20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

OR

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

For the fiscal year ended December 31, 2003

OR

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

For the transition period from                      to                     .

Commission file number 33-45136

DSG INTERNATIONAL LIMITED

(Exact name of Registrant as specified in its charter)

__________________________________________

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung

Hong Kong

Tel. No. 852-2484-4820

(Address of principal executive office)

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

Title of each Class	Name of each exchange on which registered
None

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

Ordinary Shares, par value

$0.01 per share (“Ordinary Shares”)

(Title of Class)

__________________________________________

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

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.

Ordinary Shares 7,258,316

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.

x Yes    ¨ No

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

¨ Item 17    x Item 18

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

¨ Yes    ¨ No

PART I

Item 1. Identity of Directors, Senior Management and Advisors.

Not applicable.

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

Item 3. Key Information.

A. Selected Financial Data

The information required is contained in the Selected Consolidated Financial Data of the Annual Report to Shareholders, and is incorporated herein by reference.

B. Capitalization and Indebtedness

The information required is contained in the Consolidated Balance Sheets and Consolidated Statements of Shareholders’ Equity of the Annual Report to Shareholders, and is incorporated herein by reference.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Among the factors that have a direct effect on the results of operations and financial condition of DSG International Limited (the “Company”) are the following:

1. Raw Material Cost

The Company has seen a significant price increase, in the range of 5% to 7%, among the major raw materials in 2003. It is anticipated that these raw material costs will continue to increase in 2004, particularly the wood pulp, super absorbent polymer and polypropylene, at the same pace as 2003. The operating results in all of our segments were affected adversely by this factor. Most raw materials used by the Company are commodities which are subject to price volatility caused by many unpredictable factors. In addition to maintaining multiple sourcing, the Company has entered into various

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short-term supplying contracts to effectively manage the volatility on inventory supply and the pricing. While the Company continues to implement programs to drive the cost out, it is difficult to predict that these measures are adequate to offset the raw material increases in the future.

2. Branded Product Innovation

Patents and other intellectual property rights are an important competitive factor in the disposable diaper market, mostly because of the industry emphasis in product innovations. Patents held by the main competitors could severely limit the Company’s ability to keep up with branded product innovations, by prohibiting the Company from marketing product with comparable features.

3. Competition

The market position of the Company’s main competitors, The Procter & Gamble Company (“P&G”) and Kimberly-Clark Corporation (“KC”), relative to the Company varies from one geographic area to another; but due to their substantial financial, technical, marketing, manufacturing, logistics and personnel resources, both of these major manufacturers have the ability to exert significant influence in price and volumes, and gain substantial market share in any of their marketing areas. They have heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price than previously available to the retailer and consumer. It is possible that as a consequence of this strategy, in those geographic markets in which the main competitors have adopted it, the Company may realize lower selling prices and/or lower sales volume. As a result, the intense competition in the markets may result in pricing pressure, lower sales and reduced margins. The Company’s business and operating results could be materially and adversely affect by these continuing competitive pressures and the Company may be unable to compete successfully with these main competitors in the future.

4. Increased Cost

On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian region after December 31, 2000. A similar agreement with P&G was entered into in 1998 relating to the North American region that provides for payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within the North American region.

On September 12, 2003, the Company entered into another agreement with P&G to resolve any possible dispute between the parties related to a patent. This agreement grants a royalty bearing non-exclusive rights to use certain features for certain products produced by the Company’s North American region. The royalty fee is calculated based on a percentage of the products sold and recorded as selling, general and administrative expenses in 2003.

The Company believes that the royalty being charged by P&G under its respective license agreements is approximately the same royalty that will be paid by its major competitors for similar patent rights.

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5. Increased Financial Leverage

The Company’s short and long-term debts were $36.0 million as of December 31, 2003, an increase of $11.7 million from $24.3 million last year. The debts are bearing various interest rates as of December 31, 2003 ranging from 2.1875% to 7.25%. The Company still has significant principal and interest obligations resulting from the acquisition of the North American assets of Drypers Corporation. The existing level of the Company’s financial leverage could adversely affect the Company’s ability to obtain additional financing for working capital, acquisitions or other purposes and could make the Company more vulnerable to economic crisis in the different geographical markets and to competitive pressures from its main competitors.

