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HIGHWAY HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)

Suite 810, Level 8, Landmark North
39 Lung Sum Avenue
Sheung Shui
New Territories, Hong Kong
(Address of principal executive offices)

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of each class
Common Shares, $0.01 par value per share

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 3,074,123 Common Shares were outstanding as of March 31, 2004.

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

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

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,” “predicts,” “will” 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 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, including any weakness in the currency, banking and equity markets of countries in the Asia region.

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.

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

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 selected financial information set forth below is derived from the consolidated financial statements of the Company. The selected information is qualified in its entirety by reference to, and should be read in conjunction with, such consolidated financial statements, related notes and “Operating and Financial Review and Prospects” included as Item 5 in this report.

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

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.

Dependence on Agreements with State-Owned Enterprises. All of the Company’s operations are currently dependent on its manufacturing operations conducted in China. Pursuant to its five leases (the “Premises Leases”), the Company utilizes approximately 450,000 square feet of space for manufacturing operations and dormitory facilities at the site of the factory complex in Long Hua, Shenzhen, China where the Company conducts all of its manufacturing operations. The Company’s operations are conducted pursuant to agreements entered into between certain China companies set up by the local government and the Shenzhen City Baoan District Foreign Economic Development Head Company and its designees (collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”). The Premises Leases currently expire on February 28, 2009. However, the Premises Leases may be terminated at any time prior to 2009 by either the Company or the landlord upon six months notice to the other party. Should the landlord elect to terminate the Premises Leases before 2009, or should the Premises Lease be terminated for any other reason, the entire operations of the Company would have to be relocated to other facilities. Any such relocation would be costly and would disrupt the Company’s operations and would have a severe adverse affect on the Company, its operations, its viability and its financial condition. While the Company believes that it could find suitable alternative facilities, the terms of such alternate facilities could be less favorable to the Company. Any contractual dispute under either of the BFDC Agreements or the Premises Leases could have a material adverse affect on the Company’s operations and financial condition.

To facilitate the Company’s operations in China, the local government set up three separate China companies that are parties to the BFDC Agreements which, pursuant to extension agreements (the “Extension Agreements”), expire March 31, 2006, unless renewed, with the BFDC. The BFDC is owned by the local government of Long Hua, the town in which the factory is located. Pursuant to the BFDC Agreements, the BFDC is the party responsible for providing manufacturing facilities and supplying workers to the Company and the Company is responsible for paying a management fee, and certain other charges to the BFDC. As a result of structuring its operations so that they are conducted pursuant to the BFDC Agreements and the Premises Leases, the Company is not subject to certain rules and regulations that would be imposed on entities which are considered under China law to be doing business in China by utilizing other business structures such as joint ventures or wholly owned subsidiaries organized in China. For example, the Company has not been required to apply for permits or licenses in China, to register to do business in China, or to pay taxes 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.

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

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

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 devaluations or the expropriation of private enterprise could materially adversely affect the Company. An example of such uncertainty and rapid changes was China’s imposition in 2000 on the metals industry of the Customs License Deposit, which resulted in the Company being forced to pay a 20% deposit on all imported steel metals. The imposition of this deposit requirement suddenly and materially affected the Company’s metal stamping operations. However, as indicated elsewhere in this Annual Report, the Customs License Deposit rules have since been modified and partially repealed.

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

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

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

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. The BFDC is responsible for paying its own taxes incurred as a result of its operations under the BFDC Agreements. There can be no assurances, however, that the Company will not be subject to such taxes in the future. If China did impose a tax upon the Company, the tax could materially adversely affect the Company’s business and results of operations. See Note 3 of Consolidated Financial Statements for additional information on taxation.

Dependence on Single China Factory Complex. All of the Company’s products are currently manufactured at a single factory complex located in Long Hua, Shenzhen in southern China. The Company currently maintains fire, casualty and theft insurance aggregating approximately $18,000,000 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.

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 China’s opposition to the U.S. war in Iraq in 2003, the strained relations between the U.S. and North Korea (a neighbor of China), the U.S. Navy reconnaissance plane that was downed on Hainan Island in China in April 2001, allegations by the U.S. that certain thermonuclear military technology of the U.S. has been stolen by China’s spies, the bombing by NATO forces of the Chinese embassy in Belgrade, Yugoslavia in 1999, the continuous support by the U.S. of Taiwan, and the continuous allegations by the U.S. of human rights abuses in China. In addition, the U.S. and China have recently been involved in controversies over the protection in China of intellectual property rights that threatened a trade war between the countries. These strains on U.S./China relations could affect the ability of companies operating in China, such as the Company, from engaging in business with, or selling to the U.S. or U.S. companies. Any disruption of the current trade relations with the U.S. could have a material adverse effect on the Company’s business. No assurance can be given that these and any other future controversies will not change the status quo involving peaceful trade relations between the U.S. and China, or that the Company’s business and operations in China will not be materially and adversely affected. Even if trade relations between the U.S. and China are not affected by political difficulties between the two countries, such political friction could adversely affect the prevailing market price for the Company’s Common Shares.

Labor Shortages. The Company has been affected by cyclical trends and other shortages in labor supply. For approximately two months each year, there are labor shortages in China as a result of the Chinese New Year during which time the Company follows the customary practice at its factory complex of temporarily discontinuing operations. In addition, the availability of labor is also restricted during the harvest periods of the year. There is also a large turnover of employees in China each year, particularly following the Chinese New Year holiday. The Company has experienced labor shortages in the past as a result of road and weather conditions and natural disasters. Notwithstanding such temporary shortages, the Company has to date been able to fill its labor requirements because of the large pool of available employees. However, the pool of available employees is increasingly becoming limited because (i) of the increased demand for labor due to the growth in China’s economy and (ii) the population limiting effects of the “one child” policy of the Chinese government. Any material or prolonged shortage of labor would have a material adverse effect on the Company’s results of operations.

Historically, a substantial percentage of the Company’s sales has been to small number of customers. During the years ended March 31, 2002, 2003 and 2004, the Company’s sales to its three largest customers for such periods accounted for approximately 36.3%, 40.6% and 46% of net sales respectively. See “Business—Major Customers.” In addition, as a result of a recently announced shift in strategy, the Company will further attempt to limit the number of smaller customer orders it received for its metal manufacturing operations, thereby further increasing its dependence on a smaller number of larger 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. The Company’s sales transactions with all of its customers are based on purchase orders received by the Company from time to time. While the Company is a party to certain longer term manufacturing agreements with certain of its customer that delineate the procedural arrangements between the parties, these agreements do not contain any fixed or minimum purchase requirements, and the Company is dependent upon purchase orders, if and when placed under these agreements, for future sales. As a result, the Company has no written agreements with its customers for future production or sales, and the amount of sales to any of its customers may fluctuate from time to time. The loss of any one or more of its major customers or a substantial reduction in orders from any of them would have a material adverse effect on the Company’s business unless and until the Company was able to replace the customer or order with one or more of comparable size.

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. While the Company has not, to date, experienced any material difficulty in being paid by its largest customers, the Company could be adversely affected if a major customer were unable to pay for the Company’s products or services. During the fiscal years ended March 31, 2003 and 2004, accounts receivable from the five customers with the largest receivable balances at year-end represented 49.0% and 61.5% of the total outstanding receivables, and one customer’s accounts receivable represented 36.5% of the Company’s total receivables as of March 31, 2004.

Significant Worldwide Political, Economic, Legal And Other Risks Related To International Operations.

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

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

Hong Kong Currency. 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$7.80 to $1.00. However, due to the currency turmoil that has affected many countries in Southeast Asia, there has been pressure to devalue the Hong Kong dollar. All dollar amounts (“$”) set forth in this Annual Report are in U.S. dollars. 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.

Asian Financial Problems. The Asian financial markets have experienced considerable turmoil over the past few years with significant currency fluctuations, stock market volatility and instability at banking and financial institutions, major corporations and foreign governments. These factors could result in changes in the relative value of the currencies of Asian countries, which changes could affect the Company’s financial condition and competitiveness. 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. Although China has refused to devalue its currency, international pressure to permit its currency rates to fluctuate has been increasing and may cause China to permit its currency rate to change. In addition, while the Hong Kong Government has indicated that it has no plans to break the peg with the U.S. dollars, no assurances can be given that this will remain so in the future. The Company incurs its major expenses in Hong Kong dollars and renminbi and generates its revenue’s primarily in U.S. dollars and would therefore benefit from depreciation of the Hong Kong dollar or renminbi. However, an appreciation of the renminbi or Hong Kong dollar against the U.S. dollar would increase the expenses of the Company when translated into U.S. dollars and could adversely affect profit margins.

The depreciation of the currencies of certain South East Asian countries has made these markets more competitive with China for manufacturing. The Company believes these countries will continue to compete strongly with Hong Kong/China for manufacturing business over the next year.

In order to remain competitive and viable, the Company must continuously revise and improve its operations, acquire new equipment, and anticipate and react to market forces. The failure to anticipate, detect or react to market changes can have severe adverse affects on the Company’s operations. During the past few years, the Company has identified a number of changes in the markets in which it operates and has attempted to react to these changes. The Company’s actions have included entering into a licensing and distribution arrangement with a newly formed German distributor, the establishment of a facility in Bulgaria, the consolidation of certain of its subsidiaries, changes in its marketing activities, the development of new products, and changes in its target customers. These prior changes, as well as changes that the Company anticipates making during the current year, require significant financial and personnel resources. The failure to correctly react to changes in the market could, therefore, result in a significantly drain on the Company’s resources and could adversely affect the Company’s future operations. No assurance can be given that the Company will be able to detect and correctly react to changes in its principal markets, or that its investments in anticipation of such changes will result in the anticipated return. For example, while the Company was successful in anticipating the glut of low-cost quartz clocks that severely reduced the profitability of the manufacture of quartz clocks by developing a new line of radio controlled clocks, its establishment of a facility in Bulgaria did not met the Company’s expectations, and the Bulgarian operations were closed during the fiscal year ended March 31, 2004. In addition, while the Company correctly determined that it could commercially exploit its “Kienzle” brandname in Europe, its licensing and distribution agreement with its German distributor has not met expectations. The Company anticipates that it will invest a significant amount of its financial resources during the current year to acquire new equipment, renovate some of its existing facilities, and to otherwise change its operating strategy, primarily with respect to the manufacture of cameras. The proliferation of digital cameras and the photographic capabilities of mobile telephones has reduced the demand for the Company’s film-based cameras, a trend that the Company believes will accelerate as the number of digital cameras and mobile telephones equipped with cameras increases. Accordingly, the Company is currently exploring new markets that it can enter based on its manufacturing expertise and capabilities. Should the Company err in its allocation of its resources to these new endeavors, its business, operations and financial condition would be adversely affected.

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 Article 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). Until successors are elected, the Company’s independent directors consist of Benson Lee, Terrence A. Noonan, David Tamir and Dirk Hermann. 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.

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 unit sales of its clocks and cameras in Germany and increases in metal manufacturing for European customers, which sales are paid in euros, the Company is increasingly becoming exposed to the risks associated with possible foreign currency controls, currency exchange rate fluctuations or devaluations. In addition, the Company’s exposure to exchange rate fluctuations is expected to increase if the Company’ efforts to increase sales in Europe of its Kienzle branded products, directly or through its new marketing arrangement with a German distributor, are successful.

The Company’s financial results have, from time to time, been affected by currency fluctuations. For example, during the fiscal years ended March 31, 2003 and 2004, the Company recognized net foreign currency exchange gains of $344,000 and $278,000, respectively. However, foreign currency exchange rates can also result in material losses, such as in the fiscal year ended March 31, 2001 during which the Company recognized a net foreign currency exchange loss for $216,000. Notwithstanding these currency transaction fluctuations, the Company does not attempt to hedge its currency exchange risks and, therefore, will continue to experience gains or losses due to changes in foreign currency exchange rates. However, even if the Company were to engage in currency hedging transactions, no assurance can be given that the Company will not suffer future losses as a result of either currency fluctuations or as a result of such hedging transactions.

The Company competes against numerous manufacturers for all of its current products. Such competition exist because of third party manufacturers such as the Company as well as from the in–house manufacturing capabilities of existing customers. To a large extent, the Company competes in its metal manufacturing 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 during the past few years had to reduce its price and its operating margins in all three of its business units. This has led to lower sales, lower gross margins, and lower net profits. During the past few years, the Company has at times refused certain purchase orders of manufacturing contracts because of pricing pressures, which has lowered the Company’s net sales and lowered its market share. Unless the Company can increase its gross margins, the Company will continue to operate at very narrow profit margins, which will negatively affect the Company’s financial position and its stock price. To date, the Company has been able to compete based on cost because of the cost structure of its operations in Shenzhen, China. However, numerous other manufacturers have now established facilities in Shenzhen, and the Company’s competitive advantage has been significantly diminished. As a result of the increasing competition in certain of the Company’s product markets, the Company has been forced to change its products and its operating strategy. No assurance can be given that the Company will be able to compete with it revised operations.

The Company also has experienced significant competition in the camera and clock manufacturing industries. Although the Company’s camera sales increased during the past fiscal year, competition has caused the Company to maintain narrow gross margins on its products, which pricing pressure has impacted the profitability of its camera operations. In addition, low quality, extremely inexpensive quartz clocks have recently flooded the clock market and reduced the demand for the more expensive and higher quality clocks manufactured by the Company and its principal original equipment manufacturer clients.

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.

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

While the Company has been exempted from some of the recently enacted regulations under the Sarbanes-Oxley Act of 2002, the Company will eventually become subject to the most of regulations. Most U.S. public companies already have had to adopt and implement most of the new Sarbanes-Oxley regulations. However, because the Company is a foreign private issuer, the Company has been able to defer the implementation of many of the remaining Sarbanes-Oxley regulations until later this year or the next year. Accordingly, the Company has not yet had to incur all of the additional financial and administrative burdens imposed on public companies by the Sarbanes-Oxley Act. The Company anticipates that its administrative expenses, particularly its accounting, auditing and legal fees and expenses, will significantly increase in the near future as the Sarbanes-Oxley regulations are implemented and could negatively impact the Company’s operations and profitability.

Highway Holdings Limited is a holding corporation 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 operates through various controlled subsidiaries.

Since its organization, the Company has been a manufacturer of high quality parts, components, subsystems and products for major Japanese and German original equipment manufacturers (“OEMs”). The Company currently also is a manufacturer of watches, clocks, clock movements, and single use and low-end 35 mm cameras. The cameras are manufactured for third parties for sale under various brand names. The clocks and watches are manufactured for both third party distributors and for the Company’s own account. The clocks and watches that it manufactures for its own account are marketed primarily in Europe under the Company’s “Kienzle” brand name. During the past few years, the Company has also licensed the “Kienzle” mark for use on various products in Europe, which products were manufactured by others. The Company believes that the market for certain of its camera and clock products is diminishing and, as a result, has been exploring alternative products that it can manufacture and market.

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

On February 28, 1997 the Company entered into an agreement to purchase substantially all the assets of Kienzle Uhrenfabrik GmbH (“Kienzle Uhren”), a Germany-based clock manufacturer, including the minority interest in Kienzle Time (H.K.) Ltd. The purchase included all the equipment, machinery, tools, trademarks, patents and furniture and office equipment of Kienzle Uhren. Subsequent to purchasing the equipment, the operations for Kienzle Uhren were discontinued and the assets were dismantled, packed and shipped to the Company’s facilities in China.

