a
        three-month period and the Company is able to withhold delivery or slow down
        shipments in the event of any delinquency in payment for past shipments.
        Parts
        are generally shipped 30-60 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.
  29
  **Industrial
        Property Rights**
 
 As
        a
        manufacturer of parts, components and finished products for OEMs and contract
        manufacturers, the Company has no industrial property rights, such as patents,
        licenses, franchises, concessions or royalty agreements, which it considers
        material to its OEM manufacturing business. The Company does, however, currently
        own some patents on its clock and camera technologies. Since the Company
        does
        not currently generate significant revenues from products covered by these
        patents, the patents currently are not relevant to the Company’s principal
        operations, and their carrying value has been written off on the Company’s
        consolidated financial statements.
 
 **Competition**
 
 The
        Company competes against numerous manufacturers, including both smaller local
        companies as well as large international companies. For example, management
        believes that firms which are smaller than the Company make up the largest
        segment of the metal manufacturing industry in China, although it is not
        aware
        of any empirical data defining the metal manufacturing industry in China.
        These
        metal stamping companies compete with the Company for standard metal stamping
        work. However, since some of the Company’s customers are large international
        enterprises that source their products from many international sources, the
        Company also competes against metal manufacturing companies in other low
        cost
        manufacturing countries. As a vertically integrated, multi-disciplinary
        manufacturer of complex components and products, the Company also competes
        against numerous global OEM manufacturers, whether those other manufacturers
        are
        located in Shenzhen, China or elsewhere. Most of the international competitors
        of the Company have substantially greater manufacturing, financial and marketing
        resources than the Company. The Company believes that the significant
        competitive factors are quality, price, service, and the ability to deliver
        products on a reliable basis. The Company believes that it is able to compete
        in
        its segment of the OEM manufacturing market by providing good quality products
        at a competitive prices with reliable delivery and service. In addition,
        since
        the Company’s main manufacturing facilities are located in the Shenzhen area,
        near some of its OEM customers, the Company has a competitive advantage by
        being
        able to reduce delivery times and transportation costs for these customers,
        by
        being able to offer “just in time” supply services, and by being able to recycle
        packaging materials for multi-use purposes.
 
 **Other
        Activities**
 
 Because
        the Company has been established in Shenzhen for over a decade, its also
        has
        some other minor activities in that area unrelated to its manufacturing
        operations. These other activities usually are conducted to test the market
        for
        potential expansion of the Company’s operations into other businesses that that
        could benefit from the Company’s capabilities. However, none of these other
        activities is material to the Company’s operations or financial condition.
  30
  **Organizational
        Structure**
 
 Highway
        Holdings Limited is a holding company that operates through its subsidiaries.
        As
        of March 31, 2008, Highway Holdings Limited owned twelve subsidiaries, ten
        of
        which were wholly-owned by Highway Holdings Limited; the Company owns 100%
        of
        the shares of, but only a 71% economic interest in, Kayser (Wuxi) Metal
        Precision Manufacturing Limited and owns 50% of the stock of Kayser Technik
        Overseas (Panama), a small trading company, which the Company holds in equal
        partnership with one of the previous customers from its camera business.
        However, the Company currently conducts its business primarily through eight
        of
        these subsidiaries, seven of which are incorporated in Hong Kong and the eighth
        is a Chinese company. The Company also still owns a subsidiary that is
        incorporated in Germany, but it no longer conducts any business through this
        subsidiary. For details regarding the names of these subsidiaries, the principal
        activities of subsidiaries, the country of their incorporation, and the dates
        of
        their organization, see Note 1 to the Consolidated Financial Statements
        appearing in Item 18 of this Annual Report.
 
 **Property,
        Plants and Equipment**
 
 *British
        Virgin Islands*
 
 The
        Registered Office of the Company is located at Craigmuir Chambers, Road Town,
        Tortola British Virgin Islands. Only corporate administrative matters are
        conducted at these offices, through the Company’s registered agent, HWR Service
        Ltd. The Company does not own or lease any property in the British Virgin
        Islands.
 
 *Hong
        Kong*
 
 The
        Company leases Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
        Shui, New Territories, Hong Kong as its executive offices. These premises,
        consisting of approximately 1,912 sq. ft., are leased under a lease that
        expires
        in July 2011 and has a monthly rental cost of $4,172 per month.
 
 The
        Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong
        at a
        rental cost of $1,900 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
        management and administration on the premises. The term of the leases expires
        on
        February 28, 2009. The Company is currently negotiating to extend or renew
        the
        leases for these facilities. No assurance can be given that the Company will
        enter into an extension or renewal for these leases. However, any new leases
        are
        expected to be leased at rental rates that are higher than those currently
        effect. The Company estimates that, depending on the Company’s operations, the
        utilization rate of these facilities during the fiscal year ended March 31,
        2008
        fluctuated between an estimated 50% and 80% of its maximum capacity.
        Accordingly, the Company has sufficient manufacturing space for its current
        needs, and its current facilities will continue to satisfy the Company’s space
        needs in the near future. If the Company is does not extend or renew the
        current
        lease, the Company will have to relocated its Long Hua facilities to one
        or more
        as yet unidentified sites.
  31
  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.
 
 Effective
        June 1, 2008, the Company entered into a one-year lease for (i) an approximately
        2,500 square meter manufacturing facility and (ii) an approximately 1,000
        square
        meters of dormitory living quarters in He Yuan City, China. The facilities
        in He
        Yuan are approximately 180 kilometers from the Company’s current principal
        facilities in Long Hua, Shenzhen, approximately 130 kilometers from the nearest
        ocean port, and are located near a major railroad station and highway. Under
        the
        lease, the Company pays $3,900 per month as rent. The facilities are currently
        used solely for manufacturing light fixtures.
 
 As
        part
        of its acquisition of Golden Bright Plastic Manufacturing Company Limited
        in
        Pinghu, the Company assumed that company’s obligations under an operating
        license agreement with Shenzhen City Longang District Foreign Economic
        Development Limited that expires in 2020. The Golden Bright facilities consist
        of (i) an approximately 94,000 square
        feet manufacturing facility and dormitory living quarters that are leased
        under
        a lease that expires in June, 2012, and (ii) 52,000 square feet of manufacturing
        facilities and dormitory living quarters than are leased under a lease that
        expire in March 2014.
 
 The
        Company’s Wuxi subsidiary leased a 46,000 square feet facility in February 2007.
        The facilities are leased for $5,000 per month under a lease that expires
        in
        February 2016.
 
 *Germany*
 
 When
        the
        Company’s subsidiary in Germany is party to a lease for a 1,370 square
        foot office in Villingen-Schwenningen, Germany. The lease for this office
        expires in February 2009. The Company currently is winding down its operations
        in Germany and expects to cease all operations at this site before the
        expiration of this lease.
  32
  **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 components, assemblies
        and
        products for its multi-national clients. Although the Company manufactures
        metal, plastic and electronic parts and products for its customers, it treats
        all of these interrelated OEM manufacturing operations as one business segment.
        Approximately 98% of the Company’s revenues are generated by the Company’s three
        facilities located in the Guangdong province in Southern China (the Company’s
        fourth, and smallest facility, is located in Wuxi near Shanghai).
 
 During
        the fiscal year ended March 31, 2008, the Company incurred a net loss of
        $1,921,000 (compared to net income of $594,000 for the fiscal year ended
        March
        31, 2007) as a result of a number of factors including, in particular, to
        four
        labor strikes that affected production at the Company’s main three facilities in
        Guangdong province and to significant increases in the price of raw materials.
        During fiscal 2008 China adopted the “Labor Contract Law,” which became
        effective on January 1, 2008. As a result of this new law, workers throughout
        Southern China went on strike to demand back pay and other payments. Although
        exact figures are not available, the Company estimates that most factories
        surrounding its facilities also experienced at least one workers’ strike since
        July 2007. The Company’s factories were subject to four workers’ strikes and to
        a number of other labor activities that slowed down production at the Company’s
        three major facilities and affected the quality of some of its products.
        The
        Company’s operations at its newly acquired Golden Bright subsidiary were
        particularly negatively affected, with production at the facility decreasing
        by
        approximately 30% compared to the year earlier. In addition to lost productivity
        caused by the strikes and worker slow-downs, the Company also had to pay
        approximately $205,000 as back-pay, severance payments, penalties and other
        settlement payments during fiscal 2008. As a result of the foregoing labor
        issues and laws, the Company’s labor and labor related costs have almost doubled
        since the fiscal year ended March 31, 2007. In addition to the foregoing
        costs
        and payments incurred due to the labor law issues, the Company (and all other
        manufacturers in Southern China) also experienced large increases in the
        cost of
        raw materials. For example, the cost of steel, plastic, packaging,
        transportation, and most energy sources increased by approximately 20% to
        50%.
        The Company was not immediately able to pass most of the foregoing costs
        through
        to its customers.
 
 During
        the past three years, the Company has established one new manufacturing facility
        and acquired two other businesses. The cost and effort of acquiring,
        establishing, refurbishing, and integrating these three new operations into
        the
        Company’s overall business have significantly and continue to adversely affected
        the Company’s operations and its earnings. Among others effects, the recent
        acquisitions burdened the Company’s technical, administrative and managerial
        staffs and have negatively impacted some of the internal operational targets
        and
        Company goals. The employees that the Company inherited in its acquisition
        of
        the Golden Bright subsidiary have significantly disrupted the Company’s
        operations, have instituted strikes and worker slow-downs, and have lowered
        the
        quality of products manufactured at that facility. As a result, the Company
        has
        had to lay off substantially all of those employees and rebuild those
        operations.
  33
  The
        Company is not taxed in the British Virgin Islands, the state of its
        incorporation. The
        location of the Company’s executive offices in Hong Kong enables the Company to
        pay low rates of income tax due to Hong Kong’s tax structure. The Company’s
        income arising from its Hong Kong operations or derived from its operations
        within Hong Kong is subject to Hong Kong income tax. The Company has
        successfully claimed a tax benefit from the Hong Kong Inland Revenue Department
        by providing support for its position that more than half of its income is
        derived from its activities outside of Hong Kong, namely in China. The statutory
        tax rate in Hong Kong currently is 17.5%, and there are no taxes on dividends
        or
        capital gains. However, because of the Company’s multi-jurisdictional
        operations, the Company’s overall tax rate varies from the current 17.5%
        rate.
 
 Under
        the
        BFDC Agreements that apply to the Company’s principal operations in Shenzhen,
        the Company does not pay taxes in China based on the operations of the Shenzhen
        facilities because it is not considered to be doing business in China under
        current China law. The BFDC is responsible for paying its own taxes incurred
        as
        a result of its operations under the BFDC Agreements (which taxes are indirectly
        passed through to the Company). Arrangements such as the BFDC Agreements
        under
        which the Company operates in China are 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 subsidiary that the Company acquired in Pinghu in
        fiscal
        2007 operates on a similar basis as in Shenzhen, and the Company therefore
        does
        not directly pay taxes on its Pinghu operations in China. However, the Company
        is taxed on its operations in both He Yuan and on the operations of its
        wholly-owned subsidiary in Wuxi. Because the Wuxi facilities are operated
        by a
        registered company in China that pays domestic taxes on its operations, it
        is
        authorized to manufacture and sell products for China domestic
        market.
 
 Net
        sales
        to customers by geographic area are generally determined by the physical
        locations of the customers. For example, if a customer is incorporated in
        the
        USA, the sale is recorded as a sale to the U.S.
 
 **Results
        of Operations**
 
 *General*
 
 During
        the past three years discussed below, the Company’s revenues have been derived
        primarily from the manufacture and sale of OEM manufacture of metal, plastic
        and
        electronic parts and components. To a lesser extent, the Company also derived
        some revenues form the manufacture and sale of clocks, clock movements, watches,
        cameras, camera accessories and some LED lighting products. Revenues during
        the
        fiscal year ended March 31, 2006 also include revenues generated by the Company
        from the sale of “Kienzle” branded watches and other products that it did not
        manufacture. As described elsewhere in this Annual Report, as part of its
        reorganization and restructuring in 2006, the Company sold the rights to
        the
“Kienzle” trademark and substantially terminated all clock/watch and camera
        manufacturing operations, other than a small amount of OEM manufacturing
        of
        these products.
  34
  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 31,2006
              
              2007
              
              2008Net
                  Sales
              
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of sales
              
              
              83.6
              
              
              80.2
              
              
              84.7Gross
                  profit
              
              
              16.4
              
              
              19.8
              
              
              15.3Operating
                  income (loss)(1)
              
              
              2.3
              
              
              1.2
              
              
              (6.9
              )Non-operating
                  income (loss)(2)
              
              
              (1.8
              )
              
              0.8
              
              
              1.0Income
                  (loss) before income taxes before minority interest
              
              
              0.5
              
              
              2.0
              
              
              (5.9
              )Income
                  taxes
              
              
              (0.3
              )
              
              (0.2
              )
              
              (0.1
              )Income
                  (loss) before minority interest
              
              
              0.2
              
              
              1.8
              
              
              (6.0
              )Minority
                  interest
              
              
              0
              
              
              0
              
              
              0.2Net
                  income (loss)
              
              
              0.2
              %
              
              1.8
              
              
              (5.8
              )
 
 Note:
 (1)
              Operating
                  income (loss) for the year ended March 31,2006 includes (i) impairment
                  loss of long-lived assets, and (ii) gain on sale of “Kienzle” industrial
                  property rights.
 (2)
              Non
                  operating income (loss) includes (i) exchange gain (loss) net,
                  (ii)
                  interest income (loss) net, and (iii) gain on disposal of partial
                  interest
                  in a subsidiary and investment.
  *Year
        Ended March 31, 2008 Compared to Year Ended March 31, 2007*
 
 Net
        sales
        for the fiscal year ended March 31, 2008 (“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 newly enacted labor laws, by the significant increase
        in the cost of raw materials, 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
        has a significant backlog of orders. If the Company can recruit and maintain
        a
        stable workforce during the current fiscal year, and if no further labor
        strikes
        occur, the Company anticipates that its net sales during the current fiscal
        year
        ending March 31, 2009 will further increase compared to fiscal
        2008.
  35
  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. The Company has adjusted its pricing for
        new
        orders to take into account the new higher prices and other manufacturing
        costs,
        and therefore expects that its gross margins will increase during the current
        fiscal year ending March 31, 2009.
 
 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. The Company currently is attempting to renew or extend the term of
        the
        leases on its principal manufacturing facility. If the Company is successful
        in
        extending or renewing these leases, the rental costs are expected to increase
        by
        at least 10%. Accordingly, commencing in February 2009, the Company’s lease
        expenses will be higher than its recent expenses.
 
 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.
  36
  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. Since the Company does not
        undertake any currency hedging transactions, its financial results will 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%).
 
 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 has 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.
 
 *Year
        Ended March 31, 2007 Compared to Year Ended March 31, 2006*
 
 Net
        sales
        for the fiscal year ended March 31, 2007 (“fiscal 2007”) increased by
        $5,626,000, or 21.8%, from the year ended March 31, 2006 (“fiscal 2006”). The
        increase in net sales was due to (i) an increase in sales from the Company’s
        existing OEM clients, (ii) and the addition of an entire year’s revenues from
        the He Yuan facility (that facility opened in November 2005 and therefore
        only
        contributed to net sales in fiscal 2006 for less than five months), and (iii)
        the addition of revenues from the Golden Bright facilities that the Company
        acquired in September 2006 and the Wuxi subsidiary that started operations
        in
        February 2006. These increases offset the loss of revenues that the Company
        experiences due to the termination of its camera, watch and clocks operations
        in
        fiscal 2006.
 