As a substantial portion of the Company’s available cash from operations will have to be applied to meet debt service requirements, the Company’s liquidity could be affected as well as its ability to fund capital expenditures. Notwithstanding, the Company believes that its cash flow from operations and other sources of liquidity will be adequate to meet its requirements for working capital, capital expenditures, interest payment and scheduled principal payment for the foreseeable future. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There is no assurance that this additional financing could be obtained. If financing is obtainable, there is no guarantee it could be obtained on terms favorable to the Company.

6. Litigation Risk

As the Company operates in an industry in which patents are numerous and are enforced vigorously, the Company and its subsidiaries are from time to time involved in legal matters.

The Company is currently not defending itself in any significant litigation matters. Although it cannot be certain, in management’s opinion, none of the legal proceedings in which the Company is currently involved, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition or results of operation.

7. Worldwide Political, Economic, Legal and Other Uncertainties

The Company is incorporated in the British Virgin Islands and has operating subsidiaries incorporated in Hong Kong, the United States, The United Kingdom, the Peoples’ Republic of China (“PRC”), Thailand, Indonesia and Malaysia. The Company manufactures and distributes baby diapers, training pants and adult incontinence products in North America, Europe, Greater China and South East Asia regions. The global operations may render the Company subject to political, economic risks and legal uncertainties, including the changes in economic and political conditions and government policies; wars, civil unrest, acts of terrorism and other conflicts; changes in tariffs, trade restriction, trade agreements and taxation and limitation of repatriation of funds due to foreign exchange controls. The occurrence or consequences of any of the aforesaid

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factors may restrict the Company’s ability to operate in the affected region and decrease the profitability of the Company’s operations in that region.

Item 4. Information on the Company.

A. History and Development of the Company

DSG International Limited, established in Hong Kong in 1973, is one of the world’s leading companies specializing in manufacturing disposable baby diapers, training pants and adult incontinence products, with over thirty years of experience in this industry. The Company now operates nine manufacturing facilities in North America, Asia and Europe with extensive distribution activities around the world.

In the 10-year span, from 1984 to 1994, the Company had expanded its operations into the United States of America, United Kingdom, Australia, Singapore, Switzerland, Canada, Thailand, and China. In addition, the Company successfully completed the initial public offering in the U.S. of its Ordinary Share listed under the NASDAQ National Market System in 1992.

In April 1995, the Company’s management group, led by the Chairman, Brandon Wang, and two other equity investors proposed a going private transaction to which the holders of all the outstanding shares of the Company held by the public would receive $19 per share. On May 26, 1995, after a review by a Special Committee of independent directors appointed to consider and advise on the proposal, the Board of Directors approved the going private transaction at a price of $19.25 per share and authorized the Company to enter into a merger agreement with corporations that had been formed by the management group. On July 7, 1995 the merger agreement that had been entered into as of May 26, 1995 to effect the going private transaction was terminated because there was no reasonable possibility that certain conditions of the merger agreement could be satisfied within the time period stipulated in the agreement as there was no reasonable prospect that financing would be available on satisfactory terms within such time period.

In March 2001, the Company acquired all the U.S. assets including the “DRYPERS®” brand name and the manufacturing facilities in Marion, Ohio and Vancouver, Washington of a major U.S. disposable baby diaper manufacturer which was in bankruptcy, and was thus able to substantially expand its sales in the U.S.

On November 11, 2002, the Company entered into a definitive agreement to sell its Australian subsidiaries and the sale was completed on December 6, 2002.

In October 2002, the Company purchased land in an industrial zone in Saraburi, Thailand of approximately 240,000 square feet in order to expand the production capacity in Thailand. In December 2002, the Company set up a wholly owned subsidiary in Shanghai, PRC to manufacture disposable baby diapers products.

In April 2003, the Company entered into a joint venture agreement with two Japanese partners to establish a

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manufacturing facility in Shanghai, PRC to manufacture certain raw material for disposable diapers products. The Company owns a 75% interest in the joint venture company. In September 2003, the Company closed a dormant subsidiary in Canada.

In June 2004, the Company announced the reopening of the Duluth, Georgia facility as a distribution center to reinforce logistic capabilities by having a Southeastern U.S. location. At the same time the Company announced the planned August 2004 closure of the Oconto Falls, Wisconsin adult incontinence facility. This decision is a key part of the Company’s strategic plans for 2004 to de-emphasize the Institutional Market sector of the U.S. adult incontinence business. The Company will continue to focus on and build its successful business in the Retail Market sector. The manufacturing of the adult incontinence products will be consolidated into the Marion, Ohio plant where the Company can benefit from the economy of scale and combined shipments of both baby and adult products to the same retail customers.