The Company’s OEM manufacturing business has historically been directed primarily at manufacturing and assembling metal parts used in subsystems or other products. As part of its business strategy to capture more of the revenues related to the manufacture of end-products, the Company has recently been attempting to leverage its complete manufacturing capabilities to the manufacture of the subsystems, subassemblies, larger components, and even completed end-products for its clients. In addition, the Company is attempting to diversify the types of products that it manufactures, and, in that context, now manufactures a wide variety of parts and components for its European OEM customers, including electrical connectors, coils for induction motors, ballasts casings for lighting fixtures, and friction clutch assemblies.

The Company’s business strategy has been to be a low-cost manufacturer of parts, components, subsystems and end-products. In order to maintain its competitive advantage, the Company established and currently maintains its primary manufacturing operations in Shenzhen, China in order to take advantage of lower costs and competitive labor rates while having access to Hong Kong’s port and communications and banking infrastructure. Recently, however, many other manufacturers have established their facilities in Shenzhen, China, which has resulted in increased competition. As a result, the Company has considered replicating its formula for establishing manufacturing or marketing and distribution facilities in low-cost locations that are near its target markets. As part of this business strategy, the Company in 2001 established another, significantly smaller, manufacturing and distribution facility in Bulgaria. However, the market for some of the Bulgarian products changed, and Bulgarian operations did not provide the operating and logistical benefits the Company had anticipated. As a result, the Bulgarian operations were closed during the fiscal year ended March 31, 2004 pending the Company’s reevaluation of an alternate use of the Bulgaria subsidiaries. The Company may still consider establishing other facilities outside of China in the future. For example, in August 2003 the Company acquired a 50% interest in a Panamanian marketing and distribution company that is engaged in the business of assembling, packaging and/or marketing photographic products, such as film, batteries and certain cameras.

The Company regularly investigates the strategic and opportunistic acquisition of other operations and may, in the future, acquire other businesses or product lines. However, no such acquisitions are currently pending.

The Company is primarily an integrated manufacturer of high quality parts and components, clocks and clock movements, and cameras for major Japanese, German and United States OEMs and contract manufacturers. The Company also manufactures clocks for its own account under its own “Kienzle” brandname. Because of the name recognition of the “Kienzle” name in Europe, the Company during the fiscal year ended March 31, 2002 commenced selling watches and other products in Europe under the Kienzle brandname, which products the Company purchased from other manufacturers. In January 2003, the Company also entered into a supply and licensing agreement with a newly formed German distributor for the distribution of “Kienzle” branded watches, clocks and other products in Germany and other European countries. The Company expects to increase this “Kienzle” product trading business in Europe. Although the licensing and distribution agreement with the German distributor generated $1,665,000 of revenues for the Company in the fiscal year ended March 31, 2004, the Company has terminated that agreement and is considering restructuring the arrangement with the German distributor. As of the date of this Annual Report, pending the final resolution of the restructuring of the agreement, if such restructuring occurs, the German distributor is still distributing Kienzle branded products in Europe.

All of the Company’s manufacturing activities are currently conducted at a factory complex located in China, which the Company occupies pursuant to an arrangement with affiliates of the local government. During the past fiscal year, the Company closed a smaller manufacturing and packaging facility in Bulgaria it had established to produce cameras for sale in Europe. The Company’s goal in establishing the Bulgarian facility was to operate a low-cost facility that can quickly supply products for the European market. However, the Bulgarian operations were closed in December 2003 due to the failure to achieve the operating and logistical goals established by the Company.

To date, the Company’s largest revenue source has been from its metal parts manufacturing operations. The Company manufactures and supplies a wide variety of high quality metal parts and components which 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, electronic components, electrical connectors, cameras, clocks, automobiles, vacuum cleaners, light fixtures and car audio and other audio equipment. As part of its manufacturing operations in China, the Company assists customers in the design and development of the tooling used in the metal stamping process and provides a broad array of other manufacturing services, including spray painting, screen printing, plastic injecting molding, pad printing and assembly services. By providing these services, which complement the Company’s core metal stamping operations and eliminate the need to outsource these needed functions, the Company is better able to assure product quality, control overall manufacturing costs and provide timely product delivery, all of which management believes is essential to maintaining, expanding and increasing the Company’s customer base. The Company believes its historical success as a supplier to respected multi-national companies is due in large part to: (i) its international management structure which includes Japanese, German and Chinese nationals; (ii) its low labor and operating costs resulting from locating its manufacturing operations in China; (iii) its ability to manufacture the type of high quality metal parts required by the Company’s targeted customers; (iv) its expertise in manufacturing these parts in the required quality at a reasonable cost; and (v) the breadth of its manufacturing capabilities.

Earlier in 2003, the Company announced a strategic shift in its manufacturing operations. During the past few years, a number of competing metal stamping operations have been established in Shenzhen that are also able to produce high-quality, low cost metal parts. As a result, the manufacture of many metal parts has become a commodity operation that competes primarily based on price. In order to distinguish itself from these other stamping operations, the Company has adopted and is now implementing a plan in which it has shifted its focus from smaller, simple metal stamping projects for which the Company competes solely on price to the manufacture of 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, and not just metal stamped parts, the Company will focus on manufacturing larger orders of customized products for global companies. By shifting to the manufacturing of larger, customized products that utilize more of the Company’s vertically integrated capabilities, the Company believes that it will be able to increase its gross margins and reduce the costs associated with setting up and manufacturing small run, metal stamping parts. The Company is initially focusing its marketing efforts at European OEMs. The Company believes that its restructured strategy is working and has recently announced new manufacturing agreements with OSRAM, a subsidiary of Siemens AG, and with Berger Lahr GmbH, a subsidiary of Schneider Electric. The Company has also received manufacturing orders from major German companies such as Miele & Cie. KG.

Utilizing the skills, expertise and capabilities developed from its metal manufacturing operations, the Company also manufactures (i) clocks and watches for its own Kienzle branded line of timepieces, and (ii) clocks and clock components on an OEM basis for internationally known clock companies. The Company currently manufactures high quality quartz clocks at a low cost for both its own internationally recognized brandname line of clocks and for other internationally known companies, primarily Braun of Germany, and Casio of Japan. However, the international market for quartz clocks has, during the past few years, been stagnant, and the growth in sales that the Company had anticipated has not materialized. In addition, a number of other companies, including some companies that are believed to be receiving government subsidies, have recently duplicated the quartz manufacturing process and are now manufacturing quartz clocks in such volumes and at such low prices, that the manufacture of many lines of quartz clocks is no longer feasible. As a result, sales of certain lines of clocks (primarily quartz clocks) previously manufactured by the Company have decreased. In order to address these issues, the Company has taken the following actions:

The Company’s third existing line of operations is the manufacture of low cost cameras for OEMs in the United States, Japan and Europe. Until June of 1999, the United States had been the largest market for single use (disposable) cameras. In 1999, in response by an action initiated by Fuji Film against a number of camera importers, the United States International Trade Commission (ITC) issued an order that effectively barred the Company’s OEMs from importing recycled one-time-use cameras into the United States. In response to the ITC order, the Company increased its sales into Europe and Asia, increased its manufacturing and sales of low-end 35mm cameras that are not subject to the order, and developed and commenced marketing other camera products (such as a new line underwater photographic products). As a result of the foregoing actions, the Company’s camera revenues in fiscal 2004 increased by $1,080,000, or 22%, over camera sales in fiscal 2003. In addition, the Company has developed and patented a new reusable lens fitted film package that the Company believes does not infringe on the cameras that are subject to the ITC order. The package is integral to the Company’s preloaded camera. The patent applies alternative photographic cameras that can compete in the market place with single-use cameras. Because the action regarding the ITC order is being appealed by Fuji, the Company has not yet, however, attempted to market its new camera in the United States. While sales of the Company’s single-use cameras and low-end 35mm cameras remain strong in Europe, the Company anticipates that the market for these cameras will decrease in the near future as digital cameras replace the traditional film cameras. In addition, the proliferation of mobile telephones that have the ability to take and transmit pictures also is expected to reduce the demand for the Company’s film-based camera products. As a result, the Company expects camera sales of single-use and low cost film cameras to decrease in the future.

Management believes that the third-party manufacturing industry has experienced major increases over the past decade as manufacturers increasingly outsource the manufacture of some or all of their component and/or product requirements to independent manufacturers. The benefits to OEMs of using contract manufacturers include: access to manufacturers in regions with low labor and overhead cost, reduced time to market, reduced capital investment, improved inventory management, improved purchasing power and improved product quality. The metal products manufacturing business of the Company represented approximately 58.3% of the Company’s gross revenues in the fiscal year ended March 31, 2004 and has historically been the largest segment of the Company’s business.

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

Historically, the Company has manufactured high-quality metal parts, mostly for Japanese customers. The Company did not engage in any active marketing efforts to develop its business for its metal manufacturing operations. Recently, however, because of all of the competition that has developed, in Shenzhen and elsewhere, for low cost metal stamping, the Company has changed its customer focus, its manufacturing goals, and its marketing efforts. As part of its business strategy to capture more of the revenues related to the manufacture of end-products, the Company has recently been attempting to leverage its complete manufacturing capabilities to the manufacture of the subsystems, subassemblies, larger components, and even completed end-products for its clients. In addition, the Company is attempting to diversify the types of products that it manufactures. The Company has also increased its marketing efforts and now attends trade shows and engages in direct marketing efforts. In order to upgrade its technical manufacturing abilities, the Company in 2002 received its ISO 9001 certification and has been improving its manufacturing facilities. The Company’s landlord has rebuilt one of the Company’s metal stamping buildings, and is currently refurbishing another existing building in anticipation of material orders for light fixtures from one of the Company’s German customers. The Company currently expects the light fixture manufacturing operations to commence at the refurbished facility during the summer of 2004. In total, the Company currently anticipates that it may spend between $1,500,000 and $3,000,000 this fiscal year on capital expenditures for its metal and other manufacturing operations in order to upgrade its current facilities and equipment.

Having acquired all of the manufacturing equipment of the German Kienzle Uhren company in 1997, the Company has the capability to manufacture clocks for both third parties and for its own account. In addition, as a result of the Kienzle acquisition, the Company owns the “Kienzle” trademark, a name that is a household name in Germany and a famous name throughout Europe. As a result, the Company is able to compete on a name recognition basis as well as on a cost and quality basis. Although the Company does not have any definitive data regarding worldwide clock manufacturing and sales, the Company believes that there is an industry-wide consolidation underway, and that companies that cannot produce either high-quality, brandname clocks at a competitive price, or low-end clocks at extremely low prices, are being driven out of business. The Company believes that sales of the sort of clocks that are manufactured by the Company have been stagnant worldwide during the past few years for the following reasons: (i) Higher quality clocks have a long useful life and, therefore, are not replaced frequently. Consequently, unlike other consumer products, replacement sales are less frequent. (ii) The market has been flooded by inexpensive quartz clocks manufactured by companies owned or subsidized by governments that have often been sold, in the opinion of the Company, at prices that are below the manufacturing costs of such clocks. Until recently, the Company believed that it could overcome some of these market forces by lowering its manufacturing costs and increasing its marketing efforts. Accordingly, while the Company continues to control its costs and increase its marketing efforts, the Company has decreased its emphasis on quartz clocks and has commenced manufacturing other timekeeping pieces. For example, the Company has commenced manufacturing watches that are sold under the “Kienzle” brandname and has commenced manufacturing clocks that set themselves by radio signals broadcast from atomic clock stations. These radio clocks are particularly popular in Europe and Japan and constitute a significant portion of total clock sales in Europe and Japan. During the fiscal year ended March 31, 2004, revenues from and radio controlled clock sales were approximately $500,000.

The Company’s camera operations consist of manufacturing low cost cameras and selling the Company’s own line of niche camera products. Sales of singe-use cameras have remained consistent in Europe, while the Company has experienced sales growth in the U.S. during the past two fiscal years for its low-end reusable 35 mm cameras as vendors have attempted to market camera products that are an alternative to the single-use camera. In order to increase its presence in the low-end camera market, the Company has developed its own patented reusable lens-fitted film package camera. However, to date, no material amount of cameras based on this patented film package have been manufactured or sold. The Company has also been developing and marketing other niche-market products, such as its line of underwater camera products. The Company, however, believes that the market for film-based cameras, such as the Company’s products, have been negatively impacted and will further decline as the market transitions from the traditional film camera to the digital cameras. The growing use and availability of digital photography with mobile telephones is expected to further contribute to the future decrease in demand for the Company’s cameras.

Management believes that the Company’s future growth and profitability depend on its ability to maintain product quality, control production costs, increase production capacity, commercially exploit the recognition of the Kienzle trademark and reputation, improve its marketing/distribution channels, increase its product offerings, and to effectively react to market changes.

Capitalize on its manufacturing cost structure and logistical advantages: By locating the Company’s principal manufacturing facility in Long Hua, Shenzhen, China, less than 30 miles from Hong Kong, the Company is able to take advantage of the low overhead costs and inexpensive labor available in China. The close proximity of the factory complex to Hong Kong facilitates transportation of the Company’s products out of China to customers in Hong Kong and beyond through the port of Hong Kong. Management believes that there has been an increase in the number of Japanese and German OEMs establishing factories or using contract manufacturers in southern China and this provides the Company with a large customer base within close proximity to the Company’s operations in China.

Capitalize on, and leverage its manufacturing strength: Unlike many of its metal part manufacturing competitors, primarily those in Shenzhen, China, the Company has a vertically integrated manufacturing facility that can design, manufacture and assemble more complex components and subassemblies. The Company recently revised its metal manufacturing strategy to focus on manufacturing more complex products for larger customers. 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 establish their product manufacturing facilities in China, the Company will seek to provide component and subassembly manufacturing services to these new companies.

Capitalize on its Kienzle trademark: The Company believes that its “Kienzle” trademark is widely recognized in Europe, and particularly in Germany, and represents high quality, affordable, products. As a result, the Company believes that it can capitalize on that trademark by (i) distinguishing its own Kienzle clocks and watches from many of its competitors in the crowded timepiece marketplace, (ii) offering and selling other high quality timekeeping and related products that are manufactured by others under that name, and (iii) offering and selling in Europe other electronic and household products that are manufactured by others under the Kienzle name. By marketing products, even those that the Company does not manufacture, under the Kienzle name, the Company is able to realize a name recognition premium over other similar products.

Change its product line in response to market conditions: The Company’ strategy is to respond to changes in market conditions by changing its product offerings. Recent examples of its ability to respond to market and other conditions include the development of a new line of underwater camera products and the development of a clock that sets itself based on radio signal broadcasts. The Company has also been exploring manufacturing other products, such as LCD monitors and LCD televisions. The Company is in the early stages of exploring a cooperation arrangement with a Taiwanese manufacturer of LCD televisions and monitors in which the Company would purchase semi-knock-down kits, and then assemble and sell the completed monitors and televisions. To date the Company has only manufactured sample products for marketing purposes, and it is unclear that the Company will be able to develop a viable business plan regarding LCD monitors and LCD televisions or compete in this market.

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

In addition to expanding its manufacturing capabilities through acquisition, merger, etc., the Company may also establish additional manufacturing facilities in other countries that offer benefits similar to those available in China. The Company believes that there are other countries that offer low labor and operating costs and locations close to the Company’s customers. For example, in 2001, the Company established a manufacturing facility in Bulgaria, a location that is near the Company’s European customers, has both low wage rates, low operating costs, and favorable transportation arrangements for delivery of its products to European markets. While the Bulgaria facilities were not successful and were closed during the past fiscal year, the Company may also consider opening other smaller facilities in other locations in Europe, Asia or Central/South America. However, no such other locations have been identified, and no assurance can be given that the Company will be able to duplicate its China business in other countries.