 The
        Company’s gross profits as a percentage of its net sales increased from 16.4%
        fiscal 2006 to 19.8% in fiscal 2007. The Company’s gross profits increased to
        $6,236,000 in fiscal 2007 from $4,243,000 in fiscal 2006 due to the increase
        in
        new sales and the increase in the Company’s gross margins. Traditionally, the
        Company’s OEM net sales have a higher gross margin than the gross margins it
        derives from its clocks and camera sales. During fiscal 2007 substantially
        all
        of its net sales were the result of the higher margin OEM sales, whereas
        the
        Company still had a significant amount of net sales in fiscal 2006 from its
        lower margin clock and camera operations. In addition, during fiscal 2006,
        the
        Company sold a large part of its single-use cameras at prices less than the
        historical prices in order to liquidate its inventory. The inventory of
        single-use cameras, as well as all the watch and clock inventory not directly
        related to the watch and clock OEM business that remained at March 31, 2006,
        was
        written off. During fiscal 2007, the value of the Chinese renminbi appreciated
        compared to the U.S. dollar, which increased some of the Company’s manufacturing
        costs in China. Future appreciation of the value of the renminbi may further
        increase the Company’s manufacturing costs and reduce its future gross
        margins.
  37
  The
        reorganization and restructuring of the Company during fiscal 2006 resulted
        in
        various expenses that negatively affected the Company’s financial performance.
        Included in the impacts were (i) an approximately $358,000 charge attributed
        to
        the liquidation of inventory below cost and the write-off of $592,000 of
        the
        unsold inventory; (ii) an approximately $197,000 impairment loss of property,
        plant and equipment and a $60,000 impairment loss of industrial property
        rights,
        and (iii) an approximately $80,000 expense to close the Company’s offices in
        Germany.
 
 Selling,
        general and administrative expenses for fiscal 2007 increased by $ 685,000 ,
        or 13.3 %,
        over
        fiscal 2006. The principal reason for the increase was the addition of the
        three
        additional facilities that the Company added during fiscal 2006 and fiscal
        2007.
        The increase in selling, general and administrative expenses was partially
        offset by a decrease in general and administrative expenses at the Company’s
        operations in Germany, which operations that Company is winding down. Selling,
        general and administrative expenses also increased due to the significant
        additional costs the Company incurred in establishing and integrating the
        financial and accounting functions of its new facilities, particularly those
        of
        the new Golden Bright subsidiary that it acquired in September 2006. Approximately
        $85,000 was recorded as an expense for the additional payments for acquiring
        Golden Bright. In
        addition, the Company’s operating expenses also increased due to the
        appreciation during fiscal 2007 of the Chinese renminbi against the U.S.
        dollar.
        Although the amount of selling, general and administrative costs increased
        in
        fiscal 2007, as a percentage of net sales those expenses decreased from 20.0%
        of
        total net sales in fiscal 2006 to 18.6 %
        in
        fiscal 2007.
 
 The
        Company’s operating income was negatively affected during the fiscal 2006 due to
        a $614,000 currency exchange net loss as a result of adverse currency rate
        fluctuations. However, in fiscal 2007, the Company realized a currency exchange
        rate gain of $245,000. The currency exchange loss in fiscal 2006 was the
        result
        of the decrease in the value of the Euro compared to the U.S. dollar, which
        decreased the value of payments the Company received in Euros from its sales
        in
        Europe. As the Company’s sales to European customers increases (sales to
        European customers who paid in Euros represented approximately 20% of the
        Company’s net sales in fiscal 2007), so does the Company’s risk exposure to
        currency exchange rate fluctuations.
 
 During
        fiscal 2006, the Company realized a gain of $1,781,000 from the sale of its
        industrial property rights (mostly the sale of the rights to the “Kienzle”
trademark). No such gain was realized in fiscal 2007. As a result of this
        one-time gain in fiscal 2006, the Company experienced operating income of
        $602,000 in fiscal 2006 compared to operating income of $ 386,000 in
        fiscal 2007.
 
 The
        Company’s interest expenses increased in fiscal 2007 by $108,000 over the prior
        fiscal year, but the increased interest expense was partially offset by a
        $95,000 increase in interest income. The increase in the amount of interest
        that
        the Company earned was due to an increase in the interest rates and the finance
        lease.
 
 As
        a
        result of an increase in sales, higher gross margins and gross profits, and
        lower selling, general and administrative expenses as a percentage of sales,
        the
        Company generated net income $ 594,000 in
        fiscal
        2007 compared to net income of $42,000 in fiscal 2006.
  38
  The
        Company believes that the results of its fiscal 2007 operations reflect the
        success of the reorganization and restructuring that the Company has been
        implementing since fiscal 2005. Net sales have increased from $27,678,000
        in
        fiscal 2005 to $31,469,000 in fiscal 2007. In addition, excluding the $1,781,000
        one-time gain that the Company recognized in fiscal 2006 as a result of the
        sale
        of the “Kienzle” industrial property rights, the Company realized net income in
        fiscal 2007 for the first time during the past three years.
 
 **Liquidity
        and Capital Resources**
 
 The
        following table sets forth a summary of our cash flows for the periods
        indicated:
 **Year
                    Ended March 31,****2006**
                
                **2007**
                
                **2008****(****In
                    thousands****)**Net
                    cash provided by operating activities
                
                $
                1,315
                
                $
                1,655
                
                $
                75Net
                    cash provided by (used in) investing activities
                
                
                1,984
                
                
                (1,518
                )
                
                (5
                )Net
                    cash used in financing activities
                
                
                (995
                )
                
                (1,244
                )
                
                (1,496
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                2,304
                
                
                (1,107
                )
                
                (1,426
                )Cash
                    and cash equivalents at beginning of period
                
                
                3,948
                
                
                6,384
                
                
                5,299Effect
                    of exchange rate changes
                
                
                132
                
                
                22
                
                
                16Cash
                    and cash equivalents at end of period
                
                $
                6,384
                
                $
                5,299
                
                $
                3,889
  At
        March
        31, 2008, the Company had working capital of $7,556 ,000 compared
        to working capital of $8,944,000 at March 31, 2007. The Company’s working
        capital decreased by $1,388,000 in fiscal 2008 due to the net losses incurred
        by
        the Company in fiscal 2008.
 
 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, 2008, the Company had $75,000
        of positive cash from its operating activities primarily because of $812,000
        of
        depreciation, $542,000 increase 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),
        and $550,000 increase 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 are currently being
        provided to the Company through credit facilities extended to the Company
        by the
        Hong Kong and Shanghai Banking Corporation Limited (HSBC), by DBS Bank (Hong
        Kong) Limited, and by Overseas-Chinese Banking Corporation Limited
        (OCBC).
  39
  The
        HSBC
        credit facility, as of the date of this Annual Report, provides for a maximum
        credit facility of $2,571,000 (subject to various sub-limits). The HSBC credit
        facility consists of an import loan facility that bears interest at 1.0%
        over
        the banks’ best lending rate as in effect in Hong Kong from time to time, and is
        secured by a charge on certain time deposits the Company maintains at the
        bank
        and cross guarantees and indemnities among certain of the Company’s
        subsidiaries.
 
 The
        DBS
        facility is in favor of the Company’s metal, clock and camera subsidiaries and
        provides for a maximum letter or credit/trust receipt facility of $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.
 
 The
        OCBC
        credit facility, as of the date of this Annual Report, provides for a maximum
        credit facility of $1,221,000 (subject to various sub-limits). The OCBC credit
        facility consists of an import loan facility that bears interest at 1.0%
        over
        the banks’ best lending rate as in effect in Hong Kong from time to time, and is
        secured by a charge on certain time deposits the Company maintains at the
        bank
        and cross guarantees and indemnities among certain of the Company’s
        subsidiaries.
 
 As
        of
        March 31, 2008, the Company had borrowings of a total of $2,214,000 outstanding
        under its credit facilities and had a total of $4,535,000 of available credit
        remaining under the three credit facilities. The Company’s long-term debt was
        $833,000 as of March 31, 2008. The three 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 in 2009 or posting additional deposits/bonds with
        governmental agencies) combined with a reduction of revenues, the current
        facilities may not be sufficient.
 
 During
        fiscal 2008, the Company experienced four labor strikes, as a result of which
        the Company made net cash payments of **** $188,000 **** (net
        after indemnification adjustments under the Golden Bright purchase agreement)
        in
        the aggregate to settle certain labor demands. In addition to the foregoing
        payments, a number of workers who went on strike and were not re-hired by
        the
        Company have filed approximately 94 labor claims against the Company, which
        claims were estimated to have an exposure of up to $510,000 as of March 31,
        2008. In a preliminary ruling, a labor tribunal has reduced the amount that
        the
        Company owes under these claims to $141,000. However, since the workers have
        appealed this ruling, the actual amount that the Company may owe, if anything,
        is still unclear. As a result of the workers’ appeal of the initial ruling,
        these labor claims are still pending before various judicial and administrative
        bodies. The Company is unable to estimate how much of the foregoing $510,000
        it
        will have to pay once the foregoing claims have been formally resolved. The
        Company has established a $510,000 reserve for these claims in its financial
        statements. In the event that the Company is ultimately required to pay all,
        or
        substantially all of the foregoing demands, the Company’s liquidity could be
        negatively affected.
  40
  The
        Company’s Premises Leases expire in February 2009. If the Company is able to
        extend or renew the Premises Leases, its annual lease expenses are expected
        to
        increase, which increases may negatively affect the Company’s liquidity.
        However, if the Company does not extend or renew the Premises Leases, the
        Company will have to relocate its largest manufacturing facilities, which
        relocation will (i) be costly and will significantly impact the Company’s cash
        resources, and (ii) interfere with the Company’s operations, thereby reducing
        sales and profits. The combination of the significant relocation expenses
        (and
        other cash outlays related thereto, such as new lease deposits and increased
        customs deposits) and decreased sales and profits is expected to significantly
        reduce the Company’s future liquidity.
 
 As
        a
        result of its currently available working capital and its internal projections
        for the next year, the Company expects that its working capital requirements
        and
        capital needs for at least the next 12 months can be funded through a
        combination of internally generated funds and existing facilities. The Company
        also expects to incur additional administrative costs in the current fiscal
        year
        as it further implements the additional financial internal controls and
        procedures that it is required to maintain under Section 404 of the Sarbanes
        Oxley Act of 2002.
 
 The
        Company is not a party to off-balance sheet arrangements and does not engage
        in
        trading activities involving non-exchange traded contracts. In addition,
        the
        Company has no financial guarantees, debt or lease agreements or other
        arrangements that could trigger a requirement for an early payment or that
        could
        change the value of the Company’s assets.
 
 The
        following is a summary of the Company’s contractual obligations as of March 31,
        2008 is as follows:
  **Payment
                  due by Year Ended March 31,****Contractual
                  Obligations**
              
              **Total**
              
              **2009**
              
              **2010**
              
              **2011**
              
              **2012**
              
              **2013
                  and thereafter****$’000**
              
              **$’000**
              
              **$’000**
              
              **$’000**
              
              **$’000**
              
              **$’000**Facility
                  Leases
              
              
              2,138
              
              
              1,191
              
              
              318
              
              
              301
              
              
              180
              
              
              148Finance
                  Leases
              
              
              833
              
              
              311
              
              
              249
              
              
              242
              
              
              31
              
              
              0Capital
                  commitment on purchase of property, plant and equipment
              
              
              69
              
              
              69
              
              
              0
              
              
              0
              
              
              0
              
              
              0Purchase
                  obligations
              
              
              1,307
              
              
              1,307
              
              
              0
              
              
              0
              
              
              0
              
              
              0Short
                  term borrowing
              
              
              2,214
              
              
              2,214
              
              
              0
              
              
              0
              
              
              0
              
              
              0Interest
                  commitments
              
              
              66
              
              
              36
              
              
              21
              
              
              8
              
              
              1
              
              
              0Total
              
              
              6,627
              
              
              5,128
              
              
              588
              
              
              551
              
              
              212
              
              
              148
 
 **Impact
        of Inflation**
 
 The
        rapid
        growth of China’s economy in general, and the growth in Shenzhen in particular,
        has resulted in increased levels of price inflation for raw materials, fuel
        and
        labor. These increased costs have adversely affected the Company’s cost of
        operations. While the Company has attempted to pass through most of these
        costs
        to its customers, certain of these increased expenses have negatively affected
        the Company’s gross margins and its overall administrative costs. If inflation
        continues, the Company’s costs will likely further increase, and there can be no
        assurance that the Company will be able to increase its prices to an extent
        that
        would offset the increase in expenses.
  41
  **Seasonality**
 
 The
        first
        calendar quarter (the last quarter of the Company’s March 31 fiscal year) is
        typically the Company’s lowest sales period because, as is customary in China,
        the Company’s manufacturing facilities in China are usually closed for one to
        two weeks for the Chinese New Year holidays. In addition, during the one
        month
        before and the one month after the New Year holidays, the Company normally
        experiences severe labor shortages, which further impact the operations during
        this period. The Company does not experience any other significant seasonal
        fluctuations. The Company does not consider any issues with respect to
        seasonality to be material.
 
 **Exchange
        Rates**
 
 The
        Company transacts its business with its vendors and customers primarily in
        U.S.
        dollars, Hong Kong dollars and Euros.
 
 The
        Company makes its payments under the BFDC Agreements for its manufacturing
        facilities and factory workers in both Shenzhen and He Yuan in renminbi (RMB),
        as management fees and other operating charges are based on RMB. The exchange
        rate between the U.S. dollar and the RMB has changed during the three two
        years
        as the value of the RMB compared to the U.S. dollar has increased by almost
        16%
        during that period. Accordingly, the Company’s costs (in U.S. dollars) has
        increased.
 
 For
        the
        fiscal years ended March 31, 2007 and 2008, 20% and 18%, respectively, of
        the
        Company’s net sales were paid in Euros. As a result of the increase in the value
        of the Euro compared to the U.S. dollar the Company recognized currency exchange
        gains during the past two years. However, the Company has, in the past, also
        incurred currency exchange losses. 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 earnings/losses. In order to mitigate the effects of
        significant fluctuations in the value of the Euro, the Company has, however,
        entered into agreements with 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.
  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, income taxes,
        impairment of assets, and intangible assets. The Company bases its estimates
        and
        judgments on historical experience and on various other factors that the
        Company
        believes are reasonable. Actual results may differ from these estimates under
        different assumptions or conditions.
 
 The
        following critical accounting policies affect the more significant judgments
        and
        estimates used in the preparation of the Company’s consolidated financial
        statements.
 
 Principles
        of consolidation - The consolidated financial statements include the financial
        statements of the Company and all its majority-owned subsidiaries.  All
        significant intercompany transactions and balances have been eliminated on
        consolidation.  The results of subsidiaries acquired have been consolidated
        from the date of acquisition.  The excess of fair value over purchase
        consideration has been allocated to reduce the amounts otherwise assigned
        to the
        eligible acquired assets.
 
 Affiliated
        companies (20% to 50% owned companies) in which the Company has significant
        influence but does not have a controlling interest are accounted for using
        the
        equity method.
 
 Revenue
        recognition - The Company recognizes revenue when all of the following
        conditions are met (i) persuasive evidence of an arrangement exists; (ii)
        delivery has occurred; (iii) price to the customer is fixed or determinable;
        and
        (iv) collectibility is reasonably assured.
 
 Bad
        and
        doubtful debts - The Company maintains allowances for its bad and doubtful
        accounts for estimated losses resulting from the inability of its customers
        to
        make required payments. The
        allowances are determined by (1) analyzing specific customer accounts that
        have
        known or potential collection issues and (2) applying historical loss rates
        to
        the aging of the remaining accounts receivable balances. The allowances for
        doubtful accounts were $13,000 and $108,000 in fiscal years ended March 31,
        2007
        and 2008, respectively. If
        the
        financial condition of its customers changed, changes to these allowances
        may be
        required, which would impact the Company’s future operating
        results.
 