DSG International Limited is incorporated in the British Virgin Islands under the International Business Companies Act of 1984 and has its principal executive office at 17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung, Hong Kong. Its telephone number is (852) 2484-4820.

CAPITAL EXPENDITURES

Principal capital expenditures of the continuing operations over the last three years include the following:

	2003		2002		2001
Purchase of land in Thailand	$	289,000	$	—	$	—
Purchase of land use right in Shanghai, PRC		1,676,000		1,433,000		—
Purchase of London residence property		12,297,000		—		—
Construction of manufacturing equipment for the joint venture investment in Shanghai, PRC		3,754,000		—		—
Building construction in Thailand		523,000		—		—
Additions and modifications to machinery and equipment in the Company’s various operations		5,787,000		4,136,000		1,596,000
Total	$	24,326,000	$	5,569,000	$	1,596,000

The Company’s plan for major capital expenditure in 2004 included $2.7 million and $2.5 million for the construction of the Thailand and Shanghai joint venture manufacturing facilities, respectively, and $9.0 million for the construction of manufacturing equipment for the Shanghai, PRC joint venture investment. The financing for these expenditures will be partially funded by banking facilities and partially funded by internally generated cash from operations.

The Company’s plans for capital expenditures are subject to changes from time to time and could result from, among other things, the consummation of any significant amount of additional acquisition or investment opportunities, which the Company is constantly exploring.

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B. Business Overview

1. General

The Company manufactures and markets disposable baby diapers, training pants and adult incontinence products primarily under its own brand names, which include “DRYPERS®”, “FITTI®”, “PET PET®”, “COSIFITS®”, “BABY LOVE®”, “BABYJOY®”, “DISPO 123^™”, “HANDY^™”, “CERTAINTY®” and “MERIT®”. The “DRYPERS®” brand was acquired in March 2001. The Company also manufactures and markets disposable baby diapers, adult incontinence and training pants products under private labels. The Company’s products are sold internationally, with its nine manufacturing facilities being in Hong Kong, the United States, the United Kingdom, the People’s Republic of China (“PRC”), Thailand, Indonesia and Malaysia.

The Company manufactures and distributes private label and branded disposable baby diapers, adult incontinence products, training pants and youth pants for the North American markets with its operations in Marion, Ohio and Vancouver, Washington. With a good regional presence, the Company’s “FITTI®” brand is a strong selling brand of disposable baby diapers and training pants in key markets. The Company’s “DRYPERS®” brand is another regional brand of disposable baby diapers and training pants products in the North American market. The Company’s sales in adult incontinence products, training pants and youth pants have grown in their significance in the Company’s North American market.

In the PRC, the Company estimates that the consumer market penetration rate of disposable baby diapers is around 4% and the market size is growing at a rate of 15% per annum. The Company’s leading brands, “FITTI®” and “PET PET®”, are well established in most of the major cities including Shenzhen, Guangzhou, Shanghai and Beijing; and the Company’s economy brands, “FITTI® Basic” and “BABY LOVE®”, expanded rapidly in the eastern, northeastern, western and central part of the PRC. By using the premium “FITTI®” and economy “FITTI® Basic” brands, the Company delivers a clear brand icon to the consumers in the PRC and strengthens the baby disposable diapers market penetration nationwide in the PRC. The Company estimates that it holds the third position in overall market share among its competitors in the PRC. In the Guangdong province, the major southern province of the PRC, the Company has a well-established sales and distribution network that extends throughout the province and cities and the Company believes that it is the market leader in the province, with around 35% market share. In the northern part of the PRC, the Company’s sales operation has built up direct sales distribution channels in the Beijing and Tianjin markets and expanded its wholesale network into other northern and northeastern provinces such as Shandong, Shanxi, Hebei, Shaanxi, Jilin and Liaoning as well as various cities. In the eastern part of the PRC such as Fujian, Zhejiang, Jiangsu provinces, the Company established a strong sales and distribution network by working with a number of reputable territorial wholesalers. Management of the Company is optimistic about the growth opportunity in these provinces and cities. In Shanghai Municipal, the Company developed its direct sales and distribution network with major foreign investor-owned hypermarkets and state-owned supermarket chains. The Company’s sales office in Shanghai also functions as a nationwide sales and marketing centre to focus and keep pace with the market development in the PRC. In addition, the Company has two sales offices in Wuhan and Chengdu to reinforce the distribution efforts in the Central and Western part of the PRC. Overall, the Company has