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

The Company conducts most of its manufacturing operations in accordance with typical Japanese manufacturing standards, paying particular attention to cleanliness, incoming material control, in process quality control, finished goods quality control and final quality audit. In 2002, the metal manufacturing facilities at the Company’s factory complex received ISO 9001 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.

Metal manufacturing accounted for 61.8%, 57.4% and 58.3% of the Company’s total sales during the years ended March 31, 2002, 2003 and 2004, respectively. The Company’s metal operations are conducted at the Company’s manufacturing facility in Long Hua, Shenzhen, China.

The Company’s metal business consists of three stages: (i) tooling design and production; (ii) metal stamping; and (iii) finishing, packaging and shipping.

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

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

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

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

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 metal parts 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 and components are shipped by truck directly from the factory to the customer’s factory in China or elsewhere through the port of Hong Kong.

The Company has been manufacturing clocks and clock components since June 1995. Prior to April 1997, the Company manufactured clocks for Kienzle Uhren GmbH, a clock manufacturer established over 180 years ago in Germany. In April 1997, the Company acquired the “Kienzle” trademark and substantially all of the assets of the clock manufacturer. The equipment and parts that the Company acquired were located in Germany. In order to avail itself of its low-cost, high-quality manufacturing capabilities in China, the Company packed and shipped all of the equipment to the Company’s facilities in China and assembled. Most of equipment has been operating at the Company’s facilities since the March 31, 1999 fiscal year, and the Company is currently manufacturing finished clocks, alarm clocks and clock movements with these assets. In addition to acquiring the Kienzle assets, the Company has also increased its plastic-injection capacity, and its dial printing and established a new auto lathe operation for round metal parts to handle the Company’s additional manufacturing needs.

The Company’s clock business is divided into the manufacture and sale of clock movements and finished alarm and wall clocks. During the past fiscal year, the Company manufactured clocks for Braun and other OEMs. Approximately 30% of its clock manufacturing (measured in terms of dollars of sales) were clocks that Company sold under its Kienzle trademark, and 70% of this clock manufacturing was for its OEM clients.

The “Kienzle” name is a registered trademark in approximately 50 countries world-wide including major markets of the United States, U.K., Germany and Japan. The Company believes that the “Kienzle” brand is regarded as a quality manufacturer of clocks and watches. The Company also believes that the reputation of the Kienzle name can be carried over to other high quality products, particularly in Germany. The Company is building on the Kienzle brand name, the Kienzle product range and the Kienzle equipment to sell and produce alarm and wall clocks, other branded clocks, clock movements and OEM clock manufacturing.

Since the Kienzle trademark is so well regarding in the time-keeping industry, the Company has recently also commenced manufacturing wrist watches under the Kienzle brandname. Revenues from watch manufacturing increased from $140,000 in fiscal 2003 to $260,000 in fiscal 2004. The Company has supplemented its distribution of Kienzle wrist watches that it manufactures with wrist watches manufactured by other manufacturers, which watches are branded and sold under the Kienzle name. During fiscal 2004 sales of third party manufactured watches sold under the Kienzle name represented $1,638,000 in sales.

In addition to the clocks traditionally manufactured and sold under Kienzle name, the Company is attempting to increase the line of clock products it offers. The principal new product that the Company recently introduced is a line of clocks that are synchronized with radio signals broadcast from atomic clock transmitters. These radio synchronized clocks automatically set themselves with split second accuracy and adjust for daylight saving time and leap year. The radio synchronized clocks have not been widely adopted in the U.S. because there is only one broadcast station in the U.S. that can be used to adjust the clocks (the U.S. Atomic Clock located in Boulder Colorado). However, the clocks are very popular in Europe (where there are two atomic clock broadcast stations) and are growing in popularity in Japan. The Company has been selling its radio controlled clocks to Japan and Europe and recently received a new OEM order from Braun GmbH for the development of two new radio-controlled clock products to be sold under Braun’s name. The Company believes that there are still some growth opportunities in the radio synchronized clock market in Germany. The Company has filed several patent applications for aspects of its own radio controllable clocks in Europe, Hong Kong, Germany and the U.S.

For the fiscal year ended March 31, 2004, the Company’s clock and watch revenues (including revenues generated from selling third party watches and other products under the Kienzle trademark) increased over the prior fiscal year, but decreased slightly as a percentage of total revenues, from 18.5% of total revenues in fiscal 2003 to 18.1% in fiscal 2004, due to the proportionately larger increases in the Company’s other product segments.

The Company currently manufactures and assembles cameras in its Shenzhen, China manufacturing factory complex. During the past two years, the Company also operated a small camera assembly plant in Bulgaria. The Bulgarian plant was closed during the past fiscal year. The camera products that the Company manufactures consist of (i) reusable 35mm cameras, (ii) lens-fitted film packages, commonly referred to as single-use cameras, and (iii) niche camera products, such as the Company’s underwater camera and other accessories for underwater cameras. Camera sales during the three years ended March 31,2004, 2003 and 2002 accounted for 23.6%, 24.1% and 23.4% of net sales, respectively. The Company’s cameras are sold worldwide through various distributors.

Prior to the fiscal year ended March 31, 1999, most of the Company’s camera revenues were derived from the sale of single-use lens-fitted film package cameras that the Company recycled. Approximately one-third of such sales had been to re-sellers who distributed the recycled cameras in the United States. In June 1999, in response to an action filed by Fuji Photo Film Co., the United States International Trade Commission (ITC) issued a general exclusion order that effectively bars the importation into the United States of recycled single-use lens-fitted film package cameras. Although the ITC proceedings were not directed at the Company and the order did not mention the Company, the bar on the importation of the recycled cameras prevented the Company from selling those cameras in the United States.

In order to develop potential new markets for re-usable cameras, the Company developed a new reusable lens-fitted film package, a camera that has a different design and functional mechanism from that utilized in the single-use lens-fitted film package cameras currently on the market. The Company’s reusable lens fitted film package can, however, also be sold in the same market as the single-use lens-fitted film package. In November 2000, the Company received approval from the U.S. Customs office for the importation of its new cameras in the United States. The Company also recently was granted a patent in the United States, U.S. Patent Number 6,522,835 B2, that covers the Company’s “photographic film package” with a detachable cartridge. However, in June 2001, the Fuji Photo Film Co. filed a complaint for enforcement proceedings with the United States International Trade Commission (“ITC”) against 20 companies alleging that those companies violated Fuji’s patents. The ITC action has effectively prevented the Company from marketing its film product in the United States. As a result of the proceedings before the ITC, the Company has not commenced marketing its new camera in the United States and currently has not set a date on which it will commence distributing its new camera in the United States.

In order to expand its camera product offerings, the Company has also developed a low cost, fully automatic, compact 35mm camera with flash lighting and waterproof housing, which allows the camera to take photographs underwater in depths of up to 60 feet. In addition, the Company also manufactures a variety of underwater camera accessories.

The Company fabricates many of the components used in its camera internally. Other key components such as the lens, printed circuit board, integrated circuits, carrying cases and packaging are purchased from outside vendors in Hong Kong, China, Taiwan and Japan.

The Company believes that its use of in-process quality control and a final quality audit process, together with low cost labor and overhead at its China facilities, enable it to manufacture cameras at a competitive price. Nevertheless, because of strong competition in the low cost camera markets, the Company’s gross margins on camera sales are very narrow. In addition, the Company believes that demand for its film camera products has started to decrease, and will continue to decrease, as a result of the proliferation of digital cameras and mobile telephones with photographic capabilities, all of which reduce the market for the Company’s film-based cameras.

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

In 1999-2000, the Company’s ability to import sheet metal was adversely affected due, in part, to China’s institution of a “Customs License Deposit” for the import of “sensitive materials,” which category includes sheet metals. The deposit requirement severely limited the amount of materials the Company could import and adversely affected the Company’s metal stamping operations. The Company currently is exempt from these deposit requirements. However, some of these stringent and burdensome governmental licensing and deposit requirements are still in effect, and the Company’s exemption may lapse or be lifted in the future.

Finished Products. Camera and clock manufacturing primarily involves the production of plastic injected and metal stamped components as well as integrated circuits, lenses, crystals, magnets and paper packaging products. While these materials are subject to price fluctuations, the Company has not been materially adversely affected by price increases or shortages of supply. The recycling of single-use cameras requires empty camera shells purchased mainly from Japanese and German agents for recycling in the factory complex in China. The supply of quality shells can be limited at times based on overall market use of single-use cameras; however, the supply of shells is typically only restricted by the purchase price for such shells.

The Company transports components and finished products to customers in China and to and from Hong Kong and China by truck. Generally, the Company sells its products “free-on-forwarder” (“F.O.F.”) Hong Kong or “free-on-board” (F.O.B.) Hong Kong. To date the Company has not been materially affected by any transportation problems as it uses subcontract trucking services which have been readily available in the past. Similarly, recent improvements in the roads and freeways 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.

The Company’s sales are generated from sales in Hong Kong/China, Europe, the United States, and other Asian countries. Net sales to customers by geographic area are determined by reference to the shipping destinations specified by the Company’s customers (except for sales to China). For example, if the products are delivered to the customer in China, the sales are recorded as generated in Hong Kong; if the customer directs the Company to ship its products to Europe, the sales are recorded as sold in Europe. Payments are paid in Hong Kong dollars, United States dollars and European euros. Net sales as a percentage of net sales to customers by geographic area consisted of the following for the years ended March 31, 2002, 2003 and 2004:

The Company’s customers for its metal stamping products are OEMs and contract manufacturers. While the Company sells its products in Hong Kong (which includes sales made to China which are recorded as sales in Hong Kong because the purchase orders are issued by the Hong Kong offices of the China factories), Europe (primarily Germany), the United States, and other Asian countries (predominantly Japan and Malaysia), the Company’s products are sold primarily to Japanese and German owned companies with OEM 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. 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 companies of the customers. Due to the international nature of senior management, the Company has been able to set itself apart from its competitions and bridge the cultural, language and quality gaps that most Japanese and German companies fear when dealing in China. In connection with the recent realignment of its operations, shift in manufacturing strategy, and its increased focus on increasing overall sales of higher quality components for global customers, the Company has initiated a more direct and active marketing strategy, including advertising in trade publications, attending trade shows/exhibitions and using the internet and its webpages as marketing tools.

The Company’s customers for its non-Kienzle branded clocks include internationally recognized clock manufacturers such as Braun and Casio. The ultimate customers of the Kienzle branded clocks consist of importers, wholesalers and large retailers, primarily in Europe where the Kienzle brand name has strong brand recognition. The Company also markets it watches and clocks through its marketing office located in Germany. Until January, 2004, the Company also marketed its clocks and watches in Europe through Kienzle AG, a third party distributor under a licensing and supply agreement that the Company entered into with Kienzle AG in January 2003. The Company has terminated that agreement and now markets Kienzle branded watches (other than watches sold in the promotional marketplace) and clocks exclusively in-house through its Germany offices.

Camera sales are conducted primarily through existing importers and distributors who market the cameras under their own brands. Previously, the Company limited its direct marketing or advertising activities in order not to compete with its distributors. However, the Company has now increased its marketing, advertising and exhibition activities to stimulate the demand for, and to promote its camera products.

For the fiscal year ended March 31, 2004, two customers each accounted for more than 10% of the Company’s gross revenues (or 39.5% collectively of the Company’s net sales). No other customers individually accounted for more than 10% of the Company’s gross revenues during this recent past fiscal year. During the past few years, the Company has relied to a large extent on a few larger customers and on many smaller customers. As part of its recently announced shift in its policy of handling smaller customers in its metal manufacturing operations, the Company believes that it will decrease the number of 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 these 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 metal manufacturing orders with the Company in the form of purchase orders which are supported by a delivery schedule covering up to three months of orders. Customers usually do not provide long term contracts for their purchases and are able to cancel or amend their orders at any time without penalty. In addition, certain customers enter into agreements with the Company in which the parties agree upon their purchase and sale procedures, but such agreements do not contain any specific purchase orders or purchase requirements. Orders from such customers are thereafter received from time to time by customers based on the customers needs, not on contractually fixed amounts or time periods. Accordingly, backlog has not been meaningful to the Company’s business. Except for these purchase orders, the Company normally has no written agreements with its customers. Sales of metal parts are primarily on credit terms of up to 45 to 90 days with payment in Hong Kong dollars while the sale of cameras and clocks is through letters of credit, wire transfer advance payment and, for older established accounts, some open accounts payable within 30 to 90 days of shipment in United States dollars. Management constantly communicates with its credit sale customers and closely monitors the status of payment in an effort to keep its default rate low. However, as a result of the concentration of sales among a few of the Company’s larger customers, the Company is required to bear significant credit risk with respect to these customers. Typically, metal part orders are spread over a three-month period and the Company is able to withhold delivery or slow down shipments in the event of any delinquency in payment for past shipments. Parts are generally shipped 30-40 days after an order has been placed unless the Company is required to manufacture new tools which requires approximately 14-45 days to complete prior to commencing manufacturing. While the Company has not experienced material difficulty in securing payment from its major customers, there can be no assurance that the Company’s favorable collection experience will continue. As a result, the Company has increased its allowances for doubtful account this year. The Company could be adversely affected if a major customer was unable to pay for the Company’s products or services.

In November 1998, the Company acquired the worldwide rights (other than in Italy) to the “Kienzle” trade name and trademark for use with clocks, watches and certain other timekeeping instruments. The trademark currently also covers certain other products such as electronic products, household products, and textiles for certain European countries. The trade name and trademark is registered in approximately 50 countries, including Germany, the United States, the UK and Japan. The Company believes that the trade name and trademark enable the Company to market its own products, and products that it acquires for the purpose of reselling as “Kienzle” products, at a higher price and with larger gross margins than similar products that it manufactures for others on an OEM basis.

The Company has received one patent, and has applied for two other patents relating to its clock business. The patent, U.S. Patent Number 6,466,517 B1, covers technology concerning the company’s “global clock,” a LCD timepiece that provides simultaneous analog and digital display of 24 time zones, which are divided into work, leisure and sleep categories, along with a calendar week scheduler. The global clock is designed for use by international travelers. Two patent applications relate to the Company’s Radio Controllable Clock. These patent applications were filed in the United States, Europe Hong Kong and/or Germany.

The Company has also been attempting to develop new camera technologies. In connection with its new technologies, the Company was issued a patent in the United States, U.S. Patent Number 6,522,835 B2, that covers the Company’s “photographic film package” with a detachable cartridge. The package is integral to the Company’s pre-loaded camera, and the patent applies specifically to alternative photographic cameras that can compete in the market place with single-use cameras. Applications relating to this U.S. patent application are still pending in Europe, Japan, China and Hong Kong. The Company also has applied for patents in the United States for its camera cassette assembly apparatus and method.

As a manufacturer of parts, components and finished products for OEMs and contract manufacturers, the Company has no patents, licenses, franchises, concessions or royalty agreements which it considers material to its OEM manufacturing business.