 Property,
        plant and equipment - Property, plant and equipment are stated as cost less
        accumulated depreciation. Depreciation is computed on a straight line basis
        over
        the estimated useful lives of 10 years of 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.
  43
  Intangible
        assets - Identifiable intangibles acquired in a business combination are
        determined separately from goodwill based on their fair values, as determined
        with assistance of an independent valuation expert. In particular, an intangible
        asset that is acquired in a business combination is recognized as an asset
        separate from goodwill if it satisfies either the "contractual-legal" or
        "separability" criterion. The intangible assets are carried at cost less
        accumulated amortization. Amortization is computed using the straight line
        method over the intangible assets' estimated useful lives.
 
 Inventories
        - Inventories, consisting of finished goods, raw materials and packaging
        materials, are stated at the lower of cost or market with cost determined
        using
        the first-in, first-out method. The Company makes certain obsolescence and
        other
        assumptions to adjust inventory based on historical experience and current
        information. The Company writes down inventory for estimated obsolete or
        unmarketable inventory equal to the difference between the costs of inventory
        and estimated market value, based upon assumptions about future demand and
        market conditions. These assumptions, although consistently applied, can
        have a
        significant impact on current and future operating results and financial
        position.
 
 Income
        taxes - The Company records a valuation allowance to reduce its deferred
        tax
        assets to the amount that the Company believes is more likely than not to
        be
        realized. In the event the Company was to determine that it would be able
        to
        realize its deferred tax assets in the future in excess of its recorded amount,
        an adjustment to the deferred tax allowance would increase income in the
        period
        such determination was made. Likewise, should the Company determine that
        it
        would not be able to realize all or part of its net deferred tax asset in
        the
        future, an adjustment to the deferred tax asset would be charged to income
        in
        the period such determination was made.
 
 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.19* ”
(“FIN
        48”), which clarifies the accounting for uncertainty in income taxes recognized
        in an enterprise’s financial statement. The interpretation prescribes a
        recognition threshold and measurement attribute for the financial statement
        recognition and measurement of tax position 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
        is no
        material impact of FIN 48 on the Company’s consolidated financial
        statement.
 
 Impairment
        of assets - The Company’s long-lived assets principally include property, plant
        and equipment and intangible assets. The Company reviews the carrying value
        of
        its long-lived assets for impairment whenever events or changes in circumstances
        indicate that the carrying value may not be recoverable. The Company assesses
        the recoverability of the carrying value of long-lived assets by first grouping
        its long-lived assets with other assets and liabilities at the lowest level
        for
        which identifiable cash flows largely independent of the cash flows of other
        assets and liabilities (the asset group) and, secondly, estimating the
        undiscounted future cash flows that are directly associated with and expected
        to
        arise from the use of and eventual disposition of such asset group. The Company
        estimates the undiscounted cash flows over the remaining useful life of the
        primary asset within the asset group. If the carrying value of the asset
        group
        exceeds the estimated undiscounted cash flows, the Company records an impairment
        charge to the extent the carrying value of the long-lived asset exceeds its
        fair
        value. The Company determines fair value through quoted market prices in
        active
        markets or, if quoted market prices are unavailable, through the performance
        of
        internal analysis of discounted cash flows or obtains external appraisals
        from
        independent valuation firms. The undiscounted and discounted cash flow analyses
        are based on a number of estimates and assumptions, including the expected
        period over which the asset will be utilized, projected future operating
        results
        of the asset group, discount rate and long-term growth rate. The Company’s
        assessments of impairment of long-lived assets and its periodic review of
        the
        remaining useful lives of its long-lived assets are an integral part of the
        Company’s ongoing strategic review of its business and operations. Therefore,
        future changes in the Company’s strategy and other changes in the operations of
        the Company could impact the projected future operating results that are
        inherent in the Company’s estimates of fair value, resulting in impairments in
        the future. Additionally, other changes in the estimates and assumptions,
        including the discount rate and expected long-term growth rate, which drive
        the
        valuation techniques employed to estimate the fair value of long-lived assets
        could change and, therefore, impact the assessments of impairment in the
        future. Due
        to
        the poor financial performance of the manufacturing of cameras, clocks and
        watches, the Company reassessed its property, plant and equipment and industrial
        property rights for impairment, and an impairment loss of $347,000 and $67,000,
        respectively, was recognized during the fiscal year ended March 31, 2005,
        and
        the Company further recognized an impairment loss of $197,000 for property,
        plant and equipment, and an impairment loss of $60,000 for industrial property
        rights during the fiscal year ended March 31, 2006.
  44
  Stock-based
        compensation **** -
        The Company has
        a
        stock-based employee compensation plan, as more fully described in note 18.
         Prior to April 1, 2006, the Company accounted
        for stock-based compensation arrangements under Accounting Principles Board
        (“APB”) Opinion No. 25, “Accounting for Stock Issued to
        Employees” ** and
        provided additional financial statement disclosure in accordance with SFAS
        No. 123, “Accounting for Stock-Based Compensation”.  The Company ’s
        policy
        is to generally grant stock-based compensation to employees with a stock
        price
        equal to the market price of the stock on the date of grant and as a result
        no
        expense was recognized for grant period to April 1, 2006.  The Company recognized
        compensation expense for all stock-based compensation granted to non-employees
        by estimating the fair value of the stock-based compensation utilizing the
        Black-Scholes option-pricing model.
 
 Effective
        April 1, 2006, the Company has adopted the provision of Statement of Financial
        Accounting Standards No. 123R,  “Share-Based Payment” (“SFAS 123R”).
        This statement establishes accounting for equity instruments exchanged for
        service.  The stock-based compensation cost is measured at the grant date
        based on the fair value of the award and is recognized as expense over the
        employee’s requisite service period.
 
 Upon
        adoption, the Company applied the modified-prospective transition approach
        and
        accordingly financial statement amounts for the prior periods presented have
        not
        been restated to reflect the fair value method of expensing share-based
        compensation.
 
 As
        a
        result of adopting SFAS 123R, there was no cumulative effect on the net income
        for the year ended March 31, 2007, as all awards granted in prior years had
        vested before April 1, 2006.
  45
  **Item
        6.** **Directors,
        Senior Management and Employees**
 
 **Directors
        and Executive Officers**
 
 The
        Directors and executive officers of the Company as of June 30, 2008 are listed
        below. The Directors hold office until the next annual meeting of shareholders,
        which currently is scheduled to be held on August 18, 2008.
  Name
              Age
              PositionsRoland
                  W. Kohl
              59
              Chief
                  Executive Officer, Director, Chairman of the BoardSatoru
                  Saito
              59
              Sales
                  Director, Metal Stamping Operations, DirectorFong
                  Po Shan
              42
              Chief
                  Financial Officer, SecretaryMay
                  Tsang Shu Mui
              48
              Chief
                  Administrative Officer, DirectorQuan
                  Vinh Can (Joseph)
              59
              Chief
                  Operating Officer, Metal Stamping OperationsTiko
                  Aharonov(1)(2)
              61
              DirectorDirk
                  Hermann
              44
              DirectorUri
                  Bernhard Oppenheimer(1)(2)
              72
              DirectorShlomo
                  Tamir(1)(2)
              61
              DirectorKevin
                  Yang Kuang Yu(1)
              51
              DirectorIrene
                  Wong Ping Yim(1)
              42
              DirectorBrian
                  Geary(1)(2)
              51
              DirectorGeorge
                  Leung Wing Chan(1)
              55
              Director
 ____________
 (1)
              Member
                  of Audit Committee.
 (2)
              Member
                  of Compensation Committee
 
 **Roland
        W. Kohl** .
        Mr.
        Kohl was the founder of the Company and has been its Chief Executive Officer
        since its inception in 1990. He has been a Director of the Company since
        March
        1, 1995. He has overall responsibility for the day-to-day operations of the
        Company and its subsidiaries. Prior to forming the Company, Mr. Kohl was
        the
        Managing Director of Dialbright Company Limited, a camera manufacturer located
        in China. Mr. Kohl received a degree in mechanical engineering and has over
        twenty year’s experience in managing factories and manufacturing operations in
        China. Mr. Kohl is a German national and resides in Hong Kong.
 
 **Satoru
        Saito** .
        Mr.
        Saito has been employed by the Company since its inception and has been a
        Director since September 14, 1996. Mr. Saito’s responsibilities include
        supervision of sales and marketing in the metal manufacturing division. Mr.
        Saito has extensive experience in working with Japanese companies in Japan
        and
        China. Mr. Saito is a Japanese national and resides in Hong Kong.
 
 **Fong
        Po Shan** .
        Ms.
        Fong was employed as a Chief Financial Officer and Secretary of the Company
        in
        January 1998. Ms. Fong’s responsibilities include planning financial development
        and setting up the internal systems. From 1995-1997, Ms. Fong worked at Philips
        Hong Kong Limited and KONE Elevator (HK) Limited as a Management Accountant
        and
        Financial Control and Supply Manager, respectively. From 1991-1994 Ms. Fong
        was
        employed as an Accounting Manager of the Company. She is a member of CPA
        Australia and Hong Kong Institute of Certified Public Accountants. She graduated
        from Simon Fraser University with a Bachelor Degree in Business Administration
        in Canada in 1990 and received a Masters in Accounting from the Charles Stuart
        University in 1994.
  46
 **Tiko
        Aharonov** .
        Mr.
        Aharonov has been a Director of the Company since its inception in 1990 and
        was
        a General Manager of the Company’s camera operations from 1998 to 2004. Until
        the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as
        the General Manager of the Bulgarian operations. He was a bank manager for
        a
        leading Israeli commercial and retail bank from
        1969
        to 1989  and has
        operated his own real estate and investment company for high net worth
        individuals desiring to invest in real estate in Israel. Mr.
        Tiko
        also represents investors in real estate in Bulgaria.
 
 **May
        Tsang Shu Mui** .
        Ms.
        Tsang has been the Company’s Factory Manager in charge of camera manufacturing
        and a Director of the Company since 1990. In 2001, Ms. Tsang became the
        Company’s Administration Manager, and in 2005 became the Company’s Chief
        Administrative Officer. Ms. Tsang is a Chinese national and resides in Hong
        Kong.
 
 **Quan
        Vinh Can (Joseph)** .
        Mr.
        Quan has been employed as the Company’s Factory Manager since 1994, responsible
        for all of the Company’s manufacturing operations. Mr. Quan currently is the
        Company’s Chief Operating Officer, Metal Stamping Operations. He joined the
        Company’s metal stamping operations in 1990 as an assistant Production Manager.
        He graduated from the national Taiwan University with a Bachelors Degree
        in
        Electrical Engineering in 1974.
 
 **Dirk
        Hermann.** Dr.
        Hermann was appointed to the Board of Directors in January 2003. Dr. Hermann
        has
        served since 2006 as a sales executive for VKB AG, a leading insurance company
        in Germany. Prior thereto, he used to work for Allianz Versicherungs-AG as
        a
        regional marketing director for southwest Germany. He joined Allianz, the
        German
        insurance firm, in 1994 as a marketing executive assistant based in Munich.
        Prior, he held a marketing position with MSU Management Consulting GmbH.
        He
        began his marketing career with Gruber, Titze and Blank GmbH, a management consulting firm based in Germany. Dr. Hermann graduated from the University
        of
        Konstanz in Germany with a bachelor’s degree in business administration. He also
        holds a master’s degree in business administration from the University of St.
        Gallen in Switzerland. He earned a Ph.D. degree in business administration
        from
        the University of Leipzig, in Germany.
 
 **Uri
        Bernhard Oppenheimer.** Mr.
        Oppenheimer was elected to the Board of Directors in July 2005. Mr. Oppenheimer
        is founder, managing director and the majority owner of U.B. Oppenheimer
        GmbH in
        Germany and MIG Germany GmbH in Germany.
 
 **Shlomo
        Tamir.** Mr.
        Tamir was elected to the Board of Directors in July 2005. Mr. Tamir has worked
        with Taman/Israel Aircraft Industry since 1969, holding various positions,
        including Director of Product Assurance, Program Manager, and most recently
        as a Group
        of
        Programs Manager.
  47
  **Kevin
        Yang Kuang Yu.** Mr.
        Yang
        was elected to the Board of Directors in July 2005. He has, since 2004 been
        the
        China-USA Director of Holt Asia LLC in the U.S. Prior thereto, from 2000
        to May
        2003, Mr. Yang set up and managed a factory in Shanghai for CHT Co., Ltd.
        and
        controlled and managed other manufacturing facilities in China. Mr. Yang
        has
        also been involved with trading companies that were engaged in exporting
        products to the U.S.
 
 **Irene
        Wong Ping Yim.** Ms.
        Wong
        was elected to the Board of Directors in July 2005. Ms. Wong has been the
        Chief
        Accountant of CNIM HK Ltd. in Hong Kong since 2003. Prior thereto, she spent
        two
        years earning a Master of Business Administration from Deakin University
        in
        Australia. From 1994 to 2001, Mr. Wong was the Accounting Manager of Highway
        Holdings.
 
 **Brian
        Geary.** Mr.
        Geary was
        appointed to the Board of Directors in December 2005. Mr. Geary has since
        2002
        been a director of LMI Aerospace, a public company that manufactures components,
        assemblies, and kits for the aerospace, defense, and technology industries,
        From 1978
        until 2002, Mr. Geary was the President and owner Versaform Corp. and Versaform
        Canada ,
        two
        companies that were sold to LMI Aerospace in 2002.
 
 **George
        Leung Wing Chan** .
        Mr.
        Leung was appointed to the Board of Directors in December 2005. Since 2004,
        Mr.
        Leung has been a management consultant. Prior thereto, from 1995 to 2004,
        he was
        the Managing Director/Vice President or Lucky Metal & Plastic Mfg. Co., Ltd.
 
 Dr.
        Hermann is the brother-in-law of Roland Kohl. Other than the foregoing
        relationship, there is no family relationship between any of the above-named
        officers, directors or employees. To the Company’s knowledge, no arrangement or
        understanding exists between any such director and executive officer and
        any
        major shareholder, customer, supplier or other party pursuant to which any
        director or executive officer was elected as a director or executive officer
        of
        the Company.
 
 **Compensation
        of Directors and Officers**
  The
          aggregate amount of compensation (including non-cash benefits) paid by
          the
          Company and its subsidiaries during the year ending on March 31, 2008 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
          $1,217,000.  Because of the Company’s financial difficulties, Mr. Kohl, the
          Company’s Chief Executive Officer, voluntarily accepted a 20% reduction in his
          salary from September 1, 2006 to June 30, 2008. In addition, because of the
          of the losses the Company incurred in fiscal 2008, Mr. Kohl has agreed
          to a
          further 20% reduction in his salary (a total reduction of 40%) from July
          1,
          2008, which reduction will continue until the expiration of his employment
          agreement on March 31, 2009.
 During
        the past fiscal year, the Company paid each non-executive director (Tiko
        Aharonov, Dirk Hermann, Uri Bernhard Oppenheimer, Shlomo Tamir, Kevin Yang
        Kuang
        Yu, Irene Wong Ping Yim, Brian
        Geary, and George
        Leung Wing Chan) an annualized director’s fee of $10,000, and reimbursed them
        for their reasonable expenses incurred in connection with their services
        as
        directors. In addition, members of any Board committee and the Chairman of
        the
        Audit Committee are paid an additional fee of $1,660 per year for each committee
        on which they serve. On July 3, 2007, the Company granted to each director
        a
        five-year option to purchase 5,000 shares at an exercise price of $4.03 (the
        last sale price on the first business day following the option grant). The
        options become vested and are exercisable only after the first anniversary
        (July
        3, 2008) of the option grant date.
  48
  **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 twice during fiscal
        2008. The Audit Committee operates under a formal charter that governs its
        duties and conduct.
 
 *Compensation
        Committee* During
        the past fiscal year, the Compensation Committee of the Board of Directors
        consisted of consisted of Shlomo Tamir, Uri Bernhard Oppenheimer, Brian Geary
        and Tiko Aharonov. The Compensation Committee administers the Company’s 1996
        Stock Option Plan and established the salaries and incentive compensation
        of the
        executive officers of the Company.
 