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expanded its sales and distribution networks in 28 provinces, 3 municipals and over 200 cities in the PRC through its direct sales and distribution team and engagement of either distributors or wholesalers. The Company continues its effort in exploring the potential of other PRC markets. In 2003, the Hong Kong disposable diaper market declined due to the outbreak of Severe Acute Respiratory Syndrome (“SARS”), low birth rate and a weak economy; however, the Company maintained its second place position in the Hong Kong market with an estimated market share of 25%.

The SARS also affected the South East Asian regions in 2003; the total sales in 2003 were maintained at levels consistent with 2002. Although the market condition in Thailand is difficult due to intense price competition, the Company’s “BABY LOVE®” and “FITTI® Basic” brands gained additional market share with volume growth by 4% in 2003 over 2002. In other markets such as Malaysia, Indonesia and Singapore, the Company faced severe price competition in both premium and economy products segment coupled with a television advertising program from its competitors. The Company expects these difficult conditions to continue. In 2003 it initiated a series of marketing programs including product development, expansion in distribution channels, in-store promotional support and advertising campaigns. All these activities were implemented simultaneously in Thailand, Malaysia, Indonesia and Singapore and will be carried forward to 2004. The Company is optimistic on the sales growth of disposable baby diapers in the coming years.

The Company manufactures and distributes adult incontinence products through its operation in Thailand to all other markets in Asia under its “DISPO 123™”, “HANDY™” and “CERTAINTY®” brands. The Company has achieved a 70% market share and is the market leader in the adult incontinence market in Thailand. In other Asian markets, the sales of adult incontinence products have increased steadily over the years and the Company’s brands are well established both in the retail and institutional sectors. Some new brands have been introduced in different South East Asian countries but the Company remains optimistic about the market growth potential of the adult incontinence market in the Asian Pacific region.

During 2003, the Company’s operation in the United Kingdom continues to market its branded products to wholesalers and grocery retail accounts. The Company also manufactures private label disposable diapers on a selective basis.

In December 2002, the Company sold its Australian subsidiaries and therefore no longer manufactures or sells disposable baby diapers in Australia and the related markets of the Pacific Islands.

The Company’s marketing strategy is to provide retailers and wholesalers with quality, value-oriented products which offer good profit margins, combined with a high level of service, rather than attempting to mass market its products in competition with the industry leaders. The Company believes that its attention to raw material costs and manufacturing efficiency, combined with careful control of advertising and promotional costs, enables it to produce and market value-oriented products at competitive prices.

The Company’s growth strategy is to target its branded products at selected sectors of mature markets, such as the United States, and to take a broader marketing approach in less developed markets where there is a high rate of growth in disposable diaper usage. The Company believes that its manufacturing facilities in Asia will enable it to participate in the

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expected growth of those markets. In the past, the Company has expanded its business into new markets by acquiring the assets of disposable baby diaper and adult incontinence manufacturers. The Company also expands through establishing its own manufacturing facilities in emerging markets which offer significant growth potential, such as the Company’s facilities in the PRC, Thailand, Indonesia and Malaysia, which were opened in 1994, 1995, 1998 and 1999, respectively.

The Company’s principal raw materials are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene back-sheets, cloth-like breathable back-sheets, polypropylene non-woven liners, adhesive tapes, mechanical closure tapes, hot melt adhesive, elastic, aloe vera and tissue. Fluff wood pulp costs and other raw material costs had edged up in 2003 on the average of 5% to 7%. It is anticipated that these raw material costs will continue to increase in 2004, particularly the wood pulp, super absorbent polymer and polypropylene non-woven. The Company estimates that the magnitude of this raw material increase will be about the same as 2003. Raw material costs typically account for about three-quarters of cost of goods sold.