The Company competes against numerous manufacturers of clocks, metal components and cameras as well as in–house manufacturing capabilities of existing customers. Management believes that firms which are smaller than the Company make up the largest segment of the metal manufacturing industry although it is not aware of any empirical data defining the metal manufacturing industry in China. The metal stamping industry is characterized by a large number of small metal stamping work shops. Customers evaluate competitor’s capabilities against each other and against the merits of in-house production. Some of the Company’s competitors 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 camera and clock manufacturing industry traditionally has been highly competitive and fragmented. However, the Company believes that the market for traditional clocks is undergoing a consolidation and that the market may soon be dominated by a few major manufacturers/distributors. The Company believes that its Kienzle brandname and its low-cost manufacturing provide it with the ability to compete in this market. Nevertheless, most major brands of clocks and watches have significantly greater marketing and distribution capabilities and financial resources than the Company. In the single-use camera market, customers generally are attracted to manufacturers based on the price of the product and timely delivery. The Company is able to compete by providing good quality products at a competitive prices with reliable delivery and service.

Certain of the new product markets that the Company is considering entering into also are extremely competitive and are dominated by well-capitalized, international companies. For example, the Company is considering manufacturing LCD monitor and flat panel televisions. There are numerous large, multi-national companies that currently compete in these markets.

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

A. The Company owns the worldwide rights (other than in Italy) to the name “Kienzle” for clocks, watches and certain other timekeeping instruments. The Company believes that the Kienzle name is associated with quality and prestige in Europe, particularly in Germany. Although the Kienzle name is traditionally associated with watches and clocks, the Company believes that the reputation of the name can also be used to market other high quality products, such as electronic and household products. As a result, during the past two years, the Company has attempted to market products manufactured by others under the Kienzle name in Europe. In order to maximize its distribution capabilities of Kienzle branded products, the Company in January 2003 associated a professional marketing and distribution company in Germany to exploit the “Kienzle” trademark.

B. The Company is exploring the possible manufacture and distribution of liquid crystal display (LCD) products, such as flat panel televisions and computer monitors. The Company is working with a Taiwanese manufacturer of LCD panels and electronic components to develop LCD based products that can be competitively priced. Under the current arrangement, the Company purchases the LCD monitor and required electronic components from the Taiwanese company. The Company manufactures the chassis and stand for the final product and then assembles the final product. To date, sales of these LCD products by the Company have been limited to sales made for test marketing purposes and have insignificant. The parties are still determining how best to cooperatively exploit this potential opportunity, and no assurance can be given that the Company will be able to establish a commercially reasonable relationship with the Taiwanese company or that it will otherwise become a manufacturer of LCD products.

C. In August 2003, the Company acquired a 50% interest in Kayser Photo (Overseas) Corp., a new corporation established in Panama to distribute film, cameras, batteries and single-use cameras in Central and South America. Under its agreement with Kayser Photo (Overseas) Corp., the Company will sell certain products to that company and will receive one-half of the company’s profits. The products marketed by Kayser Photo (Overseas) Corp. are sold under the “Kayser” brandname. Sales to date from this new venture were only approximately $90,000 during the past fiscal year, and no assurance can be given that the Company will determine that these operations will be further developed or will eventually become a viable business. Because of its contacts in the camera market, the Company also is exploring becoming a third party distributor of digital cameras and possibly other products that the Company currently handles (such as watches and LCD monitors).

Highway Holdings Limited is a holding company that operates through its subsidiaries. As of March 31, 2004, Highway Holdings Limited owned eleven subsidiaries, ten of which were wholly-owned by Highway Holdings Limited. However, the Company currently conducts is business primarily through eight of these subsidiaries, six of which are incorporated in Hong Kong, one that is incorporated in Germany, and one that is organized in Bulgaria. 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.

The Company also is a 50% equity owner of a Panamanian company that it and an unrelated third party established in August 2003 to engage in film, battery and camera trading activities, a 50% equity owner in a dormant U.S. entity established to market Kienzle branded clocks in the U.S.A., and a 20% interest in Kienzle AG, a German distributor.

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.

The Company leases Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung Shui, New Territories, Hong Kong as its executive offices. These premises are leased under a lease that expires in July 2006. The Company believes that suitable alternative facilities are available if the Company cannot extend the lease on satisfactory terms.

The Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong at a rental cost of $1,500 per month under an agreement that expires in January 2006.

The Company currently leases a total of approximately 450,000 square feet of space at the site of its factory complex located at Long Hua, Shenzhen, China from the Shenzhen Land & Sun Industrial & Trade Co., Ltd. pursuant to five related leases. The leased space consists of 378,000 square feet of manufacturing space, with the balance representing dormitories for the Company’s employees. This space is used predominately for the Company’s metal manufacturing, camera and clock manufacturing, spray painting, screen printing, plastic injection, tooling workshop and warehouse operations. There are also offices for management and administration on the premises. The term of the leases expires on February 28, 2009. In addition to the existing facilities, the Company’s landlord is also constructing a new office building for the Company on the premises, which new building is expected to be completed during the current fiscal year. The Company estimates that, depending on the Company’s operations, the utilization rate of these facilities during the fiscal year ended March 31, 2004 fluctuated between an estimated 50% and 80% of its maximum capacity. Accordingly, the Company is currently not in need of additional manufacturing space, and its current facilities will continue to satisfy the Company’s needs in the near future. However, should the Company need additional space, it has an option to lease additional facilities from its current landlord.

The Company also obtains materials and assets under its three BFDC Agreements which expire March 31, 2006 unless renewed. 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 factory workers.

The Company leases a 152 square meter marketing office and a 1,080 square meter warehouse in Germany, related to sales of Kienzle branded products in Germany. The lease for this facility expires in October 2004.

The Company’s net sales are derived primarily from the manufacture and sale of clocks, metal parts/components and cameras. During the past fiscal year, the Company conducted its manufacturing operations in facilities in China and, until the facilities were closed in December, 2003, in Bulgaria.

The metal manufacturing operations currently account for the largest portion of the Company’s net sales and income. The gross profit margin on metal stamping is generally higher than that of camera and clock manufacturing, but it is typically more affected by fluctuations in raw material prices, particularly prices of rolled steel.

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 has historically benefited from favorable overall income tax rates, the tax rate applicable to the Company for the fiscal year ended March 31, 2004 was 9.2%. (The Company’s income tax rate for the fiscal year ended March 31, 2003 was 9.3%.) 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.

Unlike companies which have wholly-owned subsidiaries located in China or operate under joint venture agreements in China, under the BFDC Agreements pursuant to which it operates in China, the Company does not pay taxes in China because it is not considered to be doing business in China under current China law. The BFDC is responsible for paying its own taxes incurred as a result of its operations under the BFDC Agreements. Arrangements such as the BFDC Agreements under which the Company operates in China are one of the most common types of arrangements in southern China for Hong Kong manufacturers. Management believes the Company will continue to benefit from a low overall effective tax rate in the future, barring unforeseen changes in tax laws.

Net sales to customers by geographic area are generally determined by the shipping destinations specified by the customers. In China, however, net sales are always recorded as generated in Hong Kong because the purchase orders are issued by Hong Kong-based companies. For example, if a customer directs the Company to ship a product to the U.S. (or any other overseas market), the sale is recorded as a sale to the U.S. (or the specified market). However, if a product is delivered to a customer in China, the sales will be recorded as generated in Hong Kong.

During the past three years discussed below, the Company’s revenues have been derived primarily from the manufacture and sale of (i) OEM manufacture of metal parts and components (ii) clocks and clock movements and (iii) cameras. The Company also sells watches and other products that it did not manufacture under the “Kienzle” name.

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.

Net sales for the year ended March 31, 2004 (“fiscal 2004”) increased by $4,986,000, or 24.5%, from the year ended March 31, 2003 (“fiscal 2003”). The increase in net sales was due to an increase in sales of all of the Company’s product segments compared to the prior fiscal year.

Sales of metal manufactured parts and components for the year ended March 31, 2004 experienced the largest increase both in dollar amount and as a percentage. Metal manufacturing sales increased by $3,098,000, or 26.5%, as compared to the year ended March 31, 2003, and represented 58.3% of the Company’s total sales. Net sales from the metal stamping segment for the year ended March 31, 2003 represented 57.4% of the Company’s net sales. The increase in sales of OEM manufactured products was primarily due to the increase in sales to Germany customers and by an increase in sales to Hong Kong/China.

Net sales of cameras increased in fiscal 2004 in each of the Company’s principal geographic markets for the Company’s cameras, other than sales in the U.S.A, which decreased by $1,062,000. The decrease in sales to the U.S.A. was due to the loss of the Company’s principal U.S. customer. While net sales of cameras increased by $1,080,000, or 22%, in fiscal 2004, cameras constituted 23.6% of the Company’s net sales, compared to 24.1% in the prior year due to the relatively larger increase in the Company’s overall net sales.

Sales of clocks and watches for the year ended March 31, 2004 increased by $808,000, or 21.4% as compared to the year ended March 31, 2003, and represented 18.1%, of the Company’s March 31, 2004 fiscal year sales compared to 18.5% of the Company’s net sales for the year ended March 31, 2003. In January 2003, the Company entered into a license and distribution agreement with Kienzle AG, a German distribution company, to sell watches, clocks and other products manufactured by other makers in Europe under its own “Kienzle” trademark. Sales under this agreement generated approximately $521,000 of revenues in fiscal 2003 (the three months from January through March, 2003) and $1,665,000 of revenues in fiscal 2004. Since the amount of sales made in calendar 2003 by Kienzle AG under the distribution agreement did not meet the minimum established under the distribution agreement, the Company terminated the distribution agreement with Kienzle AG. Although the distribution agreement was terminated in 2004, both parties are still conducting business with each other in substantially the same manner as before (except with respect to clocks and watches), and the parties are considering restructuring that distribution agreement to exclude watches and clocks (the rights to which the Company would retain). The termination of the distribution agreement may negatively affect the Company’s Kienzle branded sales in Europe during the current fiscal year. Sales of the Company’s principal clock products, quartz clocks, continued to decline in fiscal 2004. In order to offset decreased sales in traditional quartz clocks, the Company has developed and has commenced selling a new line of radio controlled clocks.

The Company’s gross profits as a percentage of its net sales increased from 19.1% in the year ended March 31, 2003 to 20.1% in the year ended March 31, 2004. Cost of sales as a percentage of net sales decreased from 80.9% to 79.9% despite a one-time $640,000 write-off of inventory for the fiscal year ended March 31, 2004. The Company periodically writes down inventory for estimated obsolete or unmarketable inventory equal to the difference between the costs of inventory and estimated market value, based upon assumptions about future demand and market conditions. In fiscal 2003, the Company wrote off only $52,000 of obsolete inventory. The Company attributes the large, one-time increase in the amount of inventory written off during fiscal 2004 to recent changes in accounting policies and not to an increase obsolete inventory. The reasons for the 1% increase in gross margins in fiscal 2004 include the higher margins the Company has realized in its metal manufacturing because of the increasing emphasis on manufacturing subassemblies and components, and the on-going benefits of the company-wide cost reduction efforts that were initiated during fiscal 2003. Although the Company’s gross profits as a percentage of its net sales increased during the past year, the percentage is still below the levels the Company has previously achieved. The Company attributes the lower gross profits to the loss of its competitive advantage that it used to have due to its operations in China. Since many other manufacturers have now also established facilities in China, prices for manufactured products have been decreasing and competition has been increasing.

Selling, general and administrative expenses for the year ended March 31, 2004 increased by $496,000, or 13.3%, over fiscal 2003 but decreased as a percentage of total net sales from 18.3% to 16.6%. The decrease in selling, general and administrative expenses as a percentage of net sales was due to the 24.5% increase in net sales. The increase in selling, general and administrative expenses is due in part to a $142,000 bad debt expense that the Company recognized during fiscal 2004. Selling, general and administrative expenses for both years included expenses related to the Bulgaria that the Company closed in December 2003. Unless the Company re-opens the Bulgaria operations, the Company will not bear the costs of the Bulgaria facilities in the future.

In connection with the licensing and distribution agreement the Company entered into with Kienzle AG in January 2003, the Company also agreed to acquire a minority equity interest in Kienzle AG. The amount that the Company has invested to date is $109,000. As a result of Kienzle AG’s failure to meet its minimum purchase commitment for the year ended December 31, 2003, the Company terminated the distribution agreement and wrote off its $109,000 investment in Kienzle AG. The Company and Kienzle AG are currently still conducting business with each other and are considering restructuring their prior agreement.

During the fiscal year ended March 31, 2004, the Company realized a $278,000 gain due to currency exchange rate fluctuations. The Company realized a currency exchange rate gain of $344,000 in fiscal 2003. The gains were the result of the strength of the euro compared to the U.S. dollar, which increased the value of payments the Company received in euros from it sales in Europe. Since the Company does not undertake any currency hedging transactions, its financial results will continue to be impacted by the fluctuations of currencies.

The Company’s interest expenses increased slightly for the fiscal year ended March 31, 2004 from the prior fiscal year, while the Company’s interest income for the most recent fiscal year decreased from the prior fiscal year ended March 31, 2003. The minor changes reflect the increase in the Company’s cash balances and the increase in the amounts borrowed under its line of credit.

As a result of increased sales and an improved gross profit as a percentage of net sales, the Company’s net income increased from $485,000 for the March 31, 2003 fiscal year to net income of $982,000 in the most recently completed fiscal year.

Net sales for the year ended March 31, 2003 increased by $938,000, or 4.8% from the year ended March 31, 2002 (“fiscal 2002”) as a result of increases in net sales in the Company’s camera and clock businesses. Sales in metal manufacturing decreased by $336,000 during fiscal 2003.

Net sales of clocks and watches registered the largest increase in net sales during the fiscal year ended March 31, 2003. Sales of clocks and watches increased by $905,000, or by 31.6%, from the prior year to $3,772,000 as a result of (i) the sale Kienzle branded products sold in Europe under a new trading program, (ii) the sale of watches manufactured by the Company, and (iii) to a lesser extent, the manufacture of radio controlled clocks. During fiscal 2003, sales of clocks and watches represented 18.5% of the Company’s total net sales, compared to 14.8% in fiscal 2002. Prior to fiscal 2003, the Company did not manufacture watches. Sales of quartz clocks, which historically have represented the majority of the Company’s clock sales, continued to decrease in fiscal 2003 as the Company faced stiff price competition from numerous new manufacturers of low-cost, low quality quartz clocks.

Camera sales increased by $369,000 during fiscal 2003 over fiscal 2002 from $4,541,000 to $4,910,000. For fiscal 2003, camera sales represented 24.1% of the Company’s net sales, compared to 23.4% in fiscal 2002. The increase in sales in cameras was due primarily to increased sales of single-use cameras to Hong Kong trading companies. Camera sales from the Company’s Bulgaria division constituted $1,563,000 in fiscal 2003 compared to $764,000 in fiscal 2002. As a result of significant competition for the low cost cameras that constitute a majority of the Company’s camera sales, the Company’s gross margins on most camera sales are very low. Accordingly, increases in sales of these cameras do not materially increase the Company’s profitability.

Sales of metal manufactured products decreased in fiscal 2003 by $336,000, or 2.8%, from fiscal 2002, due to a decrease in orders from the Company’s Japanese clients. Sales of metal manufactured parts represented 57.4% of the Company net sales during fiscal 2003 compared to 61.8% of net sales in fiscal 2002. During the past few years, the Company’s Japanese clients have shifted the manufacturing of their standard, simple parts to other low-cost manufacturers, many of whom were recently established near the Company’s manufacturing facilities in Shenzhen. In order to avoid competing with these other low-cost manufacturers based solely on price, the Company shifted its focus from these low margin metal stamping projects to the manufacture of parts, components and products that utilize more of the Company’s vertically integrated technologies. While sales of metal manufactured products have decreased slightly and faced increased competition, the metal manufacturing operations of the Company continued to be the most profitable segment for the Company during fiscal 2003.