 All
        eleven of the Company’s current directors ( seven of whom
        are independent directors) have participated in the selection of 2008 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.
  49
  **Employees**
 
 As
        of
        March 31, 2008, the Company had a total of 1,451  persons
        were working on a full-time basis for the Company. Of these, 1,267 workers
        in China were employed by the Company under (i) the BFDC Agreements, (ii)
        the
        Golden Bright’s agreement with Shenzhen City Longang District Foreign Economic
        Development Limited, and (iii) the Company’s agreement with the He Yuan Foreign
        Trade & Economy Cooperation Bureau regarding the He Yuan facility. As with
        the employees in Shenzhen, the employees at Pinghu Lisu and He Yuan are
        technically employed by the local authorities, not by the Company. However,
        since the Company’s Wuxi subsidiary is a registered Chinese company, the
        employees at the Wuxi facility are employees of the Company’s Wuxi subsidiary.
        As of March 31, 2008, the Company only had one full-time employee and one
        consultant left at its office in Germany. As of March 31, 2008, 46 employees
        in
        Hong Kong were employees of the Company’s subsidiaries. Of the foregoing workers
        and employees, 48 were
        engaged in the administration of the Company, 1256  were
        engaged in manufacturing (including research and development, design,
        engineering, quality control, and shipping), 23 were engaged in marketing,
        and
        the balance (124 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.
 
 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 a labor
        unions or become a party to a collective bargaining agreement.
 
 During
        the fiscal year ended March 31, 2008, the Company experienced four labor
        stoppages due to strikes called by its workers at three of its facilities.
        In
        addition, certain of the Company’s employees also protested for labor
        concessions by slowing down their production. The labor strikes affected
        the
        Company and, based on unofficial information available to the Company, a
        majority of the manufacturing companies in the Shenzhen region in which the
        Company operates. The strikes were called because, 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 demanding back pay. In response
        to the strikes, the Company terminated the employment of approximately 94
        employees. In addition, the Company also paid its existing employees
        approximately $88,000 to settle claims with remaining workers.
  50
  The
        Company did not make any payments to workers who went on strike. As a result,
        those workers have filed approximately 94 labor claims against the Company,
        demanding payment of up to $510,000. These labor claims are still pending
        before
        various judicial and administrative bodies. Although a preliminary ruling
        reduced the amount that the Company may have to pay to $141,000, because
        the
        plaintiffs have appealed this ruling, the Company is unable to estimate how
        much
        of the foregoing $510,000 it will have to pay once the foregoing claims have
        been formally resolved.
 
 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.
 
 **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
        30,
        2008, 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
              
              
              6,000
              
              
              October
                  27, 2008
              
              $
              3.1710,000
              
              
              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
              
              
              6,000
              
              
              October
                  27, 2008
              
              $
              3.1710,000
              
              
              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
 _____________________
  51
  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, 2008,
        options granted under the Option Plan to purchase a total of 184,250 Common
        Shares were still outstanding. The maximum term of options granted under
        the
        Option Plan is five years. The average weighted exercise price of all options
        outstanding on March 31, 2008 was $3.58 per share.
 
 As
        part
        of the compensation that the Company has agreed to issue 29,154 Common Shares
        annually to Mr. Kohl, the Company’s Chief Executive Officer, commencing on April
        1, 2004 and continuing annually thereafter until 2009. As required by the
        employment agreement, Mr. Kohl was issued 29,154 in 2008.
  52
  **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 25, 2008, certain information with respect to the beneficial ownership
        of
        the Company’s Common Shares by each person (i) who is an executive officer or
        director of the Company, or (ii) known by the Company to own beneficially
        more
        than 5% of the outstanding Common Shares outstanding as of such
        date.
  Name
                  of Beneficial Owner or Identify of Group(1)
              
              Number
                  of Common Shares Beneficially Owned
              
              Percent
                  Beneficial
                Owned(**)Roland
                  W. Kohl
              
              
              526,413
              
              
              13.67
              %Tiko
                  Aharonov
              
              
              267,000
              (2)
              
              6.81
              %Dirk
                  Hermann
              
              
              26,000
              (3)
              
              *Satoru
                  Saito
              
              
              375,980
              (2)
              
              9.64
              %May
                  Tsang Shu Mui
              
              
              89,171
              (4)
              
              2.19
              %George
                  Leung Wing Chan
              
              
              10,000
              (5)
              
              *Brian
                  Geary
              
              
              15,000
              (5)
              
              *Irene
                  Wong Ping Yim
              
              
              10,000
              (5)
              
              *Kevin
                  Yang Kung Yu
              
              
              18,244
              (5)
              
              *Shlomo
                  Tamir
              
              
              10,000
              (5)
              
              *Uri
                  Bernhard Oppenheimer
              
              
              10,000
              
              
              *Cartwright
                  Investments Limited
              
              
              346,830
              
              
              9.01
              %Fong
                  Po Shan
              
              
              16,283
              (6)
              
              *Quan
                  Vinh Can
              
              
              43,665
              (6)
              
              *
 
 *
              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 21,000 Common Shares which are currently
                  exercisable.
 (3)
              Includes
                  stock options to purchase 13,500 Common Shares which are currently
                  exercisable.
 (4)
              Includes
                  stock options to purchase 15,000 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 10,000 Common Shares which are currently
                  exercisable.
  There
        are
        no arrangements known to the Company, the operation of which may at a subsequent
        date result in a change in control of the Company. All holders of the Common
        Shares have the same voting rights, and the Company’s major shareholders do not
        have different voting rights.
  53
  Related
        Party Transactions.
 
 The
        Company did not engage in any related party transactions during the fiscal
        year
        ended March 31, 2008.
  **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 September 2007,
        the
        Company made a $0.035 per share dividend payment to its shareholders. During
        the
        fiscal year ended March 31,2007, the Company made two dividend payments;
        one
        dividend payment of $0.20 per share in July 2006 and a second dividend of
        $0.16
        in November 2006. During the prior fiscal year ended March 31, 2006, the
        Company
        made two cash dividend payments of $0.20 per share each ($0.40 during the
        fiscal
        year), based on profits it derived in part from the sale of its “Kienzle”
trademark. Future dividend will be paid at the discretion of the Board of
        Directors and will depend upon, among other things, the Company’s net profit
        after taxes, the anticipated future earnings of the Company, the success
        of the
        Company’s business activities, the Company’s capital requirements, and the
        general financial conditions of the Company. Although it is the Company’s
        intention to pay dividends during profitable fiscal years, no assurance can
        be
        given that the Company will pay, in fact, pay any dividends in the future
        even
        if its has a profitable year or is otherwise capable of doing so.
 
 Legal
        Proceedings .
 
 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 have
        filed
        labor claims against the Company, demanding payment of up to $510,000. In
        a
        preliminary ruling, a labor tribunal reduced the amount that the Company
        owes
        under these claims to $141,000. However, since the plaintiffs have appealed
        this
        ruling, the actual amount that the Company may owe, if anything, is still
        unclear.
 
 The
        Company is also subject to two other legal proceedings, both of which involve
        amounts less than $20,000 and, therefore, are not 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
  54
  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 27, 2008, the last reported sale price of our
        common
        shares on The Nasdaq Capital Market was $1.85 per share. As of June 27, 2008,
        there were 49 holders of record of the Company’s Common Shares. However,
        the Company believes that are a significantly greater number of “street name”
shareholders of the Common Shares.
 
 The
        following table sets forth the high and low closing sale prices as reported
        by
        The Nasdaq Stock Market for years for each of the last five years ended March
        31, 2008:
  Year
                  Ended
              
              High
              
              LowMarch
                  31, 2008
              
              $
              6.30
              
              $
              1.60March
                  31, 2007
              
              $
              6.46
              
              $
              2.80March
                  31, 2006
              
              $
              5.48
              
              $
              2.77March
                  31, 2005
              
              $
              5.80
              
              $
              3.09March
                  31, 2004
              
              $
              7.39
              
              $
              1.40
 
 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, 2008
              
              $
              3.44
              
              $
              1.60December
                  31, 2007
              
              $
              6.30
              
              $
              3.53September
                  30, 2007
              
              $
              5.16
              
              $
              4.03June
                  30, 2007
              
              $
              4.831
              
              $
              3.93March
                  31, 2007
              
              $
              7.30
              
              $
              4.10December
                  31, 2006
              
              $
              4.67
              
              $
              3.28September
                  30, 2006
              
              $
              5.19
              
              $
              2.68June
                  30, 2006
              
              $
              4.66
              
              $
              2.59
 
 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, 2008
              
              $
              1.99
              
              $
              1.70April
                  30, 2008
              
              $
              2.00
              
              $
              1.60March
                  31, 2008
              
              $
              2.08
              
              $
              1.60February
                  29, 2008
              
              $
              3.00
              
              $
              1.60January
                  31, 2008
              
              $
              3.44
              
              $
              2.72December
                  31, 2007
              
              $
              4.15
              
              $
              3.53
 
 B.  Plan
        of Distribution
 
 No
        disclosure is required in response to this Item.
  55
  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, 2008 and June 30, 2008, there were 3,819,900
        and 3,720,520 Common Shares, respectively, outstanding, net of 166,334
        treasury shares, all of which was fully paid. The number of shares outstanding
        could increase by the shares issued upon the exercise of currently issued
        and
        outstanding options (see, “Item 6, Share Ownership,” above). As of March 31,
        2008, no warrants to purchase Common Shares were outstanding. The foregoing
        share amounts include 128,534 shares that were held in escrow as of March
        31,
        2008, which shares were released from escrow and cancelled on June 26,
        2008.
 
 **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.
  56
  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.
  57
  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”.
  58
  For
        a
        description of the agreement pursuant to which the Company purchased Golden
        Bright, please see “Revised Business Strategy—Increase In Manufacturing
        Capabilities and Facilities—Additional Facilities,” above.
 
 The
        Company is subject to the information requirements of the Securities and
        Exchange Act of 1934, and, in accordance with the Securities Exchange Act
        of
        1934, the Company files annual reports on Form 20-F and submit other reports
        and
        information under cover of Form 6-K with the SEC. You may read and copy this
        information at the SEC’s public reference room at 450 Fifth Street, N.W.,
        Washington, D.C. 20549. Recent filings and reports are also available free
        of
        charge though the EDGAR electronic filing system at www.sec.gov.
 
 **Exchange
        Controls**
 
 There
        are
        no exchange control restrictions on payment of dividends on the Company’s Common
        Shares or on the conduct of the Company’s operations either in Hong Kong, where
        the Company’s principal executive officers are located, or the British Virgin
        Islands, where the Company is incorporated. Other jurisdictions in which
        the
        Company conducts operations may have various exchange controls. Taxation
        and
        repatriation of income regarding the Company’s China operations are regulated by
        Chinese laws and regulations. To date, these controls have not had and are
        not
        expected to have a material impact on the Company’s financial results. However,
        while the Company has been able to repatriate its income from the operations
        conducted in China by its Hong Kong subsidiaries, it may not be able to do
        so
        with respect to its Kayser (Wuxi) Metal Precision Manufacturing Limited
        subsidiary that owns and operates the Wuxi facility. There are no material
        British Virgin Islands laws which impose foreign exchange controls on the
        Company or that affect the payment of dividends, interest or other payments
        to
        nonresident holders of the Company’s securities.
 
 **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.
  59
  **Dividends
        and Paying Agents**
 
 The
        Company has, during each of the past three years, paid dividends to its
        shareholders. Future dividends will be paid at the discretion of the Board
        of
        Directors and will depend upon, among other things, the Company’s net profit
        after taxes, the anticipated future earnings of the Company, the success
        of the
        Company’s business activities, the Company’s capital requirements, and the
        general financial conditions of the Company. Although it is the Company’s
        intention to pay dividends during profitable fiscal years, no assurance can
        be
        given that the Company will pay, in fact, pay any dividends in the future
        even
        if its has a profitable year or is otherwise capable of doing so. 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,
        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.
  60
  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 would reduce the amount of renminbi the Company would receive upon
        conversion. Accordingly, an appreciation of the renminbi’s value would require
        the Company to pay more U.S. dollars to fund it renminbi operating expenses.
        The
        United States and certain European countries have been calling for the
        re-valuation of the renminbi, which revaluation would result in the appreciation
        of the renminbi. During the past two years, the exchange rate between the
        yuan
        and the U.S. dollar changed by approximately 15% as China allowed the yuan
        to
        appreciate 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, 2008, the Company made payments of approximately 64,750,000 in
        RMB (or
        approximately U.S. $9,220,000 based on the exchange rate as of March 31,
        2008).
        If the renminbi had been 1% and 5% more valuable against the U.S. dollars
        as of
        March 31, 2008, the amount of such RMB payments would have increased the
        Company’s expenses by $93,000 and $486,000, respectively. Should the Chinese
        government allow the renminbi to continue to appreciate, or should the Company’s
        operating expenses in renminbi significantly increase in the future, the
        Company’s cost structure and pricing could change and have a material negative
        effect on its operations, sales and financial results.
 
 The
        Company believes that its most significant foreign exchange risk results
        from
        material sales made in Euro. Approximately 18% of the Company’s net sales were
        made in Euros in fiscal year ended March 31, 2008. If the Euro had been 1%
        and
        5% less valuable against the U.S. dollars than the actual rate as of
        March 31, 2008, the Company’s net sales, as presented in U.S. dollars,
        would have been approximately reduced by $63,000 and $316,000, respectively.
        Conversely, if the Euro had been 1% and 5% more valuable against the U.S.
        dollars as of that date, then the Company’s net sales would have increased by
        $63,000 and $316,000, respectively .
 
 The
        Company has not engaged in currency hedging transactions to offset the risks
        associated with variations in currency exchange rates. Consequently, significant
        foreign currency fluctuations and other foreign exchange risks may have a
        material adverse effect on the Company’s business, financial condition and
        results of operations. The Company does not currently own any market risk
        sensitive instruments. 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. However, the
        Company may in the future undertake hedging or other transactions or invest
        in
        market risk sensitive instruments if it determines that such instruments
        can
        offset these risks is a sound and cost-efficient manner.
 
 The
        Company is also exposed to interest rate fluctuations as a result of the
        short-term investments that it makes and the borrowings it incurs. The Company
        maintains its excess cash in short-term borrowings that are subject to interest
        rate fluctuations. The Company had $ 2,214,000 of
        short-term borrowings that are subject to interest rate changes and $833,000
        of
        long-term borrowings outstanding as of March 31, 2008. However, taking into
        consideration that the Company had cash and cash equivalents of
        $3,889 ,000 available as of March 31, 2008, the Company believes that its interest rate
        risk
        on these borrowing was acceptable.
  **Item
        12.** **Description
        of Securities Other Than Equity Securities**
 
 Not
        applicable.
  61
  **PART
        II**
  **Item
        13.** **Defaults,
        Dividend Arrearages and Delinquencies.**
 
 Not
        applicable.
  **Item
        14.** **Material
        Modification to the Rights of Securities Holders and Use of
        Proceeds.**
 
 Not
        applicable.
  **Item
        15.** **Controls
        and Procedures.**
 
 *Disclosure
        Controls and Procedures*
 
 Based
        on
        their evaluation as of March 31, 2008, 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 GAAP.
 