The Company’s gross profits as a percentage of its net sales increased to 19.1% in fiscal 2003 from 17.4% in fiscal 2002. The increase was primarily due to an increase in the Company’s production efficiency and to the benefits of its cost-cutting program.

Selling, general and administrative expenses for fiscal 2003 increased by $98,000, or 2.7%, but decreased slightly as a percentage of total net sales from 18.6% in fiscal 2002 to 18.3% in fiscal 2003 due to the greater increase in net sales in fiscal 2003. The increase in selling, general and administrative expenses is due to higher insurance cost, increased marketing activities, an increase in professional fees (due in part to the additional compliance procedures imposed by the U.S. Sarbanes-Oxley Act of 2002 and related regulations), and increased transportation costs.

The combination of increased sales, improved gross margins as a percentage of sales, and moderated selling, general and administrative expenses resulted in the Company generating operating income of $159,000. The Company had a loss from operations of $241,000 in fiscal 2002.

In fiscal 2003, the Company recognized a net currency exchange gain of $344,000 due to the weakening U.S. dollar exchange rate. Since the Company’s accounts are stated in U.S. dollars, sales made in euros and other foreign currencies were converted into U.S. dollars at favorable rates.

The Company’s interest expense and interest income both decreased during fiscal 2003 compared to fiscal 2002 due primarily to the decrease in interest rates.

At March 31, 2004, the Company had a working capital of $8,774,000, compared to working capital of $7,753,000 at March 31, 2003.

The Company had historically generated sufficient funds from its operating activities to finance its operations and there had been little need for external financing other than capital leases which are used to finance equipment acquisitions. During the fiscal year ended March 31, 2004, the Company generated $1,475,000 of cash from its operating activities. After deducting cash expended in investment activities (consisting mostly of purchases of new equipment) and cash expended to repay indebtedness, the Company’s cash and cash equivalent position increased to $4,158,000 from $3,148,000 at March 31, 2003.

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

The HSBC credit facility is in favor of the Company’s camera and metal manufacturing subsidiaries and, as of the date of this Annual Report, provides for a maximum credit facility of $1,285,000 (subject to various sub-limits). The HSBC credit facility consists of an import loan facility that bears interest at 2.0% 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.

The DBS facility is in favor of the Company’s metal, clock and camera subsidiaries and provides for a maximum letter or credit/trust receipt facility of $1,928,000 and for an aggregate of $1,024,000 for capital expenditure/equipment loans. The interest rates under the DBS letter of credit facility is 1% over the best lending rate quoted by the bank from time to time for Hong Kong dollar credits, and the bank’s standard bills rate for U.S. dollar credits. The DBS capital expenditure loans are repayable in monthly installments ranging from 16 months to 36 months. Interest rates under the DBS capital expenditure facility vary from 0.25% below the prime rate quoted by the bank from time to time, to 1.5% over the prime rate quoted from time to time. The DBS facility is also secured by a charge on various accounts maintained by the Company at that bank and by cross guarantees indemnities by Highway Holdings Limited and the various borrowing subsidiaries. As of March 31, 2004, the Company had borrowings of a total of $1,933,000 outstanding under its credit facilities and had a total of $895,000 of available credit remaining under the two credit facilities.

The Company currently carries only a small amount of long-term debt ($385,000 as of March 31, 2004). 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 has previously entered into an agreement with the law firm that handled the Fuji litigation before the ITC (see, “Item 8. Financial Information—Legal Proceedings”). In the event that the litigation is resolved favorably to the Company, the law firm will be entitled to receive (i) an option to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.00 per shares, and (ii) one-third of the net profits that the Company derives from the world-wide sale of its new camera. The total maximum that the firm could receive is $1,000,000. As a result of this fee arrangement, if the Company starts to sell this new camera, the amount of profit it will generate from the sale of this camera will, therefore, be reduced. While the portion of the legal proceedings in which the law firm was involved has been concluded, the right of the law firm to receive the forgoing contingent compensation has not yet been established, and the option has not been issued.

During the current fiscal year (ending March 31, 2005), the Company anticipates that, company-wide, it will spend between $1,500,000 and $3,000,000 on capital expenditures, most of which will be used for its metal manufacturing operations. These expenditures include the refurbishment of one of the metal manufacturing buildings to accommodate the manufacture of light fixtures for the Company’s German lighting customer, acquire equipment for the potential LCD monitor and television assembly operations, furnish and decorate the new office building that the Company’s landlord intends to construct for the Company, and generally upgrade its other equipment. A portion of the capital expenditures will purchased from the Company’s existing funds, some equipment purchases will be funded by borrowings under the Company’s existing banking facilities, and some equipment will be acquired under capital leases.

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, 2004 is as follows:

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

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 closed for two weeks for the Chinese New Year holidays. The Company does not experience any other significant seasonal fluctuations. The Company does not consider any issues with respect to seasonality to be material.

The Company transacts its business with its vendors and customers primarily in U.S. dollars, Hong Kong dollars and euros. In addition, all of the payments the Company is required to make under the BFDC Agreements for its manufacturing facilities, its factory workers, as management fees and other operating charges are based on the Hong Kong dollar. The exchange rate between the U.S. dollar and the Hong Kong dollar has been fixed since 1983 at approximately HK $7.80 to US $1.00. Accordingly, the Company has not been subject to material currency fluctuations with respect to these aspects of its operations. However, since the Company’s clock, camera and other sales in Europe are denominated in euros, the Company is subject to the risks of exchange rate fluctuations. During the fiscal year ended March 31, 2003 and 2004, the Company experienced net currency exchange gains of 278,000 and $344,000, respectively. The recent exchange rate gains are due to the improved exchange rate between the euro and the U.S. dollar and the increasing amount of sales denominated in euros. However, as the Company increases its European operations, the Company will in the future continue to be subject to the risk of rate fluctuations, and such fluctuations may result in losses as well as gains. 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.

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, intangible assets and litigation. 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.

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. If the financial condition of its customers changed, changes to these allowances may be required, which would impact the Company’s future operating results.

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

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

Impairment of assets – The Company's long-lived assets principally include property, plant and equipment and intangible assets. In assessing the impairment of these assets, the Company has made assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change in the future, the Company may be required to record impairment charges for these assets. For the year ended March 31, 2004, the Company wrote off its $109,000 investment in Kienzle AG.

Litigation – The Company records contingent liabilities relating to litigation or other loss contingencies when it believes that the likelihood of loss is probable and the amount of the loss can reasonably be estimated. Changes in judgments of outcome and estimated losses are recorded, as necessary, in the period such changes are determined or become known. Any changes in estimates would impact its future operating results. Significant contingent liabilities, which the Company believes are at least possible, are disclosed in the Notes to the Consolidated Financial Statements.

Industrial property rights – Industrial property rights represent the patents, technology and the rights relating to the name “Kienzle” and are stated at cost. Amortization is provided on a straight-line basis over a period of 10 years which is the estimated useful lives of these assets.

The Directors and executive officers of the Company as of June 18, 2004 are as follows:

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 Australian Society of Certified Practicing Accountants and Hong Kong Society of Accountants. She graduated from Simon Fraser University with a Bachelor Degree in Business Administration in Canada in 1990 and received a Masters in Accounting from the Charles Stuart University in 1994.

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

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

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

Benson Lee. Mr. Lee was the founder of Hi-Lite Camera Company has been a director of the Company since 1991. Mr. Lee has been involved in property investment and development in Hong Kong, China and the U.S. over the past five years and has more than 30 years of manufacturing and business experience.

David Tamir. Mr. Tamir has been a Director of the Company since its inception in 1990. He has been a Director of Delta United Holdings, a property development company, since 1984. He has over thirty years experience in a wide range businesses including building, property development, and retailing. For the past ten years, Mr. Tamir has owned and operated petroleum retail outlets.

Terrence A. Noonan. Mr. Noonan has been a director of the Company since July 1999. He has most recently served as president and chief operating officer of Furon Company, a publicly traded manufacturer of polymer based materials. He also held a variety of other management positions at Furon, which he joined in 1987. Prior to his Furon Company tenure, Mr. Noonan held management positions with other manufacturing companies, including the Eaton Corporation, Samuel Moore & Company and Lamson & Sessions Co.

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

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.

During the past fiscal year, the Company paid each non-executive director Messrs. Lee, Tamir and Noonan) a director’s fee of $6,000, and Mr. Hermann a fee of $1,500, and reimbursed them for their reasonable expenses incurred in connection with their services as directors. Messrs. Lee, Tamir, Noonan and Hermann are outside, non-executive directors. In addition, during fiscal 2004, the Company granted the following stock options to the outside directors: (i) in June 2003, Mr. Herman was granted an option to purchase 2,000 Common Shares, and Messrs Benson, Tamir and Noonan each were granted options to purchase 3,000 Common Shares, which options are exercisable at $1.47 per share, the closing price of the Company’s common stock on the date of grant; and (ii) in October 2003, Mr. Herman was granted an option to purchase 4,000 shares of common stock, and Messrs Benson, Tamir and Noonan each were granted options to purchase 6,000 shares of common stock, which options are exercisable at $3.17 per share, the closing price of the Company’s common stock on the date of grant. The options granted to the Directors do vest one year after the date of grant and are therefore not exercisable until the first anniversary of the date of grant.

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.

The members of the both the Audit Committee of the Board of Directors currently are Benson Lee, David Tamir, Terrence A. Noonan and Dirk Hermann. 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.

The Compensation Committee of the Board of Directors currently consists of Benson Lee, David Tamir and Terrence A. Noonan. The Compensation Committee administers the Company’s 1996 Stock Option Plan and provides recommendations for the salaries and incentive compensation of the executive officers of the Company, which compensation levels are then approved by the Board of Directors.

As of March 31, 2004, the Company employed a total of 1,598 full-time employees. Of these employees, 15 were engaged in the administration of the Company, 1,481 were engaged in manufacturing (including research and development, design, engineering, quality control, and shipping), 22 were engaged in marketing, and the balance (80 employees) were engaged in miscellaneous other supporting functions. Of the foregoing employees, 1,559 were employed in China, 32 in Hong Kong, and six in Germany. The employees in Germany are principally engaged in marketing. 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 employees working at the Company’s facilities in China are employed by BFDC pursuant to the BFDC Agreements. The number of workers employed by the BFDC fluctuates largely due to the availability of workers and the time of year. The seasonality is also dependent, to a lesser extent, on orders held by the Company. The Company has experienced temporary and minor shortages of labor in China and has taken action to attract additional workers from other provinces of China to its factory complex in Long Hua, Shenzhen. From time to time, labor supply has been adversely affected primarily due to transportation difficulties in bringing workers to Shenzhen due to flooding or other natural disasters as well as seasonal demands on labor such as harvesting when the mainly rural-based laborers are required to return to their village. Although the Company experiences high turnover of employees annually, to date it has not experienced significant difficulty in obtaining employees. As a result of its agreement with the BFDC, the Company can increase or decrease the number of its employees on short notice without much difficulty or expense.

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

The following table sets forth the number of Common Shares that each Director and executive officer of the Company could purchase as of June 18, 2004, together with the exercise price of such options and the expiration date of the options.

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 400,000 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, 2004, options granted under the Option Plan to purchase a total of 308,500 Common Shares were still outstanding. The maximum term of options granted under the Option Plan is five years. The average weighted exercise price of all options outstanding on March 31, 2004 was $2.02.

In addition to the options that can be granted under the Option Plan, the Company also granted Common Share purchase rights to certain of the directors and key employees prior to its December 1996 initial public offering, of which rights to purchase a total of 132,781 of Common Shares were still outstanding as of June 18, 2004 (the 132,781 option shares include replacement rights for the purchase of 100,000 Common Shares that were granted to Mr. Kohl in June 2003 to replace 100,000 share purchase rights that were granted to him in 1996 and which rights expired in January 2003). The average weighted exercise price of the Common Share purchase rights outstanding on March 31, 2004 was $1.72.

As of June 18, 2004 the Company had outstanding stock options and Common Share purchase rights for an aggregate total of 336,281 Common Shares.

As part of the compensation that the Company has agreed to pay Mr. Kohl, the Company’s Chief Executive Officer, commencing on April 1, 2005 and continuing annually thereafter, Mr. Kohl will be issued 29,154 Common Shares. The foregoing shares are to be issued to compensate Mr. Kohl for the reduced salary that Mr. Kohl accepted during certain prior years.

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 11, 2004, 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.

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.

In January 2003, the Company entered into a licensing and distribution agreement with Kienzle AG, a newly formed marketing company located in Germany. Under the license agreement, the Company granted to Kienzle AG a five-year exclusive, royalty-free license to use and display the Kienzle mark solely in conjunction with the promotion, marketing, sale, and distribution by Kienzle AG of branded products in Austria, Benelux, Denmark, Germany, Spain, Switzerland, Norway, Sweden, Denmark, Finland, Portugal, France, and the United Kingdom. The Company retained the right to market Kienzle products in all other markets and to manufacture and market clock movements under the Kienzle name. The Company also retained the internet rights to use the name in the foregoing European territories, although the two companies intend to jointly operate a Kienzle website. Under the license agreement, Kienzle AG was required to purchase all Kienzle branded products from the Company, and the Company is permitted to charge Kienzle AG its normal arms’ length price for those products. For products that the Company did not manufacture, such as, for example, audio systems, the Company was obligated to purchase those products and then sell those products to Kienzle AG at an agreed upon mark-up price. During the first year of the license, Kienzle AG purchased $1,952,000 of products from the Company. Since this amount of revenues was less than required by the agreement and less than the Company had anticipated, the Company has terminated the license agreement. Although the agreement is no longer in effect, Kienzle AG is still purchasing products from the Company under the same terms as before. The parties are currently discussing restructuring their prior agreement to permit Kienzle AG to continue to market all Kienzle branded products other than clocks and watches; the rights to market Kienzle clocks and watches would be retained by the Company. In order to continue to commercially exploit the Kienzle brand in Europe, the Company has retained new marketing personnel in its Germany offices in order to more aggressively market “Kienzle” branded watches and clocks in Europe.

Other than its transactions with Kienzle AG, the Company did not engage in any related party transactions during the fiscal year ended March 31, 2004.

The Company’s consolidated financial statements for the three-year period ended March 31, 2004 are set forth under Item 18 “Financial Statements.” The Company’s unaudited quarterly financial information for the year ended March 31, 2004 and 2003 are set out below:

Dividend Policy. On August 18, 2003, the Company paid a cash dividend of $0.08 per share to all holders of its common shares. Prior to the 2003 dividend, the Company had not paid a dividend since the fiscal year ended March 31, 2000 due to its operating losses. Since the Company has now returned to profitability, the Company is considering reinstating its policy of paying cash dividends annually. However, any 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.

In the Matter of Certain Lens-Fitted Film Packages, Inv. No. 337-TA-406 Consolidated Enforcement and Advisory Opinion Proceeding. The International Trade Commission (“ITC”) issued a “Notice Of Institution Of Formal Enforcement And Advisory Opinion Proceedings” on July 31, 2001. The proceedings are directed to Lens-Fitted Film Packages which are inexpensive, single use cameras. The Notice named a number of parties to the Formal Enforcement proceedings and a number of parties to the Advisory Opinion proceedings. The Company was originally named as an Advisory Opinion respondent. The ITC referred the case to an Administrative Law Judge (“ALJ”) to conduct a hearing and address other issues pertaining to the proceedings. Subsequent to the initial filing, a motion was filed with the ALJ to add the Company as an Enforcement respondent. This motion was granted by the ALJ.