 Management
        recognizes that effective internal control over financial reporting may
        nonetheless not prevent or detect all possible misstatements or frauds.
  As
        part
        of its evaluation of the effectiveness of its internal control over financial
        reporting, the
        Company has appointed Resources Global Professional as an independent consultant
        to assess our internal control systems in one of our operations located in
        Long
        Hua (the Company’s principal and largest facility). The framework of assessment
        was developed from the guidelines of the Committee of Sponsoring Organizations
        of the Treadway Commission (“COSO”). No material weakness in internal controls
        over financial reporting was identified from the assessment of the Long Hua
        operations. The Company applies the same internal control system in different
        locations.
  62
  Management
        also assessed the effectiveness of the Company’s internal control over financial
        reporting as of the fiscal year ended March 31, 2008 at its three newer,
        and
        smaller operations. Based on that evaluation, Management concluded that the
        Company’s internal control over financial reporting at those other three
        facilities were not fully effective because
        the Company experiences significant turnover in its accounting and financial
        reporting personnel and has had difficulty in hiring and keeping highly
        qualified accounting personnel, some persons involved in the Company’s financial
        reporting activities have limited experience with the financial reporting
        system
        required by the SEC’s rules. ****
 
 *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 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:
 
 Highway
        Holdings Limited
 Suite
        810, Level 8, Landmark North
 39
        Lung
        Sum Avenue
 Sheung
        Shui
 New
        Territories, Hong Kong
 
 Attn:
        Chief Financial Officer
  63
  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, 2008 has been Deloitte Touche Tohmatsu.
        The
        auditor is selected annually by the Company’s Board of Directors and ratified by
        the shareholders at the Annual General Meeting. The Audit Committee has selected
        Deloitte Touche Tohmatsu as the auditor for the fiscal year ended March 31,
        2008
        and will propose to the Annual General Meeting convening on August 18, 2008
        that
        Deloitte Touche Tohmatsu be ratified as the auditor for that fiscal year.
 
 The
        following table sets forth the aggregate fees for professional services and
        other services rendered by Deloitte Touche Tohmatsu to the Company during
        the
        fiscal years ended March 31, 2007 and 2008.
  **2007**
              
              **2008**Audit
                  Fees (1)
              
              $
              317,600
              
              $
              334,200Audit-Related
                  Fees (2)
              
              
              -
              
              
              -Tax
                  Fees (3)
              
              $
              33,600
              
              $
              17,300All
                  Other Fees
              
              
              -
              
              $
              14,000Total
              
              $
              351,200
              
              $
              365,500
  (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 were Deloitte Touche Tohmatsu 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
  **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.
  64
  **Item
        19.** **Exhibits.**
 
 The
        following exhibits are filed as part of this annual report:
 
 1.1
              Memorandum
                  and Articles of Association, as amended, of Highway Holdings Limited,
                  (incorporated by reference to Exhibit 1.1 of registrant’s Form 20-F for
                  the year ended March 31, 2001.)
 
 1.2
              Amendment
                  to Memorandum and Articles of Association, as filed on January
                  20, 2003
                  (incorporated by reference to Exhibit 1.2 of registrant’s Form 20-F for
                  the year ended March 31, 2002.)
 
 1.3
              Form
                  of Amendment to Articles of Association, as filed on November 2,
                  2005.
 
 4.1
              1996
                  Stock Option Plan (incorporated by reference to Exhibit 10.32 of
                  the
                  registrant’s Registration Statement on Form F-1, Reg. No. 333-05980, filed
                  with the SEC on November 8, 1996.)
 
 4.2
              Form
                  of Longcheng Industrial Area Common Property Tenancy Contract No.
                  WJ-003,
                  dated October 10, 2003, between the Company and Shenzhen Land & Sun
                  Industrial & Trade Co., Ltd. (incorporated by reference to the
                  registrant’s Annual Report on Form 20-F for the fiscal year ended March
                  31, 2004).
 
 4.3
              Form
                  of Longcheng Industrial Area Common Property Tenancy Contract No.
                  WJ-004,
                  dated November 28, 2003, between the Company and Shenzhen Land
& Sun
                  Industrial & Trade Co., Ltd. (incorporated by reference to the
                  registrant’s Annual Report on Form 20-F for the fiscal year ended March
                  31, 2004).
 
 4.4
              Form
                  of Longcheng Industrial Area Common Property Tenancy Contract No.
                  WJ-005,
                  dated December 11, 2003, between the Company and Shenzhen Land
& Sun
                  Industrial & Trade Co., Ltd. (incorporated by reference to the
                  registrant’s Annual Report on Form 20-F for the fiscal year ended March
                  31, 2004).
 
 4.5
              Form
                  of Longcheng Industrial Area Common Property Tenancy Contract No.
                  HTHT-006, dated December 12, 2003, between the Company and Shenzhen
                  Land
                  & Sun Industrial & Trade Co., Ltd. (incorporated by reference to
                  the registrant’s Annual Report on Form 20-F for the fiscal year ended
                  March 31, 2004).
 
 4.6
              Form
                  of Longcheng Industrial Area Common Property Tenancy Contract,
                  dated
                  December 29, 2003, between the Company and Shenzhen Land & Sun
                  Industrial & Trade Co., Ltd. (incorporated by reference to the
                  registrant’s Annual Report on Form 20-F for the fiscal year ended March
                  31, 2004).
 
 4.7
              Tenancy
                  Agreement, dated October 30, 2003, between Nissin Precision Metal
                  Manufacturing Limited and SHK Sheung Shui Landmark Investment Limited,
                  as
                  amended February 23, 2004 (incorporated by reference to the registrant’s
                  Annual Report on Form 20-F for the fiscal year ended March 31,
                  2005).
  65
  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)
 
 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)
  66
 
 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.
 
 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.
 
 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.
 
 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.
 
 4.23
                  Factory
                      Lease Contract-Extension between He Yuan Advanced Technological
                      Development District Co. Ltd. and He Yuan City Hi-Lite Electricity
                      Co
                      Ltd., dated January 12, 2008 regarding the He Yuan
                      facilities.
 
 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
  67
 **SIGNATURES**
 
 The
              registrant hereby certifies that it meets all of the requirements for
              filing on
              Form 20-F and has duly caused this Annual Report to be signed on its
              behalf.
  HIGHWAY
                        HOLDINGS LIMITEDBy
                    /s/
                        PO S. FONGPo
                        S. Fong*Chief
                        Financial Officer and**Secretary*Date:
                        June 30, 2008


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, 2008
            F
                -
                3Consolidated
                Balance Sheets as of March 31, 2007 and 2008
            F
                -
                4Consolidated
                Statements of Shareholders' Equity and Comprehensive Income (loss)
                for
                each of the three years in the period ended March 31, 2008
            F
                -
                5Consolidated
                Statements of Cash Flows for each of the three years in the period
                ended
                March 31, 2008
            F
                -
                6Notes
                to Consolidated Financial Statements
            F
                -
                8




F - 
          1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Shareholders and Board of Directors of


Highway
      Holdings Limited:





We
      have
      audited the accompanying consolidated balance sheets of Highway Holdings Limited
      and its subsidiaries (the "Company") as of March 31, 2007 and 2008, 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, 2008. These financial statements are the responsibility
      of the Company's management. Our responsibility is to express an opinion on
      these financial statements based on our audits.





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





In
      our
      opinion, such consolidated financial statements present fairly, in all material
      respects, the financial position of the Company at March 31, 2007 and 2008,
      and
      the results of their operations and their cash flows for each of the three
      years
      in the period ended March 31, 2008, in conformity with accounting principles
      generally accepted in the United States of America.





**Deloitte
      Touche Tohmatsu**


Certified
      Public Accountants


Hong
      Kong


June
      28,
      2008


F - 
          2


HIGHWAY
      HOLDINGS LIMITED





CONSOLIDATED
      STATEMENTS OF OPERATIONS


(In
      thousands except for share and per share amounts)





Year
                ended March 31,2006
            
            2007
            
            2008$
            
            $
            
            $Net
                sales
            
            
            25,843
            
            
            31,469
            
            
            33,164Cost
                of sales
            
            
            (21,600
            )
            
            (25,233
            )
            
            (28,090
            )Gross
                profit
            
            
            4,243
            
            
            6,236
            
            
            5,074Selling,
                general and administrative expenses
            
            
            (5,165
            )
            
            (5,850
            )
            
            (7,351
            )Impairment
                of industrial property rights (note 2)
            
            
            (60
            )
            
            -
            
            
            -Impairment
                of property, plant and equipment (note 2)
            
            
            (197
            )
            
            -
            
            
            -Gain
                on sale of "Kienzle" industrial property rights (note 1)
            
            
            1,781
            
            
            -
            
            
            -Operating
                income (loss)
            
            
            602
            
            
            386
            
            
            (2,277
            )Non-operating
                income (expense):Exchange
                gain (loss), net
            
            
            (614
            )
            
            245
            
            
            283Interest
                expense
            
            
            (134
            )
            
            (242
            )
            
            (225
            )Interest
                income
            
            
            66
            
            
            161
            
            
            100Other
                income
            
            
            195
            
            
            92
            
            
            60Gain
                on disposal of partial interest in a subsidiary (note 1)
            
            
            -
            
            
            -
            
            
            111Gain
                on disposal of investment securities
            
            
            -
            
            
            -
            
            
            2Total
                non-operating income (expense)
            
            
            (487
            )
            
            256
            
            
            331Income
                (loss) before income taxes and minority interests
            
            
            115
            
            
            642
            
            
            (1,946
            )Income
                taxes (note 4)
            
            
            (73
            )
            
            (48
            )
            
            (28
            )Income
                (loss) before minority interests
            
            
            42
            
            
            594
            
            
            (1,974
            )Minority
                interests
            
            
            -
            
            
            -
            
            
            53Net
                income (loss)
            
            
            42
            
            
            594
            
            
            (1,921
            )Net
                income (loss) per share - basic
            
            
            0.01
            
            
            0.16
            
            
            (0.50
            )Net
                income (loss) per share - diluted
            
            
            0.01
            
            
            0.16
            
            
            (0.50
            )Weighted
                average number of shares outstanding - basic
            
            
            3,465,390
            
            
            3,635,517
            
            
            3,809,888Weighted
                average number of shares outstanding - diluted
            
            
            3,544,216
            
            
            3,690,174
            
            
            3,809,888





See
      accompanying notes to consolidated financial statements.


F - 
          3


HIGHWAY
      HOLDINGS LIMITED





CONSOLIDATED
      BALANCE SHEETS


(In
      thousands except for share and per share amounts)





March
                31,2007
            
            2008$
            
            $ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            
            5,299
            
            
            3,889Restricted
                cash (note 10)
            
            
            1,221
            
            
            1,671Accounts
                receivable, net of allowances for doubtful accounts of $13 in 2007
                and
                $108 in 2008
            
            
            4,742
            
            
            4,766Inventories
                (note 5)
            
            
            6,104
            
            
            5,775Investment
                securities (note 6)
            
            
            316
            
            
            -Prepaid
                expenses and other current assets
            
            
            680
            
            
            689Total
                current assets
            
            
            18,362
            
            
            16,790Property,
                plant and equipment, net (note 7)
            
            
            3,980
            
            
            3,646Intangible
                assets, net (note 8)
            
            
            70
            
            
            52Investments
                in affiliates (note 9)
            
            
            2
            
            
            2Total
                assets
            
            
            22,414
            
            
            20,490LIABILITIES
                AND SHAREHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable
            
            
            3,990
            
            
            3,757Short-term
                borrowings (note 10)
            
            
            3,097
            
            
            2,214Obligations
                under capital leases - current portion (note 11)
            
            
            478
            
            
            311Accrued
                mould charges
            
            
            253
            
            
            260Accrued
                payroll and employee benefits
            
            
            446
            
            
            988Other
                liabilities and accrued expenses
            
            
            1,154
            
            
            1,704Total
                current liabilities
            
            
            9,418
            
            
            9,234Obligations
                under capital leases - net of current portion (note 11)
            
            
            655
            
            
            522Deferred
                income taxes (note 4)
            
            
            174
            
            
            189Total
                liabilities
            
            
            10,247
            
            
            9,945Commitments
                and contingencies (note 12)Minority
                interests
            
            
            -
            
            
            151Shareholders'
                equity:Common
                shares $0.01 par value (Authorized: 20,000,000 shares; 3,779,746
                shares as
                of March 31, 2007, and 3,819,900 shares as of March 31, 2008 respectively,
                issued and outstanding)
            
            
            38
            
            
            38Additional
                paid-in capital
            
            
            11,304
            
            
            11,562Retained
                earnings (Accumulated deficit)
            
            
            1,439
            
            
            (614
            )Accumulated
                other comprehensive loss
            
            
            (48
            )
            
            (26
            )Subscription
                receivable - 128,534 shares in 2007 (note 14)
            
            
            (513
            )
            
            -Treasury
                shares, at cost - 37,800 shares in 2007 and 166,334 shares in 2008
                (note 14)
            
            
            (53
            )
            
            (566
            )Total
                shareholders' equity
            
            
            12,167
            
            
            10,394Total
                liabilities and shareholders' equity
            
            
            22,414
            
            
            20,490





See
      accompanying notes to consolidated financial statements.


F - 
          4


HIGHWAY
      HOLDINGS LIMITED





CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY


AND
      COMPREHENSIVE INCOME (LOSS)


(In
      thousands except per share amounts)








Common shares,
            
            
            
            Retained
            
            Accumulated
            
            
            
            
            
            
            
            Compre-issued and
            
            Additional
            
            earnings
            
            other
            
            
            
            Treasury
            
            Total
            
            hensiveoutstanding
            
            paid-in
            
            (accumulated
            
            comprehensive
            
            Subscription
            
            shares,
            
            shareholders'
            
            incomeShares
            
            Amount
            
            capital
            
            deficit)
            
            income (loss)
            
            receivable
            
            at cost
            
            equity
            
            (loss)Number
            
            $
            
            $
            
            $
            
            $
            
            $
            
            $
            
            $
            
            $Balance
                at March 31, 2005
            
            
            3,316
            
            
            33
            
            
            9,820
            
            
            3,480
            
            
            (222
            )
            
            -
            
            
            (53
            )
            
            13,058Issued
                during the year
            
            
            209
            
            
            2
            
            
            265
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            267Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            42
            
            
            -
            
            
            -
            
            
            -
            
            
            42
            
            
            42Director's
                stock compensation
            
            
            -
            
            
            -
            
            
            160
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            160Unrealized
                holding gain on investmentsecurities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            -
            
            
            -
            
            
            4
            
            
            4Translation
                adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            132
            
            
            -
            
            
            -
            
            
            132
            
            
            132Cash
                dividends ($0.4 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,389
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,389
            )Balance
                at March 31, 2006
            
            
            3,525
            
            
            35
            
            
            10,245
            
            
            2,133
            
            
            (86
            )
            
            -
            
            
            (53
            )
            
            12,274
            
            
            178Issued
                during the year
            
            
            254
            
            
            3
            
            
            861
            
            
            -
            
            
            -
            
            
            (513
            )
            
            -
            
            
            351Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            594
            
            
            -
            
            
            -
            
            
            -
            
            
            594
            
            
            594Director's
                stock compensation
            
            
            -
            
            
            -
            
            
            160
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            160Employee's
                share-based compensation
            
            
            -
            
            
            -
            
            
            38
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            38Unrealized
                holding gain on investment securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            16
            
            
            -
            
            
            -
            
            
            16
            
            
            16Translation
                adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22
            
            
            -
            
            
            -
            
            
            22
            
            
            22Cash
                dividends ($0.36 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,288
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,288
            )Balance
                at March 31, 2007
            
            
            3,779
            
            
            38
            
            
            11,304
            
            
            1,439
            
            
            (48
            )
            
            (513
            )
            
            (53
            )
            
            12,167
            
            
            632Issued
                during the year
            
            
            40
            
            
            -
            
            
            38
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            38Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,921
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,921
            )
            
            (1,921
            )Director's
                stock compensation
            
            
            -
            
            
            -
            
            
            160
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            160Employee's
                share-based compensation
            
            
            -
            
            
            -
            
            
            60
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            60Escrow
                shares returned to treasury (note 14)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            513
            
            
            (513
            )
            
            -Reversal
                of unrealized holding gain oninvestment
                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
            )




See
      accompanying notes to consolidated financial statements.


F - 
          5





HIGHWAY
      HOLDINGS LIMITED





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(In
      thousands except for share and per share amounts)





Year ended March 31,2006
            
            2007
            
            2008$
            
            $
            
            $Cash
                flows from operating activities:Net
                income (loss)
            
            
            42
            
            
            594
            
            
            (1,921
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Impairment
                of industrial property rights
            
            
            60
            
            
            -
            
            
            -Loss
                on disposal of property, plant and equipment
            
            
            -
            
            
            13
            
            
            51Gain
                on disposal of investment securities
            
            
            -
            
            
            -
            
            
            (2
            )Gain
                on sale of "Kienzle" industrial property rights
            
            
            (1,781
            )
            
            -
            
            
            -Impairment
                of property, plant and equipment
            
            
            197
            
            
            -
            
            
            -Gain
                on disposal of a subsidiary
            
            
            (3
            )
            
            -
            
            
            -Gain
                on disposal of partial interest in a subsidiary
            
            
            -
            
            
            -
            
            
            (111
            )Gain
                on disposal of an affiliate
            
            
            (121
            )
            
            -
            
            
            -Depreciation
                of property, plant and equipment
            
            
            968
            
            
            926
            
            
            812Amortization
                of industrial property rights
            
            
            122
            
            
            -
            
            
            -Amortization
                of intangible assets
            
            
            -
            
            
            13
            
            
            18Minority
                interests
            
            
            -
            
            
            -
            
            
            (53
            )Directors'
                stock compensation
            
            
            160
            
            
            160
            
            
            160Deferred
                income taxes
            
            
            (21
            )
            
            21
            
            
            15Employee's
                share-based compensation
            
            
            -
            
            
            38
            
            
            60Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            1,376
            
            
            586
            
            
            (24
            )Inventories
            
            
            944
            
            
            (1,261
            )
            
            329Prepaid
                expenses and other current assets
            
            
            175
            
            
            (97
            )
            
            (125
            )Accounts
                payable
            
            
            (348
            )
            
            391
            
            
            (233
            )Accrued
                mould charges
            
            
            38
            
            
            7
            
            
            7Accrued
                payroll and employee benefits
            
            
            (39
            )
            
            154
            
            
            542Other
                liabilities and accrued expenses
            
            
            (454
            )
            
            110
            
            
            550Net
                cash provided by operating activities
            
            
            1,315
            
            
            1,655
            
            
            75Investing
                activities:Acquisition
                of subsidiary
            
            
            -
            
            
            (331
            )
            
            -Purchase
                of property, plant and equipment
            
            
            (250
            )
            
            (934
            )
            
            (211
            )Purchase
                of industrial property rights
            
            
            (93
            )
            
            -
            
            
            -Proceeds
                from disposal of an affiliate
            
            
            121
            
            
            -
            
            
            -Proceeds
                from disposal of partial interest in a subsidiary
            
            
            -
            
            
            -
            
            
            315Proceeds
                from disposal of property, plant and equipment
            
            
            46
            
            
            3
            
            
            17Proceeds
                from disposal of industrial property rights
            
            
            2,160
            
            
            -
            
            
            -Proceeds
                from disposal of investment securities
            
            
            -
            
            
            -
            
            
            324Increase
                in restricted cash
            
            
            -
            
            
            (256
            )
            
            (450
            )Net
                cash provided by (used in) investing activities
            
            
            1,984
            
            
            (1,518
            )
            
            (5
            )





See
      accompanying notes to consolidated financial statements.




F - 
          6


HIGHWAY
      HOLDINGS LIMITED





CONSOLIDATED
      STATEMENTS OF CASH FLOWS - continued


(In
      thousands except for share and per share amounts)





Year ended March 31,2006
            
            2007
            
            2008$
            
            $
            
            $Financing
                activities:Cash
                dividends paid
            
            
            (1,389
            )
            
            (1,288
            )
            
            (132
            )Repayment
                of long-term debt
            
            
            (439
            )
            
            (535
            )
            
            (519
            )Increase
                (decrease) in short-term borrowings
            
            
            566
            
            
            375
            
            
            (883
            )Proceeds
                from shares issued on exercise of options
            
            
            267
            
            
            204
            
            
            38Net
                cash used in financing activities
            
            
            (995
            )
            
            (1,244
            )
            
            (1,496
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            2,304
            
            
            (1,107
            )
            
            (1,426
            )Cash
                and cash equivalents, beginning of year
            
            
            3,948
            
            
            6,384
            
            
            5,299Effect
                of exchange rate changes
            
            
            132
            
            
            22
            
            
            16Cash
                and cash equivalents, end of year
            
            
            6,384
            
            
            5,299
            
            
            3,889Supplemental
                disclosure of cash flow information:Interest
                paid
            
            
            134
            
            
            242
            
            
            225Income
                taxes (paid) refunded
            
            
            (195
            )
            
            (32
            )
            
            11


Supplemental
      disclosure of non-cash transactions:


Property,
      plant and equipment amounting to $275, $766 and $219 in the years ended March
      31, 2006, 2007 and 2008, respectively, were acquired under capital lease
      arrangements.





In
      December 2006, 30,000 shares valued at $147 were issued to acquire certain
      machinery and equipment. The purchase price of this machinery and equipment
      was
      based on the fair value of the shares on the transaction date.





See
      accompanying notes to consolidated financial statements.


F - 
          7


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(In
      thousands except for share and per share amounts)





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"), and in
                Germany.





The
                Company operates in four principal business segments - metal stamping
                and
                mechanical original equipment manufacturing ("OEM"), electric OEM,
                the
                manufacture and trading of cameras and underwater products, and clocks
                and
                watches.The
                Company's manufacturing activities are principally conducted in Shenzhen,
                He Yuan and Wuxi and its selling activities are principally conducted
                in
                Hong Kong and Wuxi.





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





On
                March 28, 2003, theCompanyacquired a 20% equity interest in Kienzle AG for $109. Kienzle AG
                was
                accounted as an affiliate using the equity method. TheCompanyreassessed
                its investment in Kienzle AG in 2004 and determined that the investment
                had been impaired as Kienzle AG did not meet the minimum purchase
                requirement and had dissatisfactory operating results. An impairment
                loss
                of $109 in respect of the investment in Kienzle AG has been recognized
                during the year ended March 31, 2004. TheCompanysold all "Kienzle" trademarks relating to clock and non-clock business
                for
                $2,160 and recognized gain on sale of $1,781 during the year ended
                March
                31, 2006.





Additionally,
                theCompanyreceived $121 for the sale of its 20% equity interest and recognized
                a
                gain of $121 on disposal of investment in Kienzle AG during the year
                ended
                March 31, 2006.





Upon
                the sale of the "Kienzle" trademark, the Companydid
                not renew the lease on its marketing office in Germany and incurred
                costs
                related to involuntary termination of most of the employees in its
                marketing office in Germany. These costs were accrued and paid in
                the year
                ended March 31, 2006. There were no additional costs for exiting
                the
                Kienzle clock business.





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.


F - 
          8


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)








1.
            ORGANIZATION
                AND BASIS OF FINANCIAL STATEMENTS-
                continued





Golden
      Bright has been accounted as a subsidiary using the purchase method. The
      contingent payments represent compensation for post combination services and
      accordingly $85 and $171 have been accrued as compensation expense in the years
      ended March 31, 2007 and 2008, respectively. As of March 31, 2008, 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 a subsidiary
      during the year ended March 31, 2008.





At
                March 31, 2007 and 2008, details of the subsidiaries are as
                follows:




Percentageof ownershipPlace
                of
            
            
            
            
            
            
            
            
            
            as at March 31,incorporation
            
            Name of entity
            
            Date of incorporation
            
            Principal activities
            
            2007
            
            2008Hong
                Kong
            
            
            Antemat
                Limited
            
            
            May
                5, 1989
            
            
            Dormant
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Nissin
                Mechatronic Limited
            
            
            May
                25, 1990
            
            
            Dormant
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Cavour
                Industrial Limited
            
            
            May
                9, 1989
            
            
            Providing
                tooling, handling and repairing services in China and management
                services
                to fellow subsidiaries
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Hi-Lite
                Camera Company Limited ("Hi-Lite")
            
            
            November
                10, 1978
            
            
            Trading
                of camera and underwater products
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Kayser
                Technik Limited
            
            
            June
                23, 1994
            
            
            Sales
                of metal parts and OEM products
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Kienzle
                Time (H.K.) Limited("Kienzle
                HK")
            
            
            August
                24, 1997
            
            
            Manufacturing
                OEM business and trading of clocks, watches, camera and underwater
                products
            
            
            100
            %
            
            100
            %Germany
            
            
            Kienzle
                Uhrenfabriken G.m.b.h.("Kienzle
                Germany")
            
            
            April
                1, 1999
            
            
            Dormant
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Nissin
                Precision MetalManufacturing
                Limited ("Nissin")
            
            
            November
                21, 1980
            
            
            Metal
                stamping, tooling design and manufacturing and assembling OEM
                products
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Saiwan
                Industries Limited
            
            
            August
                10, 1990
            
            
            Manufacturing
                of plastic injection parts to fellow subsidiaries
            
            
            100
            %
            
            100
            %Hong
                Kong
            
            
            Golden
                Bright
            
            
            May
                19, 1992
            
            
            Manufacturing
                and trading of plastic injection products
            
            
            100
            %
            
            100
            %China
            
            
            Kayser
                Wuxi
            
            
            December
                21, 2005
            
            
            Metal
                stamping and tooling design
            
            
            100
            %
            
            71
            %China
            
            
            Kayser
                Restaurant (Shenzhen)
              Company
                Limited ("Kayser Restaurant")
            
            
            November
                1, 2006
            
            
            Sales
                of noodles and ice- cream in 2007 but dormant in 2008
            
            
            100
            %
            
            100
            %


F - 
          9


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES





**Principles
      of consolidation** -
      The
      consolidated financial statements include the financial statements of Highway
      Holdings Limited
      and all its majority-owned subsidiaries .
      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.





**Investment
                securities**-
                Investment securities, which consist primarily of capital guaranteed
                investment fund, have been categorized as available for sale and,
                are
                stated at fair value based generally on quoted market prices. Unrealized
                holding gains and losses are included as a component of accumulated
                other
                comprehensive income (loss). Upon the sale of an available for sale
                security, the amount recorded in other comprehensive income, representing
                the unrealized gain or loss at the date of sale, is reversed into
                earnings
                with the related deferred tax amounts
                adjusted.





**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 transfer 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.
                Amortization is computed using the straight line method over the
                intangible assets' estimated useful
                lives.


F - 
          10


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)








2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued





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






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





**Impairment
                or disposal of long-lived assets**-
                The Company reviews its long-lived assets for impairment whenever
                events
                or changes in circumstances indicate that the carrying amount of
                an asset
                may no longer be recoverable. When these events occur, the Company
                reviews
                impairment by comparing the carrying value of the long-lived assets
                to the
                estimated undiscounted future cash flows expected from the use of
                the
                assets and their eventual disposition. If the sum of the expected
                undiscounted cash flow is less than the carrying amount of the assets,
                the
                Company would recognize an impairment loss based on the difference
                between
                the estimated fair value of the assets and the carrying
                amount.





Due
                to the poor financial performance of cameras, clocks and watches,
                the
                Company reassessed its property, plant and equipment and industrial
                property rights for impairment and an impairment loss of $197 and
                $60
                respectively, had been recognized during the year ended March 31,
                2006. As
                of March 31, 2007 and 2008, none of the long-lived assets were
                impaired.





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





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


F - 
          11


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued





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





·
            Persuasive
                evidence of an arrangement exists;


·
            Delivery
                has occurred;


·
            Price
                to the customer is fixed or determinable;
                and


·
            Collectibility
                is reasonably assured.





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





**Foreign
      currency** -
      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.
      Unrealised 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
      is
      included in determination of net income. A
      valuation allowance is recorded to reduce the amount of deferred tax assets
      if
      it is considered more likely than not that some portion of, or all, the deferred
      tax asset will not be realized.





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 is no material impact of FIN 48 on the
      Company's consolidated financial statements.


F - 
          12


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





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 and intangible assets; valuation
                allowances for doubtful receivables; valuation of share-based
                compensation; impairment of long-lived assets; write down of inventories;
                and amounts recorded for contingencies. These estimates are often
                based on
                complex judgments and assumptions that management believe to be reasonable
                but are inherently uncertain and unpredictable. Actual results may
                differ
                from those estimates.





**Stock-based
                compensation**-TheCompanyhas
                a stock-based employee compensation plan, as more fully described
                in note
                18. Prior to April 1, 2006, theCompanyaccounted
                for stock-based compensation arrangements under Accounting Principles
                Board Opinion No. 25, "Accounting for Stock Issued to
                Employees"**and
                provided additional financial statement disclosure in accordance
                with
                Statement of Financial Accounting Standards ("SFAS") No. 123,
                "*Accounting
                for Stock-Based Compensation*".
                TheCompany's
                policy is to generally grant stock-based compensation to employees
                with a
                stock price equal to the market price of the stock on the date of
                grant
                and as a result no expense was recognised for grants prior to April
                1,
                2006. TheCompanyrecognized
                compensation expense for all stock-based compensation granted to
                non-employees by estimating the fair value of the stock-based compensation
                utilizing the Black-Scholes option-pricing
                model.





Effective
                April 1, 2006, the Company has adopted the provision of SFAS
                No. 123R, "*Share-Based
                Payment*"
                ("SFAS 123R"). This statement establishes accounting for equity
                instruments exchanged for service. The stock-based compensation cost
                is
                measured at the grant date based on the fair value of the award and
                is
                recognized as expense over the employee's requisite service
                period.





Upon
                adoption of SFAS 123R, the Company applied the modified-prospective
                transition approach and accordingly financial statement amounts for
                the
                prior periods presented have not been restated to reflect the fair
                value
                method of expensing share-based
                compensation.





As
                a result of adopting SFAS 123R, there was no cumulative effect on
                the net
                income for the year ended March 31, 2007, as all awards granted in
                prior
                years had vested before April 1,
                2006.


F - 
          13




HIGHWAY
      HOLDINGS LIMITED


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued





The
      following table illustrates the effect on net loss per share as if the Company
      had applied the fair value recognition in 2006.





2006$Net
                income, as reported
            
            
            42Less:
                Stock based compensation costs under fair value based method for
                all
                awards
            
            
            (140
            )Net
                loss, pro forma
            
            
            (98
            )Net
                income per share - basicAs
                reported
            
            
            0.01Pro
                forma
            
            
            (0.03
            )Net
                income per share - dilutedAs
                reported
            
            
            0.01Pro
                forma
            
            
            (0.03
            )





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





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




F - 
          14


HIGHWAY
      HOLDINGS LIMITED


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued





**Recent
                changes in accounting standards -**In
                September 2006, the FASB issued SFAS No. 157, "*Fair
                Value Measurement*".
                SFAS No. 157 addresses standardizing the measurement of fair value
                for
                companies who are required to use a fair value measure for recognition
                or
                disclosure purposes. The FASB defines fair value as "the price that
                would
                be received to sell an asset or paid to transfer a liability in an
                orderly
                transaction between market participants at the measurement date."
                SFAS No.
                157 is effective for financial statements issued for fiscal years
                beginning after November 15, 2007 and interim periods within those
                fiscal
                years. The Company is evaluating the impact, if any, of the adoption
                of
                SFAS No. 157. It is not expected to have a material impact on the
                Company's financial position, results of operations and cash flows.