On February 11-16, 2002, a hearing was conducted. On May, 2, 2002 the ALJ made an Initial Determination regarding the merits of the case. At issue for the Company were certain claims in four US Patents assigned to Fuji Photo Film Co., Ltd.: US Patent No. 4,884,087 (“the ‘087Patent”), US Patent No. 5,381,200 (“the ‘200 Patent”), US Patent No. Re 34,168 (“the ‘168 Patent”), and US Patent No. 4,972,649 (the ‘649 Patent”) and whether the Company’s HL-1 model camera violated one or more of those patents. During the proceedings preparatory to the hearing, the Company sought to introduce its HL-2 camera into the proceedings. The HL-2 camera was designed to be outside the scope of all patents at issue in the proceeding, and in particular the ‘200 Patent and the ‘649 Patent. Introduction of the HL-2 camera into the ITC proceeding was denied by the ALJ.

In the Initial Determination regarding the Company, the ALJ found that the HL-1 camera did not infringe the ‘087 Patent and the ‘168 Patent. The ALJ also found that the HL-1 camera infringed the ‘200 Patent and the ‘649 Patent. The ALJ did not assess any enforcement sanctions against the Company.

On August 7, 2002, the ITC decided not to review any of the ALJ's findings concerning these five patent claims. Nonetheless, due to further disputes between Fuji and other parties, additional hearings to which the Company was not a party, were required. The ALJ made his determinations and the ITC adopted the ALJ's views and issued a final order on May 15, 2003. In its order, the ITC also adopted the ALJ's recommendations concerning relief. As a result, the Company is subject only to a general exclusion order which is applicable to all companies importing products into the United States prohibiting them from importing items that infringe the patents at issue in the ITC proceeding. The ITC rejected Fuji's request to issue a cease and desist order against the Company or to impose civil penalties upon it.

On October 7, 2002, while further proceedings between Fuji and other parties were taking place before the ALJ, Fuji filed a notice of appeal of the decision by the ITC on the Company’s issues. The appeal identified the International Trade Commission as the respondent and was filed with the U.S. Court of Appeals for the Federal Circuit. On November 26, 2002, the Court of Appeals granted the Company's motion to intervene in the appeal. The Court of Appeals subsequently stayed and suspended its review to allow the ITC to reach a final decision.

The ITC’s decisions are final and complete. Nevertheless, the Court of Appeals has the authority to reverse any or all of the ITC's determinations, to impose monetary penalties against the Company, and to return the matter to the ITC to rehear any or all of the case.

The Company’s Common Shares are currently traded on The Nasdaq SmallCap Market under the symbol “HIHO” and are not listed for trading in any trading market outside the United States. On June 18, 2004, the last reported sale price of our common shares on The Nasdaq SmallCap Market was $5.00 per share. As of June 18, 2004, there were 54 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, 2004:

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.

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.

The Company’s authorized capital consists of 20,000,000 Common Shares, $0.01 par value per share. As of March 31, 2004 and June 18, 2004, there were 3,074,123 and 3,179,123 Common Shares, respectively, outstanding, net of 37,800 treasury shares, all of which was fully paid.

The number of shares outstanding could increase by the shares issued upon the exercise of currently issued and outstanding options (see, “Item 6, Share Ownership,” above) and by an option to purchase 100,000 shares of Common Shares that the Company has agreed to issue to the law firm that represents the Company in the Fuji proceedings currently pending before the ITC if the proceedings are resolved favorably to the Company (See, Item 8, “Financial Information--Legal Proceedings,” above.)

As of March 31, 2004, the Company no longer had any warrants to purchase Common Shares outstanding. Prior to December 9, 2001, the Company had an aggregate of 1,155,000 warrants outstanding, which warrants were exercisable for the purchase of 525,000 Common Shares at $6.45 per share until December 9, 2001. Pursuant to their terms, the warrants expired on December 9, 2001.

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

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

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

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

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

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

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

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

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

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.

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

Effective October 1, 2003, Nissin Precision Metal MFG, Ltd., the Company’s metal stamping subsidiary, entered into that certain Purchase and Sales Agreement (worldwide FRAME) with OSRAM Gesellshaft mit beschraenkter Haftung (”OSRAM”), with OSRAM acting on its own behalf and on behalf of certain of its subsidiaries. The agreement establishes the procedures under which OSRAM or its listed subsidiaries can order and purchase electronic ballasts from the Company. Under the agreement, the Company has agreed to manufacture, package and ship these products for OSRAM and its subsidiaries under the terms and conditions, and at the fixed specified prices listed in the agreement. The agreement does not, however, require OSRAM or its subsidiaries to purchase any set or minimum amount from the Company. The Purchase and Sales Agreement shall remain in effect until September 30, 2005, but may be extended by the parties for successive one-year periods by agreeing on a new price list for the following year.

Effective October 15, 2003, Nissin Precision Metal MFG, Ltd. entered into that certain Long Term Sales and Purchase Agreement with OSRAM. Under the agreement, the Company agreed to manufacture various lighting products for OSRAM at fixed specified prices. The Company has agreed to manufacture an amount of such lighting products as OSRAM may, from time to time order. The agreement expires on December 31, 2004 but may be extended by the parties for period of one year each by agreeing on a new price list for the following year.

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 has not entered into any other material contracts other than in the ordinary course of business and other than those discussed in the Property, Plant and Equipment section under Item 4 “Information on our Company” and in the and the Liquidity and Capital Resources section under Item 5 “Operating and Financial Review and Prospects”.

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

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.

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.

We pay labor costs and overhead expenses in renminbi, the currency of China (the basic unit of which is the yuan). However, we sell most of our products in Hong Kong dollars, U.S. dollars, and in euros. The exchange rate between the U.S. dollar and Hong Kong dollar has remained stable. However, the exchange rate between the euro and the U.S. and Hong Kong dollars has fluctuated, resulting in currency exchange gains and losses. As a result of the increasing amount of transactions that are denominated in euros, the Company is increasingly subject to fluctuations in the rates of exchange between the dollar and the euro, which fluctuations will affect the Company’s results of operations. 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. The Company has not engaged in currency hedging transactions to offset the risks associated with variations in currency exchange rates. Consequently, significant foreign currency fluctuations and other foreign exchange risks may have a material adverse effect on the Company’s business, financial condition and results of operations. The Company does not currently own any market risk sensitive instruments. However, the Company may in the future undertake hedging or other transactions or invest in market risk sensitive instruments if it determines that such instruments can offset these risks is a sound and cost-efficient manner.

The Company is also exposed to interest rate fluctuations as a result of the short-term investments that it makes and the borrowings it incurs. The Company maintains its excess cash in short-term borrowings that are subject to interest rate fluctuations. The Company had $1,933,000 of short-term borrowings that are subject to interest rate changes and $385,000 of long-term borrowings outstanding as of March 31, 2004. However, taking into consideration that the Company had cash and cash equivalents of $4,158,000 available as of March 31, 2004, the Company believes that its interest rate risk on these borrowing was acceptable.

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

As required by Rule 13a-14 under the Securities Exchange Act of 1934, as of March 31, 2004, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934. This evaluation was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer. The Company’s controls and procedures are designed and provided reasonable assurance of preventing errors and irregularities, and to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934 recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosures.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date our Chief Executive Officer and our Chief Financial Officer completed their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls requiring corrective actions.

The Company’s Audit Committee does not currently have a member who qualifies as “audit committee financial expert” as defined by Item 401(h) of Regulation S-K adopted pursuant to the Exchange Act. The Board of Directors believes that Dr. Hermann meets the requirements as an “audit committee financial expert” except for his lack of experience with U.S. accounting procedures. Dr. Hermann received bachelor’s degree in business administration from the University of Konstanz in Germany, a master’s degree in business administration from the University of St. Gallen in Switzerland, and a Ph.D. degree in business administration from the University of Leipzig, in Germany. In addition, each of the other three members of the audit committee have extensive financial and business experience as presidents, chief operating officers, and directors of various public and private enterprises.

Three of the members of the audit committee, Messrs. Lee, Tamir, and Noonan, are independent non-executive directors. Dr. Hermann has no affiliation with the Company or business relationship with the Company that would disqualify him as an independent director. However, Dr. Hermann is the brother-in-law of Roland Kohl, the Chief Executive Officer of the Company.

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 to this Annual Report on Form 20-F.

The Company’s independent public accountant for each of the fiscal years in the three-year period ended March 31, 2004 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, 2004 and will propose to the Annual General Meeting convening on August 3, 2004 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, 2003 and March 31, 2004.

(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; tax consultations, such as tax advice related to mergers and acquisitions and transfer pricing; and tax planning services.

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.

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

	HIGHWAY HOLDINGS LIMITED

	Consolidated Financial Statements
	For each of the three years in the period ended March 31, 2004
	and Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheets of Highway Holdings Limited and its subsidiaries as of March 31, 2003 and 2004, and the related consolidated statements of operations, shareholders' equity and comprehensive (loss) income, and cash flows for each of the three years in the period ended March 31, 2004. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Highway Holdings Limited and its subsidiaries as of March 31, 2003 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
June 2, 2004

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE (LOSS) INCOME
(In thousands except per share data)

Additions to property, plant and equipment of $237 and $289 during the year ended March 31, 2003 and 2004, respectively, were acquired under arrangements qualified as capital leases. There was no new capital lease arrangement entered into during the year ended March 31, 2002.

Investment in an affiliate of $109 was financed by a payable to an affiliate during the year ended March 31, 2003.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

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

The Company and its subsidiaries operate in three principal business segments - metal stamping, (including tooling design and manufacturing), the manufacture and assembly of cameras, and clocks and watches. The Company sells its products to customers under its customers' brand names and a portion of its sale of clocks and watches under the name "Kienzle". The manufacturing activities and certain administrative activities are all conducted in Shenzhen and selling activities are principally performed in Hong Kong, Shenzhen and Germany. In prior years, certain camera manufacturing activities were also carried out in Bulgaria. During the year ended March 31, 2004, the Company closed the operations in Bulgaria resulting in a write off of assets amounting to $9 in 2004.

The financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). There are no material differences between the U.S. GAAP amounts and the amounts used in the statutory accounts of the subsidiaries.

On March 28, 2003, the Company acquired a 20% equity interest in Kienzle AG, a German stock corporation which is engaged in the marketing, sale and distribution of products under the brand name of "Kienzle", for $109. Kienzle AG is accounted for in the consolidated financial statements as an affiliate using the equity method.

On January 30, 2003, the Company entered into a license agreement with Kienzle AG. Under the license agreement, the Company granted to Kienzle AG a five-year exclusive, royalty-free license to use and display the trademark of "Kienzle" solely in conjunction with the promotion, marketing, sale, and distribution by Kienzle AG of products under the brand name of "Kienzle" in Austria, Benelux, Denmark, Germany, Spain, Switzerland, Norway, Sweden, Denmark, Finland, Portugal, France, and the United Kingdom. Under the license agreement, Kienzle AG was required to purchase all products under the brand name of "Kienzle" from the Company. Under the license agreement, Kienzle AG was required to purchase $3,000 of products from the Company during the year ended December 31, 2003; and in subsequent years, the amount of required purchases is required to increase to no less than $6,000 in the year ending December 31, 2004, $14,000 in the year ending December 31, 2005, and $28,000 in the year ending December 31, 2006. The Company would have the right to terminate the license agreement if Kienzle AG fails to meet these minimum requirements.

Kienzle AG did not meet the minimum purchase requirement for the year ended December 31, 2003 and the Company, in order to protect its own interest, terminated the license agreement on January 16, 2004. In addition, the Company reassessed its investment in Kienzle AG in 2004 and determined that the investment had been impaired as Kienzle AG did not meet the minimum purchase requirement and had dissatisfactory operating results. An impairment loss of $109 in respect of the investment in Kienzle AG has thus been recognized during the year ended March 31, 2004.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

On August 5, 2003, the Company acquired a 50% equity interest in Kayser Photo (Overseas) Corp. (K.P.C.) ("Kayser Photo"), a company incorporated in the Republic of Panama, at a cash consideration of $5. Kayser Photo is engaged in the trading of camera batteries, films and disposable cameras. It is accounted for in the consolidated financial statements as an affiliate using the equity method.

At March 31, 2004, details of the Company's subsidiary companies are as follows:

Place of
incorporation	Name of entity	Date of incorporation	Principal activities

Hong Kong	Antemat Limited	May 5, 1989	Dormant

Hong Kong	Badex Investments Limited	May 25, 1990	Dormant

Hong Kong	Cavour Industrial Limited	May 9, 1989	Providing tooling, handling and
			repairing services in China and
			management services to
			fellow subsidiaries

Hong Kong	Hi-Lite Camera Company	November 10, 1978	Manufacturing and trading of
	Limited ("Hi-Lite")		camera and rental of machinery
			and equipment to its fellow
			subsidiary

Hong Kong	Kayser Technik Limited	June 23, 1994	Sales of metal parts and rental of
			machinery and equipment to fellow
			subsidiaries

Bulgaria	Kienzle Balkan Limited	November 27, 2001	Sales of cameras, clocks and watches
	("Kienzle Balkan")

Bulgaria	Kienzle Bulgaria Limited	January 23, 2001	Dormant
	("Kienzle Bulgaria")

Hong Kong	Kienzle Time (H.K.) Limited	August 24, 1997	Manufacturing and trading of
	("Kienzle HK")		clocks and watches

Germany	Kienzle Uhrenfabriken G.m.b.h.	April 1, 1999	Sales of clocks and watches
	("Kienzle Germany")

Hong Kong	Nissin Precision Metal	November 21, 1980	Metal stamping and tooling design
	Manufacturing Limited		and manufacturing
	("Nissin")

Hong Kong	Saiwan Industries Limited	August 10, 1990	Manufacturing of plastic injection
			parts to fellow subsidiaries

All of the subsidiaries are wholly-owned except for Kienzle Balkan, which is 51% owned by the Company.

On January 25, 2000, the Company and an unrelated party established Kienzle USA Ltd. ("Kienzle USA"), a company incorporated in the United States of America ("USA") which sells clocks, with each party owning 50% of its common shares. It is accounted for in the consolidated financial statements as an affiliate. Kienzle USA has been inactive since September 2002.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

Principles of consolidation - The consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and all its subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. Affiliated companies (20% to 50% owned companies) in which the Company has significant influence but does not have a controlling interest are accounted for using the equity method.

Revenue recognition - The Company recognizes revenue 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.

Provision for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.

Cash and cash equivalents - Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts, and certificates of time deposit with a maturity of three months or less at the time of purchase.

Inventories - Inventories are stated at the lower of cost determined by the first in first out method, or market value. Work-in-progress and finished goods consist of raw materials, direct labor and overhead associated with the manufacturing process.

Property, plant and equipment - Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method based on the estimated useful lives of the property being 10 years for machinery and equipment and generally 6 to 7 years for other properties. Assets held under capital leases are depreciated over the shorter of their lease period or estimated useful lives on the same basis as owned assets.