In
                February 2007, the FASB issued SFAS No. 159, "*The
                Fair Value Options for Financial Assets and Financial
                Liabilities"*.
                SFAS No. 159 permits an entity, to make an election to account for
                certain
                types of financial instruments and certain other items at fair value,
                rather than historical cost, with changes in the fair value, whether
                realized or unrealized, recognized in earnings. SFAS No. 159 is effective
                for financial year beginning after November 15, 2007. The Company
                is
                evaluating the impact, if any, of the adoption of SFAS No. 159. It
                is not
                expected to have a material impact on the Company's financial position,
                results of operations and cash
                flows.





In
                June 2007, the Emerging Issues Task Force ("EITF") of FASB ratified
                EITF
                Issue 06-11 "*Accounting
                for the Income Tax Benefits of Dividends on Share-Based Payment
                Awards*"
                ("EITF 06-11"). EITF 06-11 provides that tax benefits associated
                with
                dividends on share-based payment awards be recorded as a component
                of
                additional paid-in capital. EITF 06-11 is effective, on a prospective
                basis, for fiscal years beginning after December 15, 2007. The Company
                is
                currently assessing the impact of EITF 06-11 on its consolidated
                financial
                position and results of operations.





In
                2007, the EITF of FASB issued EITF Issue 07-3, "*Accounting
                for Nonrefundable Advance Payments for Goods or Services Received
                for Use
                in Future Research and Development Activities*"
                ("EITF 07-3"). The Task Force reached a consensus that nonrefundable
                advance payments for goods or services that will be used or rendered
                for
                future research and development activities should be deferred and
                capitalized. Such amounts should be recognized as an expense as the
                related goods are delivered or the related services are performed.
                Entities should continue to evaluate whether they expect the goods
                to be
                delivered or services to be rendered. If an entity does not expect
                the
                goods to be delivered or services to be rendered, the capitalized
                advance
                payment should be charged to expense. EITF 07-3 is effective for
                fiscal
                years beginning after December 15, 2007. The Company is evaluating
                the
                impact, if any, of the adoption of EITF 07-3. It is not expected
                to have a
                material impact on the Company's financial position, results of operations
                or cash flows.




F - 
          15


HIGHWAY
      HOLDINGS LIMITED


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES -
                continued




In
          December 2007, FASB issued SFAS No. 141 (revised 2007), *"Business
          Combinations"* ("SFAS
          No. 141R"). The objective of SFAS No. 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 No. 141R is effective for financial statements issued
          for
          fiscal years beginning on or after December 15, 2008. The Company is evaluating
          the impact, if any, of the adoption of SFAS No. 141R.


In
          December 2007, the FASB issued SFAS No. 160, *"Noncontrolling
          Interest in Consolidated Financial Statements"* .
          SFAS
          No. 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
          Statements", to establish accounting and reporting standards for the
          noncontrolling interest in a subsidiary and for the deconsolidation of
          a
          subsidiary. SFAS No. 160 defines "a noncontrolling interest, sometimes
          called a
          minority interest, is the portion of equity in a subsidiary not attributable,
          directly or indirectly, to a parent". The objective of SFAS No. 160 is
          to
          improve the relevance, comparability, and transparency of the financial
          information that a reporting entity provides in its consolidated financial
          statements. SFAS No. 160 is effective for fiscal years, and interim periods
          within those fiscal years, beginning on or after December 15, 2008. The
          Company
          is evaluating the impact, if any, of the adoption of SFAS No.
          160.




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities - an amendment of FASB
      Statement No. 133* . This
      statement changes the disclosure requirements for derivative instruments and
      hedging activities. Entities are required to provide enhanced disclosures
      stating how and why an entity uses derivative instruments; how derivatives
      and
      related hedged items are accounted for under SFAS
      No. 133, *"Accounting
      for Derivative Instruments and Hedging Activities"* and
      its
      related interpretations; and how derivative instruments and related hedge items
      affect an entity's financial position, financial performance and cash flows. SFAS
      No. 161
      is
      effective for fiscal years beginning after November 15, 2008. The
      Company is evaluating the impact that this statement will have, if any, on
      its
      consolidated financial statements.





In
      May
      2008, the FASB issued SFAS No. 163, *Accounting
      for Financial Guarantee Insurance Contracts – an interpretation of FASB
      Statement No* . *60* . 
      This statement requires that an insurance enterprise recognize a claim liability
      prior to an event of default (insured event) when there is evidence that credit
      deterioration has occurred in an insured financial obligation. This statement
      also clarifies how  statement
      60 applies to financial guarantee insurance contracts, including
      the recognition and measurement to be used to account for premium revenue and
      claim liabilities. This statement requires expanded disclosures about financial
      guarantee insurance contracts. This statement is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and all
      interim periods within those fiscal years, except for some disclosures about
      the
      insurance enterprise's risk-management activities. This statement requires
      that
      disclosures about the risk-management activities of the insurance enterprise
      be
      effective for the first period (including interim periods) beginning after
      issuance of this statement. The Company is evaluating the impact that this
      statement will have, if any, on its consolidated financial
      statements.




F - 
          16




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





3.
            ACQUISITION





As
      mentioned in note 1, the Company acquired 100% equity interest in Golden Bright.
      The assets and liabilities of Golden Bright have been recorded at fair values
      on
      the date of acquisition, after the eligible assets have been pro rata reduced
      by
      $1,186, the excess of the net assets acquired over the purchase
      consideration.





The
      cash
      consideration of $514 has been allocated to the assets acquired and liabilities
      assumed as follows:





$Net
                assets acquired, at fair value:Cash
                and cash equivalents
            
            
            183Accounts
                receivable
            
            
            1,540Inventories
            
            
            725Property,
                plant and equipment
            
            
            288Intangible
                assets
            
            
            83Accounts
                payable
            
            
            (1,101
            )Short
                term borrowings
            
            
            (707
            )Other
                current liabilities
            
            
            (497
            )Purchase
                consideration
            
            
            514





The
      estimated fair value of intangible assets was derived from a valuation report
      prepared with the assistance of a valuation expert.





$Net
                cash outflow arising on acquisition is determined as
                follows:Cash
                consideration paid
            
            
            (514
            )Bank
                balance and cash acquired
            
            
            183(331
            )





The
                following pro forma information summarizes the effect of the acquisition,
                as if the acquisition of Golden Bright had occurred as of April 1,
                2006.
                This pro forma information is presented for information purposes
                only. It
                is based on historical information and does not purport to represent
                the
                actual results that may have occurred had the acquisition been consummated
                on April 1, 2006, nor is it necessarily indicative of future results
                of
                operations of the consolidated
                enterprises:





$(unaudited)Pro
                forma net sales
            
            
            35,101Pro
                forma operating income
            
            
            482Pro
                forma net income
            
            
            678





F - 
          17




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





4.
            INCOME
                TAXES





Income
                is subject to tax in the various countries in which theCompanyoperates.





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





YearendedMarch31,2006
            
            2007
            
            2008$
            
            $
            
            $Hong
                Kong
            
            
            942
            
            
            1,113
            
            
            (1,743
            )China
            
            
            -
            
            
            (320
            )
            
            (272
            )Europe
            
            
            (827
            )
            
            (151
            )
            
            69115
            
            
            642
            
            
            (1,946
            )




The
      Company is not taxed in the British Virgin Islands.





The
      Company's operating subsidiaries, other than Kienzle Germany, Kayser Wuxi and
      Ksyser Restaurant are all incorporated in Hong Kong and are subject to Hong
      Kong
      taxation on their activities conducted in Hong Kong.





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





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





Under
                the BFDC Agreements, theCompanyis
                not considered by local tax authorities to be doing business in China;
                accordingly, theCompany'sactivities in China have not been subject to local taxes. The BFDC
                is
                currently responsible for paying taxes it incurs as a result of its
                operations under the BFDC Agreements.





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




F - 
          18




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





4.
            INCOME
                TAXES - continued





The
      provision for income taxes consists of the following:





Year ended March 31,2006
            
            2007
            
            2008$
            
            $
            
            $Hong
                KongCurrent
                tax
            
            
            94
            
            
            27
            
            
            13Deferred
                tax
            
            
            (21
            )
            
            21
            
            
            1573
            
            
            48
            
            
            28





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





YearendedMarch31,2006
            
            2007
            
            2008%
            
            %
            
            %Profits
                tax rate in Hong Kong
            
            
            17.5
            
            
            17.5
            
            
            17.5Non-deductible
                items/non-taxable income
            
            
            (848.1
            )
            
            19.8
            
            
            (14.0
            )Changes
                in valuation allowances
            
            
            1,027.8
            
            
            (38.8
            )
            
            (4.6
            )Effect
                of different tax rate of subsidiary operating in other
                jurisdiction
            
            
            (100.7
            )
            
            2.2
            
            
            0.4Other
            
            
            (33.0
            )
            
            6.8
            
            
            (0.7
            )Effective
                tax rate
            
            
            63.5
            
            
            7.5
            
            
            (1.4
            )





Deferred
                income tax (assets) liabilities are as
                follows:





March 31,2007
            
            2008$
            
            $Deferred
                tax liability:Property,
                plant and equipment
            
            
            226
            
            
            225Deferred
                tax asset:Tax
                loss carryforwards
            
            
            (1,666
            )
            
            (1,560
            )Valuation
                allowance
            
            
            1,614
            
            
            1,524Total
                net deferred tax asset
            
            
            (52
            )
            
            (36
            )Net
                deferred tax liability
            
            
            174
            
            
            189




F - 
          19




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)




4.
            INCOME
                TAXES - continued





At
                March 31, 2007 and 2008, tax losses amounting to approximately $5,667
                and
                $6,171, respectively may be carried forward indefinitely, subject
                to the
                agreement of the Hong Kong Inland Revenue
                Department.





At
      March
      31, 2007 and 2008, the tax losses of a subsidiary in Germany amounting to
      approximately $2,249 and $1,389, respectively, may be carried forward
      indefinitely.





At
      March
      31, 2007 and 2008, the Company's China subsidiaries had tax losses of
      approximately of $267 and $418 respectively that will expire five years from
      respective financial years incurring the losses.





The
      tax
      losses will expire in following years:





2008$2012
            
            
            2672013
            
            
            151418





On
      March
      16, 2007, the Chinese government enacted the new "Law of People's Republic
      of
      China on Enterprise Income Tax" which became effective on January 1, 2008.
      The
      new law requires that for all resident enterprises, domestic or foreign, the
      Enterprise Income Tax rate is unified to 25%. As the Company's subsidiaries
      in
      China are all resident enterprises, the tax rate applied by the subsidiaries
      will be transferred to new tax rate of 25% effective from January 1,
      2008.





The
      Company adopted the provisions of FIN 48 effective April 1, 2007. The Company
      has made its assessment for each tax position and determined there are no
      unrecognized tax benefits associated with its tax positions. For the year ended
      March 31, 2008, the adoption of FIN 48 did not have a material impact on the
      Company's consolidated financial statements. The Company's policy is to classify
      interest and penalties related to uncertain tax positions as a component of
      loss
      before income tax. There was no interest and penalty recorded in the year ended
      March 31, 2008.




F - 
          20




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





5.
            INVENTORIES





Inventories
      by major categories are summarized as follows:





March 31,2007
            
            2008$
            
            $Raw
                materials
            
            
            3,752
            
            
            3,570Work
                in progress
            
            
            711
            
            
            844Finished
                goods
            
            
            1,641
            
            
            1,3616,104
            
            
            5,775





Inventories
                amounting to $592, $94 and $145 were written off in the years ended
                March
                31, 2006, 2007 and 2008,
                respectively.





6.
            INVESTMENT
                SECURITIES





March 31,2007
            
            2008$
            
            $Cost
            
            
            322
            
            
            -Gross
                unrealized holding loss
            
            
            (6
            )
            
            -Fair
                value
            
            
            316
            
            
            -





These
                investment securities were pledged to secure banking facilities granted
                (note 10).





These
                investment securities are disposed of with a gain of $2 during the
                year
                ended March 31, 2008.




F - 
          21




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





7.
            PROPERTY,
                PLANT AND EQUIPMENT, NET





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





March 31,2007
            
            2008$
            
            $At
                cost:Machinery
                and equipment
            
            
            11,272
            
            
            11,662Furniture
                and fixtures
            
            
            18
            
            
            27Leasehold
                improvements
            
            
            1,008
            
            
            1,108Motor
                vehicles
            
            
            97
            
            
            76Total
            
            
            12,395
            
            
            12,873Less:
                Accumulated depreciation
            
            
            (8,415
            )
            
            (9,227
            )Net
                book value
            
            
            3,980
            
            
            3,646





Depreciation
                expense incurred for the years ended March 31, 2006, 2007 and 2008
                were
                $968, $926 and $812, respectively.





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





March 31,2007
            
            2008$
            
            $Machinery
                and equipment, at cost
            
            
            2,526
            
            
            1,549Less:
                Accumulated depreciation
            
            
            (535
            )
            
            (288
            )Net
                book value
            
            
            1,991
            
            
            1,261





Depreciation
                of machinery and equipment held under capital leases, which is included
                in
                depreciation expense were $196, $257 and $149 for the years ended
                March
                31, 2006, 2007 and 2008,
                respectively.




8.
            INTANGIBLE
                ASSETS, NET





March 31,2007
            
            2008$
            
            $At
                cost:Customer
                relationship
            
            
            14
            
            
            14Contract
                backlog
            
            
            4
            
            
            4Non-compete
                agreement
            
            
            65
            
            
            65Total
            
            
            83
            
            
            83Less:
                Accumulated amortization
            
            
            (13
            )
            
            (31
            )Net
                book value
            
            
            70
            
            
            52




The
      Company expects to record amortization expense of $18 for each of the years
      ending 2009 and 2010, $10, $2 and $2 in the years ending 2011, 2012 and
      2013.




F - 
          22




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





9.
            INVESTMENTS
                IN AFFILIATES





On
                January 25, 2000, theCompanyand
                an unrelated party established Kienzle U.S.A. Limited ("Kienzle USA"),
                a
                company incorporated in the United States of America to sell clocks,
                with
                each party owning 50% of its common shares. Kienzle USA has been
                inactive
                since September 2002.





On
                August 5, 2003, theCompanyacquired
                a 50% equity interest in Kayser Technik (Overseas) Inc. (K.T.I.)
                ("Kayser
                Technik (Overseas)") (formerly known as Kayser Photo (Overseas) Corp.
                (K.P.C.) ("Kayser Photo")), a company incorporated in the Republic
                of
                Panama, at a cash consideration of $5. Kayser Technik (Overseas)
                is
                engaged in the trading of camera batteries, films and disposable
                cameras.




10.
            SHORT-TERM
                BORROWINGS





Short-term
                borrowings include import loans obtained from banks and bank overdraft
                amounting to $2,623 and $474 as of March 31, 2007, respectively and
                $2,214
                and nil as of March 31, 2008,
                respectively.





March 31,2007
            
            2008$
            
            $Maximum
                credit facilities available to the Company
            
            
            5,720
            
            
            7,134Weighted
                average interest rate on borrowings at end of year
            
            
            8.4
            %
            
            8.5
            %





At
      March
      31, 2007 and 2008, the Company pledged bank deposits of $1,221 and $1,671,
      and
      investment securities of $316 and nil, respectively, to banks to secure banking
      facilities granted. There are no restrictive financial covenants associated
      with
      these bank facilities.





Interest
      rates are generally based on the banks' best lending rate in Hong Kong plus
      1%
      to 2% per annum, subject to fluctuations at the banks' discretion. The credit
      facilities are subject to annual review by the banks.




F - 
          23




HIGHWAY
      HOLDINGS LIMITED




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





11.
            OBLIGATIONS
                UNDER CAPITAL LEASES





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





Future
                minimum lease payments as at March 31, 2008 are as
                follows:





Year
      ending March 31





$2009
            
            
            3112010
            
            
            2492011
            
            
            2422012
            
            
            31833





The
                capital lease commitment amounts above exclude implicit interest
                of $36,
                $21, $8 and $1 payable in the years ending March 31, 2009, 2010,
                2011 and
                2012, respectively.