Industrial property rights - Industrial property rights represent the patents, technology and the rights relating to the name "Kienzle" and are stated at cost. Amortization is provided on a straight-line basis over a period of 10 years which is the estimated useful lives of these assets. Amortization expense charged to operating (loss) income for the year ended March 31, 2002, 2003 and 2004 was $110, $119 and $127, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

Amortization expense on industrial property rights for each of the next five years is as follows:

Year ending March 31,
- 2005	$	129
- 2006		129
- 2007		129
- 2008		93
- 2009	93

Total	$	573

Investment securities - Investment securities, which consist primarily of capital guaranteed investment fund, have been categorized as available for sale and, as a result, are stated at fair value based generally on quoted market prices. Unrealized holding gains and losses are included as a component of accumulated other comprehensive income.

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

Foreign currency translation - The Company uses the United States dollar as its reporting currency. Assets and liabilities of non-United States dollar functional currency financial statements of subsidiaries are translated at year-end exchange rates, while revenues and expenses are translated at average currency exchange rates during the year. Adjustments resulting from translating non-United States dollar functional currency financial statements are reported as a separate component of shareholders' equity. Gains or losses from foreign currency transactions are included in net income.

Income taxes - Deferred income taxes are provided using the asset and liability method. Under this method, deferred income taxes are recognized for all significant temporary differences and classified as current or non-current based upon the classification of the related asset or liability in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all, the deferred tax asset will not be realized.

Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

Stock-based compensation - The Company accounts for stock-based awards to employees using the intrinsic value method.

Had compensation cost for the Company's stock option plan and stock purchase rights been determined based on the fair value at the grant dates for awards under the plan in accordance with the method of SFAS No. 123, the Company's net (loss) income and (loss) income per share would have been as follows:

		2002			2003		2004

Net (loss) income, as reported		$	(231	)	$	485	$	982
Less: Stock based compensation costs under fair
value based method for all awards			(9	)		—		(212	)

Net (loss) income, pro forma			(240	)		485		770

(Loss) income per share - basic	As reported	$	(0.08	)	$	0.17	$	0.32
	Pro forma		(0.08	)		0.17		0.25

(Loss) income per share - diluted	As reported	$	(0.08	)	$	0.17	$	0.30
	Pro forma		(0.08	)		0.17		0.24

Compensation expense resulting from the fair value method of SFAS No. 123 may not be representative of compensation expense to be incurred on a pro forma basis in future years.

The weighted average fair value of options and stock purchase rights granted during 2004 was $1.2130, using the Black-Scholes option-pricing model based on the following assumptions:

Risk-free interest rate	4.75%
Expected life	4.25 to 4.50 years
Expected volatility	101.73%
Expected dividend yield	2.50%

(Loss) income per share - Basic (loss) income per share is computed by dividing net (loss) income attributable to common shareholders by the weighted average of common shares outstanding for the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the year. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In each of the three years ended March 31, 2004, the Company had 558,128, 326,128 and nil respectively, of outstanding employee stock options and stock purchase rights which could potentially dilute basic earnings per share ("EPS") in the future, but were excluded in the computation of diluted EPS in such periods, as their effect would have been antidilutive.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

Comprehensive (loss) income - Comprehensive (loss) income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.

Comprehensive (loss) income for the years, which comprises foreign currency translation adjustments, unrealized holding loss on investment securities and net (loss) income, has been disclosed within the consolidated statement of shareholders' equity and comprehensive (loss) income.

Recent changes in accounting standards - In January 2003, the Financial Accounting Standard Board ("FASB") issued Interpretation No. ("FIN") 46 (revised), "Consolidation of Variable Interest Entities". FIN 46 (revised) requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in consolidated financial statements of the business enterprise. FIN 46 (revised) applies immediately to variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 (revised) are effective beginning January 1, 2004. The adoption of FIN 46 (revised) did not have a material impact on the Company's financial position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the third calendar quarter of 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's financial position, results of operations, or cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

The Company is not taxed in the British Virgin Islands where the holding company is incorporated.

The Company's subsidiaries, other than Kienzle Germany, Kienzle Balkan and Kienzle Bulgaria, are all incorporated in Hong Kong and are subject to Hong Kong taxation on their activities conducted in Hong Kong.

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

Under the BFDC Agreements, the Company is not considered by local tax authorities to be doing business in China; accordingly, the Company's activities in China have not been subjected to local taxes. The BFDC is responsible for paying taxes it incurs as a result of its operations under the BFDC Agreements. There can be no assurances, however, that the Company will not be subject to such taxes in the future. If China did impose a tax upon the Company, the tax could materially adversely affect the Company's business and results of operations.

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

The provision for income taxes consists of the following:

	March 31,

	2002		2003		2004

Hong Kong
Current	$	58	$	50	$	153
Deferred	—		—		(53		)

	$	58	$	50	$	100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

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

	Year ended March 31,

	2002		2003				2004

Profits tax rate in Hong Kong	16.0	%	16.0		%		17.5	%
Non-deductible items/non-taxable income	(30.5	%)	(16.6		%)	(10.9		%)
Changes in valuation allowances	(26.6	%)	9.9		%		4.0	%
International rate difference	15.0	%	10.3		%		(3.5	%)
Increase in opening deferred income taxes
resulting from an increase in profits
tax rate in Hong Kong	—		—				2.0	%
Other	(7.4	%)	(10.3		%)	0.1		%

Effective tax rate	(33.5	%)	9.3		%		9.2	%


Deferred income tax (assets) liabilities are as follows:
			March 31,

			2003			2004

Deferred tax liability:
Property, plant and equipment			$	231		$	390

Deferred tax asset:
Operating loss carryforwards			(1,140		)		(572	)
Valuation allowance				1,140		360

Total net deferred tax asset				—		(212		)

Net deferred tax liability			$	231		$	178

At March 31, 2003 and 2004, subsidiaries of the Company had tax loss carryforwards for Hong Kong profit tax purposes, subject to the agreement of the Hong Kong Inland Revenue Department, amounting to approximately $3,597 and $3,174, respectively, which have no expiration date.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except per share data)

Property, plant and equipment consist of the following:

	March 31,

	2003			2004

At cost:
Machinery and equipment	$	9,456		$	10,377
Furniture and fixtures		666			671
Leasehold improvements	479			527

Total		10,601			11,575
Less: Accumulated depreciation and amortization	(6,944		)	(7,795		)

Net book value	$	3,657		$	3,780

Depreciation expense charged to operating (loss) income for the year ended March 31, 2002, 2003 and 2004 was $958, $1,011 and $985, respectively.

Included in property, plant and equipment are assets held under capital leases with the following net book values:

	March 31,

	2003			2004


Machinery and equipment, at cost	$	441		$	796
Less: Accumulated depreciation and amortization	(53		)	(98		)

	$	388		$	698

Depreciation and amortization of machinery and equipment held under capital leases, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations, was $16, $37 and $45 for the year ended March 31, 2002, 2003 and 2004, respectively.

Short-term borrowings include import loans obtained from banks.

	March 31,

	2003			2004

Credit facilities granted	$	1,864		$	2,828

Weighted average interest rate on borrowings at
end of year	4.2		%	4.2		%

At March 31, 2003 and 2004, the Company pledged bank deposits of $1,157 and $965, and investment securities of Nil and $309, respectively, to banks to secure banking facilities granted.

There is 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.

The Company is committed to invest approximately $200 in Kienzle USA pursuant to an agreement entered with a joint venture partner of Kienzle USA. The Company had invested $31 in Kienzle USA as of March 31, 2004. Kienzle USA has been inactive since September 2002.
The Company has a total capital commitment of $271 for the purchase of property, plant and equipment as of March 31, 2004.
The BFDC Agreements (see Note 3) will expire on March 31, 2006, unless renewed, with the BFDC. Pursuant to the BFDC Agreements, the Company is not subject to certain rules and regulations that would be imposed on entities which are considered under China law to be doing business in China by utilizing other business structures such as joint ventures or wholly owned subsidiaries organized in China. Should there be any adverse change in the Company's dealings with the BFDC, or should the local or federal government change the rules under which the Company currently operates, all of the Company's operations and assets could be jeopardized.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share and per share amounts)

The United States International Trade Commission ("ITC"), an independent, nonpartisan, quasi-judicial federal agency of the Government of the USA that: (i) provides trade expertise to both the legislative and executive branches of the United States of America, (ii) determines the impact of imports on U.S. industries, and (iii) directs actions against certain unfair trade practices, such as patent, trademark, and copyright infringement, initiated an investigation in 1998 concerning certain lens-fitted film packages ("proceedings").

The ITC referred the investigation to an Administrative Law Judge ("ALJ") to conduct a hearing and address other issues pertaining to the proceedings. The ITC, based on an initial determination made by the ALJ, had issued an order "1998 Order" banning the importation of products fitting the description lens-fitted film packages.

The Company, as a result of the 1998 Order issued by the ITC in connection with the proceedings, had obtained a ruling from the United States Customs Services ("USCS") stating that its product (HL-1 camera) does not meet the description of lens-fitted film package under the 1998 Order. Fuji Photo Co. Ltd. ("Fuji") believed that the USCS had wrongly interpreted the 1998 Order in respect to the HL-1 camera and had requested an Advisory Opinion from the ITC whereby it asked the ITC to redefine lens-fitted film packages in order to invalidate the ruling of the USCS in respect to the HL-1 camera. Also, Fuji claimed, in its request for Advisory Opinion, that the HL-1 camera of the Company infringed four of its US Patents. The ALJ has made an initial determination on May 2, 2002 that the HL-1 camera did not infringe US Patent No. 4,884,087 and the US Patent No. Re 34,168; both held by Fuji and (ii) did infringe the US Patent No. 5,381,200 and the US Patent No. 4,972,649; both held by Fuji. Notwithstanding the infringement on two of Fuji's US Patents, the ALJ did not assess any enforcement sanctions (including penalties) against the Company. The initial determination by the ALJ finding HL-1 camera to have infringed on two of Fuji's US Patents had the effect of invalidating the ruling issued by the USCS.

The ITC, on August 7, 2002, accepted the findings of the ALJ concerning the four Fuji patents as they applied to HL-1 camera. Fuji appealed the findings accepted by the ITC related to the US Patent No. 4,884,087 and the US Patent No. Re 34,168 with the United States Federal Circuit Court of Appeals for the Federal Circuit ("FCCA") on October 7, 2002. The FCCA also granted on November 26, 2002 a motion of the Company to intervene in the appeal. The FCCA subsequently suspended its review to allow the ITC to reach a final decision on other matters related to the proceedings. The ITC, on May 15, 2003, adopted the initial determination of the ALJ (including the recommendation not to take any enforcement sanctions against the Company) regarding the four Fuji patents through the issuance of a final order ("Fuji Patent Final Order").

The FCCA, as of June 2, 2004, still has not completed its review of the appeal by Fuji.

Management and its legal counsel believe that no monetary penalties will be imposed on the Company by the FCCA as a result of the appeal filed by Fuji. Accordingly, the accompanying financial statements do not include an accrual for any such monetary penalties. However, an unfavorable opinion by the FCCA may have a negative impact on the Company's ability to sell in the USA related products including its HL-2 camera; which management believes does not infringe any of Fuji's US Patents. The Company's sales of HL-1 and HL-2 cameras in the USA have not been significant.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share and per share amounts)

The Company has entered into a fee arrangement with a law firm in connection with legal services provided to the Company. The terms of the fee arrangement entitle the law firm to the following consideration if the ITC matter discussed in (e) above is resolved in favour of the Company:

— A right to receive one-third of the Company's net profit from world-wide sales of the Company's HL-2 camera up to a maximum of $1,000.

— An option entitling the law firm to purchase 100,000 common shares of the Company at a price of $1.00 per share; the option expires in one year from resolution of the ITC matter.

At March 31, 2004, the option has not been granted as the Company believes that the ITC matter has not been resolved in favour of the Company. Accordingly, no compensation expense has been recorded in the consolidated statements of operations for the year ended March 31, 2004. The Company and the law firm are currently negotiating regarding the issuance of the option. If the option was issued on March 31, 2004, the Company's net income and income per share for the year ended March 31, 2004 would have been as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share and per share amounts)

A substantial percentage of the Company's sales are made to two customers and are typically on an open account basis. Details of the customers accounting for 10% or more of total net sales in any of the years ended March 31, 2002, 2003 and 2004 are as follows:

	March 31,

	2002		2003		2004

Company A	17.4	%	18.9	%	17.1	%
Company B	*		14.6	%	22.4	%

* Less than 10%

Details of the accounts receivable from the five customers with the largest receivable balances at March 31, 2003 and 2004 are as follows:

	March 31,

	2003		2004


Company A	5.4	%	11.2	%
Company B	7.0	%	—
Company C	23.2	%	36.5	%
Others	13.4	%	13.8	%

Five largest receivable balances	49.0	%	61.5	%

Details of the movements of the allowance for doubtful account for the years ended March 31, 2002, 2003 and 2004 are as follows:

	2002			2003			2004

At beginning of year	$	5		$	30		$	63
Bad debt expense		27			41			142
Amount written off	(2		)	(8		)	(94		)

At end of year	$	30		$	63		$	111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share and per share amounts)

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

The carrying amounts of cash and cash equivalents, restricted cash, investment securities, accounts receivable, accounts payable, accrued liabilities, short-term borrowings and long-term debt are reasonable estimates of their fair value. The interest rates on the Company's long-term debt approximate those which would have been available at March 31, 2004 for debt of similar remaining maturities and credit rating.

The Company has adopted the 1996 Stock Option Plan (the "Option Plan") that currently covers 400,000 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 of Directors, which determines the terms of the options granted, including the exercise price (provided, however, that the option price shall not be less than fair market value or less than the par value per share on the date the options granted), the number of Common Shares subject to the option and the option's exercisability. The maximum exercisable period of options granted under the Option Plan is five years. In addition to the options that can be granted under the Option Plan, the Company also granted stock purchase rights to purchase 262,076 Common Shares to certain of the directors and key employees prior to its December 1996 initial public offering and granted stock purchase rights to purchase 100,000 Common Shares to a director during the year ended March 31, 2004.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share and per share data)

The following summarizes the stock purchase rights and options outstanding:

	Stock
	purchase rights				Stock options
	Average				Average
	exercise		Number		exercise		Number
	price		of shares		price		of shares

April 1, 2002	$	1.6683	185,628		$	2.6115	372,500
Stock purchase rights lapsed		1.5500	(100,000	)		—	—
Stock options lapsed/cancelled		—	—			3.8909	(132,000	)

March 31, 2003	$	1.8065	85,628		$	1.9093	240,500
Stock purchase rights granted		1.5500	100,000			—	—
Stock options granted		—	—			2.1986	168,000
Stock purchase rights exercised		1.5500	(52,847	)		—	—
Stock options exercised		—	—			1.8871	(85,500	)
Stock options lapsed/cancelled		—	—			3.0000	(14,500	)

March 31, 2004	$	1.7154	132,781		$	2.0217	308,500

All stock purchase rights are exercisable at March 31, 2002, 2003 and 2004 while the stock options granted during the year end March 31, 2004 have a one year vesting period.