12.
            COMMITMENTS
                AND CONTINGENCIES





(a)
            The
                Company leases premises under various operating leases which do not
                contain any renewal or escalation clauses. Rental expense under operating
                leases was $879, $1,040 and $1,199 in 2006, 2007 and 2008,
                respectively.





At
                March 31, 2008, the Company is committed under operating leases requiring
                minimum lease payments as follows:





$YearendingMarch31,2009
            
            
            1,1912010
            
            
            3182011
            
            
            3011,810




(b)
            The
                Company had a total capital commitment of $426 and $13 for the purchase
                of
                property, plant and equipment as of March 31, 2007 and 2008, respectively.




F - 
          24


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





12.
            COMMITMENTS
                AND CONTINGENCIES - continued





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





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





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





(d)
            In
                fiscal 2008, the Company made payments of $330 to settle claims of
                additional compensation made by the employees of Golden Bright and
                other
                subsidiaries. In addition, the Company has accrued an amount of $510
                to
                settle several claims made by employees of subsidiaries, other than
                the
                Golden Bright. The labor tribunal arbitrating the claims has determined
                that $141 was payable by the Company to settle these claims. The
                employees
                have appealed against the labor tribunal decision. The outcome of
                appeal
                is pending.





(e)
            $284
                of the $330 paid to settle labor claims related to Golden Bright.
                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, and if claims by the Company on amount
                of
                such liabilities are not settled by the former shareholder, consideration
                of $514 contingent on revenue and earnings target will not be
                payable.




F - 
          25


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





13.
            CAPITAL
                STOCK





In
                August 1998, the Board of Directors authorized the Company to repurchase
                shares up to the value of $400 with a maximum repurchase price of
                $3.50
                per share. During the year ended March 31, 2003, 6,000 shares were
                purchased for a total cash consideration of $4 at prices per share
                ranging
                from $0.60 to $1.41. At March 31, 2007 and 2008, these shares were
                held in
                treasury and are not eligible to vote or receive
                dividends.





In
                September 2006, Highway Holdings Limited issued 128,534 shares of
                common
                shares and delivered to a professional legal practice as a security
                for
                its obligation to pay the second contingent payment of $514 (HK$4
                million)
                relating the acquisition of Golden Bright. The shares have been returned
                to the Company during the year ended March 31, 2008. Details are
                more
                fully described in Note 14.





In
                December 2006, 30,000 shares valued at $147 were issued to acquire
                certain
                machinery and equipment.




14.
            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 12 (e), the former
      shareholders of Golden Bright have breached certain conditions as set out in
      the
      purchase agreement. In accordance with the purchase and the escrow agreements,
      the Company has requested the escrow agent to return all the escrow shares
      to
      the Company for cancellation. As at March 31, 2008, all the escrow shares have
      been returned to the Company which has now been classified as treasury shares.
      The cancellation of these shares has not been completed.




F - 
          26


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)




15.
            CONCENTRATIONS
                OF CREDIT RISK AND MAJOR CUSTOMERS





A
      substantial percentage of the Company's sales are made to three customers and
      are typically on an open account basis. Customers accounting for 10% or more
      of
      total net sales in any of the years ended March 31, 2006, 2007 and 2008 are
      as
      follows:





Year ended March 31,2006
            
            2007
            
            2008%
            
            %
            
            %Company
                A
            
            
            19.0
            
            
            N/A
            
            
            N/ACompany
                B
            
            
            16.4
            
            
            24.8
            
            
            22.4Company
                C
            
            
            15.9
            
            
            10.7
            
            
            13.2Company
                D
            
            
            N/A
            
            
            11.4
            
            
            10.5





Accounts
      receivable from the three customers with the largest receivable balances at
      March 31, 2007 and 2008 are as follows:





Percentage of accounts receivable2007
            
            2008%
            
            %Company
                A
            
            
            N/A
            
            
            N/ACompany
                B
            
            
            10.7
            
            
            8.5Company
                C
            
            
            15.1
            
            
            33.1Company
                D
            
            
            6.9
            
            
            N/ACompany
                E
            
            
            N/A
            
            
            9.9Three
                largest receivable balances
            
            
            32.7
            
            
            51.5





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





March 31,2006
            
            2007
            
            2008$
            
            $
            
            $At
                beginning of year
            
            
            99
            
            
            31
            
            
            13Allowance
                for the year
            
            
            9
            
            
            4
            
            
            102Amounts
                written off
            
            
            (77
            )
            
            (22
            )
            
            (7
            )At
                end of year
            
            
            31
            
            
            13
            
            
            108




F - 
          27




HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





16.
            NET
                (LOSS) INCOME PER SHARE





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





Year ended March 31,2006
            
            2007
            
            2008$
            
            $
            
            $Net
                income (loss), basic and diluted
            
            
            42
            
            
            594
            
            
            (1,921
            )Shares:Weighted
                average common shares used in computing basic net income (loss) per
                share
            
            
            3,465,390
            
            
            3,635,517
            
            
            3,809,888Effect
                of dilutive securities:Weighted
                average shares from assumed exercise of stock options and issuance
                of
                common shares
            
            
            78,826
            
            
            54,657
            
            
            -Weighted
                average common shares used in computing diluted net income (loss)
                per
                share
            
            
            3,544,216
            
            
            3,690,174
            
            
            -Net
                income (loss) per share, basic
            
            
            0.01
            
            
            0.16
            
            
            (0.50
            )Net
                income (loss) per share, diluted
            
            
            0.01
            
            
            0.16
            
            
            (0.50
            )





As
      of
      March 31, 2008, the Company had 184,250 outstanding employee stock options
      and
      29,154 common shares have been granted to a director (note 19), which are
      potentially dilutive, but have been excluded in the computation of diluted
      net
      loss per share as, as these are anti-dilutive for the year ended March 31,
      2008.





17.
            FAIR
                VALUE OF FINANCIAL INSTRUMENTS





The
                estimated fair value amounts have been determined by theCompany,
                using available market information and appropriate valuation
                methodologies. The estimates presented are not necessarily indicative
                of
                amounts that theCompanycould
                realize in a current market
                exchange.





The
                carrying amounts of cash and cash equivalents, restricted cash, accounts
                receivable, accounts payable, short-term borrowings and the current
                portion of obligations under capital leases approximate their fair
                values
                due to the short term nature of these instruments. The interest rates
                on
                theCompany'sobligations
                under capital leases approximate those which would have been available
                at
                March 31, 2008 for capital lease of similar nature and repayment
                period.




F - 
          28


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





18.
            STOCK
                OPTIONS AND STOCK PURCHASE RIGHTS





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





The
                fair value of options granted to employees and directors in 2007
                and 2008
                was $1.0017 and $1.1177 per option, respectively, determined using
                the
                Black-Scholes option-pricing model based on the following
                assumptions:






2006
            
            2007
            
            2008Risk-free
                interest rate
            
            
            3.84
            %
            
            5.27
            %
            
            4.86
            %Expected
                life
            
            
            5
                years
            
            
            2
                years
            
            
            2
                yearsExpected
                volatility
            
            
            55
            %
            
            60
            %
            
            65
            %Expected
                dividend yield
            
            
            5.71
            %
            
            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
      and $60 for the year ended March 31, 2007 and 2008 respectively, which is
      included in selling, general and administrative expenses. Options awards granted
      in 2007 and 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, 2007 and 2008, there were 50,000
      and
      55,000 non-vested stock options, respectively. The weighted-average exercise
      price and aggregate intrinsic value of these non-vested stock options for the
      year ended March 31, 2007 and 2008 was $3.42 and $4.03 per option and $220
      and
      $108, respectively.




F - 
          29


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





18.
            STOCK
                OPTIONS AND STOCK PURCHASE RIGHTS -
                continued





As
      of
      March 31, 2007 and 2008, there was $12 and $13 of unrecognized compensation
      cost
      related to non-vested stock options granted under the Option Plan, respectively.
      The cost is expected to be recognized over a weighted-average period of 80
      and
      91 days, respectively.





The
                following summarizes the options
                outstanding:





Stock optionsAverageexercise
            
            Numberprice
            
            of shares$March
                31, 2006
            
            
            3.2531
            
            
            161,750Stock
                options granted
            
            
            3.4200
            
            
            50,000Stock
                options exercised
            
            
            3.0642
            
            
            (66,500
            )Stock
                options lapsed/cancelled
            
            
            -
            
            
            (5,000
            )March
                31, 2007
            
            
            3.6073
            
            
            140,250Stock
                options granted
            
            
            4.0300
            
            
            55,000Stock
                options exercised
            
            
            3.4336
            
            
            (11,000
            )March
                31, 2008
            
            
            3.5810
            
            
            184,250




At
      of
      March 31, 2007 and 2008, there were 90,250 and 129,250, respectively, of stock
      options exercisable.





The
      total
      intrinsic value of option exercised in the year ended March 31, 2007 and 2008
      was $41 and $9, respectively. The weighted-average exercise price of the
      exercisable stock options in the year ended 2007 and 2008 was $3.33 and $3.39
      respectively. The aggregate intrinsic value of the stock options exercisable
      at
      March 31, 2007 was $95. The weighted-average remaining contractual life of
      the
      exercisable stock options at March 31, 2007 and 2008 was 3.46 years and 2.37
      years respectively.





F - 
          30


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





18.
            STOCK
                OPTIONS AND STOCK PURCHASE RIGHTS -
                continued





Additional
      information on options outstanding at March 31, 2008 is as follows:





WeightedaverageremainingNumber
            
            contractualExercise prices
            
            outstanding
            
            life (years)$1.4700
            
            
            3,000
            
            
            0.17$3.1700
            
            
            13,750
            
            
            0.57$3.4200
            
            
            45,000
            
            
            3.25$3.5000
            
            
            67,500
            
            
            2.25$4.0300
            
            
            55,000
            
            
            4.26184,250
            
            
            2.93





The
                weighted-average exercise price of the outstanding stock options
                in the
                year ended 2007 and 2008 was $3.39 and $3.58 respectively. The aggregate
                intrinsic value of the outstanding stock options at March 2007 was
                $140.





19.
            STOCK
                COMPENSATION





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





The
                shares were issued to the director in 2006, 2007 and 2008 respectively
                and
                the Company recorded a compensation expense of $160 for each of the
                years
                ended March 31, 2006, 2007 and 2008, based on the fair value of the
                shares
                granted as of April 1, 2004.





F - 
          31


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





20.
            SEGMENT
                INFORMATION





TheCompany's
                chief operating decision maker evaluates segmentperformanceand allocates resources based on several factors, of which the primary
                financial measure is operating
                income.





The
                Company considers its reportable segments to be metal stamping and
                mechanical OEM, electric OEM, the manufacture and trading of cameras
                and
                underwater products, and clocks and watches. 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 31,2006
            
            2007
            
            2008$
            
            $
            
            $Net
                sales:Metal
                stamping and Mechanical OEM:Unaffiliated
                customers
            
            $
            19,404
            
            $
            22,474
            
            
            23,363Intersegment
                sales
            
            
            2,503
            
            
            2,448
            
            
            3,27821,907
            
            
            24,922
            
            
            26,641Electric
                OEM:Unaffiliated
                customers
            
            
            2,322
            
            
            7,233
            
            
            8,501Intersegment
                sales
            
            
            794
            
            
            909
            
            
            1,1583,116
            
            
            8,142
            
            
            9,659Cameras
                and underwater products:Unaffiliated
                customers
            
            
            1,487
            
            
            511
            
            
            404Intersegment
                sales
            
            
            120
            
            
            62
            
            
            281,607
            
            
            573
            
            
            432Clocks
                and watches:Unaffiliated
                customers
            
            
            2,630
            
            
            1,251
            
            
            896Intersegment
                sales
            
            
            294
            
            
            239
            
            
            1962,924
            
            
            1,490
            
            
            1,092Corporate:Intersegment
                sales
            
            
            93
            
            
            285
            
            
            344Intersegment
                eliminations
            
            
            (3,804
            )
            
            (3,943
            )
            
            (5,004
            )Total
                net sales
            
            
            25,843
            
            
            31,469
            
            
            33,164





F - 
          32




HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





20.
            SEGMENT
                INFORMATION - continued





Year ended March 31,2006
            
            2007
            
            2008$
            
            $
            
            $Operating
                income (loss):Metal
                stamping and Mechanical OEM
            
            
            806
            
            
            353
            
            
            (932
            )Electric
                OEM
            
            
            12
            
            
            277
            
            
            (891
            )Cameras
                and underwater products
            
            
            (319
            )
            
            142
            
            
            22Clocks
                and watches
            
            
            388
            
            
            (40
            )
            
            (33
            )Corporate
            
            
            (285
            )
            
            (346
            )
            
            (443
            )Total
                operating income (loss)
            
            
            602
            
            
            386
            
            
            (2,277
            )Interest
                expense:Metal
                stamping and Mechanical OEM
            
            
            126
            
            
            210
            
            
            210Electric
                OEM
            
            
            4
            
            
            29
            
            
            12Clocks
                and watches
            
            
            4
            
            
            3
            
            
            3Total
                interest expense
            
            
            134
            
            
            242
            
            
            225Depreciation
                and amortization expense:Metal
                stamping and Mechanical OEM
            
            
            638
            
            
            601
            
            
            553Electric
                OEM
            
            
            220
            
            
            259
            
            
            227Cameras
                and underwater products
            
            
            13
            
            
            9
            
            
            3Clocks
                and watches
            
            
            216
            
            
            45
            
            
            19Corporate
            
            
            3
            
            
            25
            
            
            28Total
                depreciation and amortization
            
            
            1,090
            
            
            939
            
            
            830Capital
                expenditure:Metal
                stamping and Mechanical OEM
            
            
            471
            
            
            1,276
            
            
            472Electric
                OEM
            
            
            36
            
            
            491
            
            
            65Cameras
                and underwater products
            
            
            -
            
            
            -
            
            
            -Clocks
                and watches
            
            
            167
            
            
            97
            
            
            6Corporate
            
            
            -
            
            
            67
            
            
            3Total
                capital expenditure
            
            
            674
            
            
            1,931
            
            
            546





F - 
          33


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





20.
            SEGMENT
                INFORMATION - continued





As at March 31,2007
            
            2008$
            
            $Identifiable
                assets:Metal
                stamping and Mechanical OEM
            
            
            13,556
            
            
            13,262Electric
                OEM
            
            
            7,089
            
            
            5,868Clocks
                and watches
            
            
            865
            
            
            521Cameras
                and under water products
            
            
            708
            
            
            720Corporate
            
            
            196
            
            
            119Total
                identifiable assets
            
            
            22,414
            
            
            20,490Long-lived
                assets:Metal
                stamping and Mechanical OEM
            
            
            2,467
            
            
            2,298Electric
                OEM
            
            
            1,314
            
            
            1,239Clocks
                and watches
            
            
            159
            
            
            73Corporate
            
            
            40
            
            
            36Total
                long-lived assets
            
            
            3,980
            
            
            3,646





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 31,2006
            
            2007
            
            2008$
            
            $
            
            $Net
                sales:Hong
                Kong and China
            
            
            13,981
            
            
            16,754
            
            
            16,457Other
                Asian countries
            
            
            524
            
            
            204
            
            
            238Europe
            
            
            10,298
            
            
            13,118
            
            
            14,426USA
            
            
            978
            
            
            1,261
            
            
            1,960Others
            
            
            62
            
            
            132
            
            
            8325,843
            
            
            31,469
            
            
            33,164




F - 
          34


HIGHWAY
      HOLDINGS LIMITED





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS - continued


(In
      thousands except for share and per share amounts)





20.
            SEGMENT
                INFORMATION - continued





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





March 31,2007
            
            2008$
            
            $China
            
            
            3,973
            
            
            3,645Europe
            
            
            7
            
            
            13,980
            
            
            3,646





*
      * * * *
      *




F - 
          35