Additional information on options and stock purchase rights outstanding at March 31, 2004 is as

		Weighted
		average
		remaining
	Number	contractual
Exercise prices	outstanding	life (years)

$1.1875	40,500	1.0
$1.4700	96,000	4.2
$1.5500	100,000	4.2
$2.0625	100,000	0.5
$2.2200	32,781	0.5
$3.1700	72,000	4.6

	441,281	2.9

At of March 31, 2003 and 2004, there were 326,128 and 273,281, respectively, of stock options/purchase rights exercisable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share and per share data)

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

The Company considers its reportable segments to be metal stamping, the manufacture and assembly of cameras, and clocks and watches. A summary of the net sales, profitability information and asset information by segment and geographical areas is shown below:

	Year ended March 31,

	2002			2003			2004

Net sales:
Metal stamping:
Unaffiliated customers	$	12,024		$	11,688		$	14,786
Intersegment sales	402			529			1,190

	12,426			12,217			15,976

Cameras:
Unaffiliated customers		4,541			4,910			5,990
Intersegment sales	790			618			413

	5,331			5,528			6,403

Clocks and watches:
Clocks:
Unaffiliated customers		2,867			3,772			4,580
Intersegment sales	319			205			415

	3,186			3,977			4,995

Corporate:
Intersegment sales	1,606			1,506			1,209

Intersegment eliminations	(3,117		)	(2,858		)	(3,227		)

Total net sales	$	19,432		$	20,370		$	25,356

Operating (loss) income:
Metal stamping	$	1,015		$	1,054		$	1,304
Cameras		(385	)		(234	)		41
Clocks and watches		(658	)		(466	)		(323	)
Corporate expenses (net)	(213		)	(195		)	(147		)

Total operating (loss) income	$	(241	)	$	159		$	875

	Year ended March 31,

	2002		2003		2004

Interest expense:
Metal stamping	$	76	$	55	$	67
Cameras		3		5		2
Clocks and watches		3		4		8
Corporate expense (net)	—		—		—

Total interest expense	$	82	$	64	$	77

Depreciation and amortization expense:
Metal stamping	$	591	$	636	$	588
Cameras		228		126		148
Clocks and watches		142		268		290
Corporate assets	107		100		86

Total depreciation and amortization	$	1,068	$	1,130	$	1,112

Capital expenditure:
Metal stamping	$	335	$	165	$	896
Cameras		147		99		95
Clocks and watches		83		201		209
Corporate assets	26		18		17

Total capital expenditure	$	591	$	483	$	1,217


			As at March 31,
			2003		2004

Identifiable assets:
Metal stamping			$	8,060	$	10,635
Cameras				3,082		3,078
Clocks and watches				4,632		4,316
Corporate assets				720	659

Total identifiable assets			$	16,494	$	18,688

Long-lived assets:
Metal stamping			$	2,606	$	2,924
Cameras				363		293
Clocks and watches				1,520		1,242
Corporate assets				2	1

Total long-lived assets			$	4,491	$	4,460

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.)

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 Stock Option Agreement, dated October 16, 1999, between the Company and Roland W. Kohl (incorporated by reference to the registrant’s Annual Report on Form 20-F for the fiscal year ended March 31, 2002).

4.3 License and Supply Agreement, dated as of January 30, 2003, is entered into by and between Highway Holdings Limited and Kienzle AG (incorporated by reference to Exhibit 4.3 of registrant's Form 20-F for the year ended March 31, 2003).

4.4 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.

4.5 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.

4.6 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.

4.7 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.

4.8 Form of Longcheng Industrial Area Common Property Tenancy Contract, dated December 29, 2003, between the Company and Shenzhen Land & Sun Industrial & Trade Co., Ltd.

4.9 Tenancy Agreement, dated October 30, 2003, between Nissin Precision Metal Manufacturing Limited and SHK Sheung Shui Landmark Investment Limited, as amended February 23, 2004.

4.10 General Business Agreement, dated April 29, 2004, between Berger Lahr GmbH & Co. KG and Kayser Technik Ltd., the Company's metal manufacturing subsidiary.

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

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

99.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

[ ]		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, 2004.

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ____________ to ____________.

PART I	1

Item 1. Identity of Directors, Senior Management and Advisers	1
Item 2. Offer Statistics and Expected Timetable	1
Item 3. Key Information	2
Item 4. Information on the Company	12
Item 5. Operating and Financial Review and Prospects	31
Item 6. Directors, Senior Management and Employees	41
Item 7. Major Shareholders and Related Party Transactions	46
Item 8. Financial Information.	48
Item 9. The Listing	50
Item 10. Additional Information	51
Item 11. Quantitative and Qualitative Disclosures About Market Risk.	54
Item 12. Description of Securities Other Than Equity Securities	55

PART II	55

Item 13. Defaults, Dividend Arrearages and Delinquencies	55
Item 14. Material Modification to the Rights of Securities Holders and use of Proceeds.	55
Item 15. Controls and Procedures	55
Item 16. Not applicable	56
Item 16A. Audit Committee Financial Expert	56
Item 16B. Code of Ethics	56
Item 16C. Principal Accountant Fees and Services	57
Item 16D. Exemptions From the Listing Standards for Audit Committees	57
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers	57

PART III	57

Item 17. Not applicable	57
Item 18. Financial statements.	58
Item 19. Exhibits	58

	2000				2001				2002				2003		2004
Income Statement Data
Net Sales	$	18,187			$	17,543			$	19,432			$	20,370	$	25,356
Gross profit		3,347				2,492				3,384				3,882		5,094
Operating income (loss)		(105		)		(1,029		)		(241		)		159		875
Net income (loss)		(265		)	(1,252			)		(231		)		485		982
Dividend declared and paid ⁽¹⁾		126				0				0				0		237
Per share amounts
Net income (loss)-basic	$		(0.09	)	$		(0.43	)		(0.08		)		0.17		0.32
Net income (loss)-diluted	$	(0.09		)	$		(0.43	)		(0.08		)		0.17		0.30
Dividend declared & paid ⁽¹⁾		0.044				0				0				0		0.08
Weighted average shares:
Basic		2,868				2,905				2,904				2,902		3,030
Diluted		2,868				2,905				2,904				2,902		3,258

Balance Sheet Data
Property, plant and equipment, net	$	5,263			$	4,723			$	4,243			$	3,657	$	3,780
Working capital			7,110				6,425				6,716			7,753			8,774
Total assets		17,285				15,644				15,701				16,494		18,688
Long Term Debt			305				49				112			230			385
Shareholders’ equity		12,929				11,697				11,466				11,907		12,842


	Year Ended March 31,

	2002		2003		2004


Net Sales	100	%	100	%	100	%
Cost of sales	82.6		80.9		79.9

Gross profit	17.4		19.1		20.1
Selling, general and administrative expenses	18.6		18.3		16.6

Operating income/(loss)	(1.2	)	0.8		3.5
Interest expense	(0.1	)	(0.2	)	(0.3	)
Other income	0.4		2.1		1.5
Impairment of investment in an affiliate	0		0		(0.4	)
Share of affiliate (loss)	0		0		0

Income/(loss) before income taxes	(0.9	)	2.7		4.3
Income taxes	(0.3	)	(0.3	)	(0.4	)

Income/(loss) before minority interest	(1.2	)	2.4		3.9
Minority interest	0		0		0

Net income/(loss)	(1.2	%)	2.4	%	3.9	%

	Payment due by Year Ended March 31,

											2009 and
Contractual Obligations	Total		2005		2006		2007		2008		thereafter

	000’s		000’s		000’s		000’s		000’s		000’s
Facility Leases	$	3,875	$	828	$	805	$	779	$	760	$	703
Finance Leases		385		173		121		91		—		—
Purchase obligations		2,160		2,160		—		—		—		—
Short term borrowing		1,933		1,933		—		—		—		—

Total	$	8,353	$	5,094	$	926	$	870	$	760	$	703

	Year Ended March 31
	2002		2003		2004
GEOGRAPHIC AREAS:
Hong Kong & China	60.5	%	63.7	%	66.1	%
Europe	31.4	%	25.7	%	23.7	%
Other Asian countries	1.7	%	1.3	%	2.4	%
United States	5.5	%	7.5	%	2.4	%
Others	0.9	%	1.8	%	5.4	%

Name	Age	Positions


Roland W. Kohl	55	Chief Executive Officer, Director, Chairman of the Board
Satoru Saito	55	Sales Director, Metal Stamping Operations, Director
Fong Po Shan	38	Chief Financial Officer, Secretary
May Tsang Shu Mui	44	Administration Manager, Director
Quan Vinh Can (Joseph)	55	Factory Manager, Metal Stamping Operations
Tiko Aharonov	57	Director
Benson Lee ^{(1) (2)}	62	Director
David Tamir ^{(1) (2)}	68	Director
Terrence A. Noonan ^{(1) (2)}	66	Director
Dirk Hermann ⁽¹⁾	40	Director

Name of Beneficial Owner	Number of
Or Identity of Group	Common Shares	Expiration Date	Exercise Price

Roland W. Kohl	100,000	June 2, 2008	$	1.55

Tiko Aharonov	32,781	August 31, 2004	$	2.22
	10,000	May 7, 2005	$	1.1875
	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

May Tsang Shu Mui	10,000	May 7, 2005	$	1.1875
	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

Lee Benson	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

David Tamir	10,000	May 7, 2005	$	1.1875
	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

Terrence A. Noonan	10,000	May 7, 2005	$	1.1875
	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

Satoru Saito	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

Dirk Hermann	2,000	June 2, 2008	$	1.47
	4,000	October 27, 2008	$	3.17

Fong Po Shan	20,000	June 2, 2008	$	1.47

Quan Vinh Can (Joseph)	3,000	June 2, 2008	$	1.47
	6,000	October 27, 2008	$	3.17

Name of Beneficial Owner or	Number of Common Shares		Percent Beneficially
Identity of Group⁽¹⁾	Beneficially Owned		Owned^(**)

Roland W. Kohl	424,797	⁽²⁾	12.95	%
David Tamir	13,000	⁽³⁾	*
Benson Lee	353,830	⁽⁴⁾	11.12	%
Tiko Aharonov	274,900	⁽⁵⁾	8.52	%
Dirk Hermann	2,000	⁽³⁾	*
Satoru Saito	352,980	⁽⁴⁾	11.09	%
May Tsang Shu Mui	63,171	⁽⁶⁾	1.98	%
Cartwright Investments Limited	346,830		10.91	%
Terrence A. Noonan	13,000	⁽³⁾	*
Fong Po Shan	21,283	⁽⁷⁾	*
Quan Vinh Can	27,665	⁽⁴⁾	*

*	Less than 1%.
**	Under the rules of the Securities and Exchange Commission, shares of Common Shares that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

(1)	The address of each of the named holders is c/o Highway Holdings Limited, Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung Shui New Territories Hong Kong.
(2)	Includes stock options to purchase 100,000 Common Shares which are currently exercisable.
(3)	Represents currently exercisable stock options to purchase Common Shares.
(4)	Includes stock options to purchase 3,000 Common Shares which are currently exercisable.
(5)	Includes stock options to purchase 45,781 Common Shares which are currently exercisable.
(6)	Includes stock options to purchase 13,000 Common Shares which are currently exercisable.
(7)	Includes stock options to purchase 20,000 Common Shares which are currently exercisable.

	1^st			2^nd		3^rd		4^th
	Quarter			Quarter		Quarter		Quarter

2004
Net Sales	$	5,953		$	6,234	$	6,457	$	6,712
Gross profit		1,139			1,128		1,198		1,629
Operating income (loss)		78			209		76		511
Net income (loss)		159			201		214		408
Earnings (loss) per share – basic		0.05			0.07		0.07		0.13
Earnings (loss) per share – diluted		0.05			0.06		0.07		0.12

2003
Net Sales	$	4,544		$	5,092	$	5,349	$	5,385
Gross profit		724			1,171		1,035		952
Operating income (loss)		(145	)		183		83		38
Net income (loss)		89			100		162		134
Earnings (loss) per share – basic		0.03			0.04		0.05		0.05
Earnings (loss) per share – diluted		0.03			0.04		0.05		0.05

Year Ended	High		Low
March 31, 2004	$	7.39	$	1.40
March 31, 2003	$	2.00	$	0.47
March 31, 2002	$	1.33	$	0.60
March 31, 2001	$	1.625	$	0.625
March 31, 2000	$	4.125	$	0.813

Quarter Ended	High		Low
March 31, 2004	$	7.39	$	4.72
December 31, 2003	$	3.91	$	2.65
September 30, 2003	$	4.60	$	1.99
June 30, 2003	$	2.10	$	1.40

March 31, 2003	$	2.00	$	0.60
December 31, 2002	$	0.80	$	0.48
September 30, 2002	$	0.70	$	0.47
June 30, 2002	$	0.79	$	0.55

Month Ended	High		Low
May 31, 2004	$	5.03	$	4.00
April 30, 2004	$	5.60	$	4.74
March 31, 2004	$	5.50	$	4.70
February 28, 2004	$	5.66	$	4.75
January 31, 2004	$	7.39	$	5.46
December 31, 2003	$	3.87	$	2.95

	2003		2004
Audit Fees (1)	$	97,000	$	105,000
Audit-Related Fees (2)		—		—
Tax Fees (3)	$	5,000	$	19,000
All Other Fees		-		-
Total	$	102,000	$	124,000

	March 31,

	2003		2004

Raw materials	$	2,486	$	2,292
Work in progress		446		855
Finished goods	1,640		1,247

	$	4,572	$	4,394

	Page
CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F - 2

Consolidated Statements of Operations for each of the three years in the period
ended March 31, 2004	F - 3

Consolidated Balance Sheets as of March 31, 2003 and 2004	F - 4

Consolidated Statements of Shareholders' Equity and Comprehensive (Loss)
Income for each of the three years in the period ended March 31, 2004	F - 5

Consolidated Statements of Cash Flows for each of the three years in the period
ended March 31, 2004	F - 6

Notes to Consolidated Financial Statements	F - 8

	Common shares,								Accumulated
	issued and			Additional					other			Treasury			Total			Compre-
	outstanding			paid-in		Retained			comprehensive			shares			shareholders'			hensive
	Shares	Amount		capital		earnings			loss			at cost			equity			(loss) income

Balance at April 1, 2001	2,936	$	30	$	8,793	$	2,956		$	(33	)	$	(49	)	$	11,697
Net loss	—		—		—		(231	)		—			—			(231	)	$	(231	)


Balance at March 31, 2002	2,936		30		8,793		2,725			(33	)		(49	)		11,466
Repurchase of treasury shares	—		—		—		—			—			(4	)		(4	)
Net income	—		—		—		485			—			—			485		$	485
Translation adjustments	—		—		—		—			(40	)		—			(40	)	(40		)

Comprehensive income																		$	445


Balance at March 31, 2003	2,936		30		8,793		3,210			(73	)		(53	)		11,907
Issued during the year	138		1		242		—			—			—			243
Net income	—		—		—		982			—			—			982		$	982
Unrealised holding loss on
investment securities	—		—		—		—			(13	)		—			(13	)		(13	)
Translation adjustments	—		—		—		—			(40	)		—			(40	)	(40		)

Comprehensive income																		$	929

Cash dividends ($0.08 per share)	—		—		—		(237	)	—			—			(237		)

Balance at March 31, 2004	3,074	$	31	$	9,035	$	3,955		$	(126	)	$	(53	)	$	12,842

Net income, as reported		$	982
Less: Stock based compensation costs under
fair value based method		423

Net income, pro forma			559

Income per share - basic	As reported	$	0.32
	Pro forma	0.18

Income per share - diluted	As reported	$	0.30
	Pro forma	0.17

Rise-free interest rate	4.75%
Expected life	1 year
Expected volatility	101.73%
Expected dividend yield	2.5%

	HIGHWAY HOLDINGS LIMITED


	By	/s/ PO S. FONG
		Po S. Fong
		Chief Financial Officer and
		Secretary

	Date:	June 23, 2004