Disposable diapers are designed and marketed with two basic objectives in mind: (1) to afford parents of infants up to two and one-half years of age the convenience of diapers which are disposed of after one use and (2) to reduce the risk of chapping (“diaper rash”) which often occurs when moisture from a soiled diaper remains in contact with the baby’s skin. The basic concept of most disposable diapers on the market is the same: to allow moisture to pass through a soft inner layer which is in contact with the baby’s skin into a highly absorbent inner core, from which the moisture is prevented from escaping by an outer moisture-proof back-sheet. There are significant differences in quality among the various disposable diapers currently on the market. The most important quality features of disposable diapers are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure the diaper firmly without causing discomfort to the baby. Other features, such as innovative fastenings, attractive designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg gathers, cloth-like breathable back-sheets, mechanical closure tapes, elastic waistband, aloe vera and packaging help to differentiate products from one another.

Adult incontinence products are designed for the convenience of males and females having various degrees of incontinence. The basic concept of most adult incontinence products is to prevent leakage of liquid and solid by absorbing the moisture into a highly absorbent inner core and retaining the soiled contents within an outer moisture proof back-sheet. Similar to disposable diapers, the most important quality features of adult incontinence products are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure firmly without causing discomfort to the user. The absorption media for adult incontinence products are fluff wood pulp and super absorbent polymer. Other features, such as wetness indicator, stand-up leg gathers, elastic waistband, frontal tape closure system and packaging help to differentiate products from one another.

The Company introduces adult incontinence products into its markets in a manner consistent with its niche market strategy. The Company believes that the key to successful marketing of this type of product is the high and prompt level of service from the manufacturer and distributor, regular contact with institutions to ensure proper knowledge of the products, and providing a range of products of high quality and performance.

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2. Geographic Segment and Product Category Information

The following table sets forth the percentage of the Company’s net sales of continuing operations by geographic market and product category activity:

	2003		2002		2001
Net sales
North America	69.8	%	70.9	%	69.7	%
Asia	28.5		27.3		27.6
Europe	1.7		1.8		2.7
	100.0	%	100.0	%	100.0	%
Product sales by category
Disposable baby diapers	77.5	%	79.3	%	78.7	%
Adult incontinence products	16.4		14.5		13.3
Training pants, youth pants and sanitary napkins	6.1		6.2		8.0
	100.0	%	100.0	%	100.0	%

3. Seasonality

There is no significant seasonality impact on the Company’s business in most countries.

4. Raw Materials

The raw material components used in the manufacturing process are fluff wood pulp, super absorbent polymer, polyethylene back-sheet, cloth-like breathable back-sheet, polypropylene non-woven liner, adhesive closure tape, mechanical closure tapes, hotmelt adhesive, elastic, aloe vera and tissue.

The main raw material is fluff wood pulp, which is purchased from several suppliers in the United States and Scandinavia. The source from which the fluff wood pulp is shipped to the Company’s manufacturing facilities is dependent on price, quality and availability. Other raw materials are purchased from various sources, also depending on price, quality and availability. Fluff wood pulp costs and other raw material costs had edged up in 2003. It is anticipated that these raw material costs will continue to increase in 2004. The Company maintains good and long-term relationships with its raw materials suppliers. The Company’s chief purchasing officer oversees the purchasing and sourcing policies of each of the Company’s manufacturing facilities and is responsible for new material developments and keeping track of all world-wide producers of raw materials. This person also negotiates and determines the purchase of the Company’s major raw materials with the Company’s key raw material suppliers.

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The Company has negotiated supply contracts with several of its key suppliers. Such arrangements are generally designed to achieve volume discounts on price and to assure supply stability. In the event of unacceptable price increases, the Company usually has the right to terminate the arrangement upon specified notice periods, which generally range from two to three months.

Some of the suppliers of raw materials to the Company also manufacture disposable diapers which compete with the Company’s products. The Company has not experienced any difficulty with its raw material suppliers who are in competition with it on sales of finished product, but nevertheless it takes steps to ensure that it has alternative sources of supply available.

The main source of energy for the Company’s plants is electricity. The automated process for manufacturing disposable diapers consumes larger amounts of electricity than many other light industries, but none of the Company’s operating subsidiaries has experienced any problems with electricity supply.

5. Marketing Channels

a. North America

i. Products

The Company manufactures and distributes disposable baby diapers, disposable training and youth pants and adult incontinence products throughout North America under the brand names of “DRYPERS®”, “COMFEES®” and “FITTI®”, as well as a growing number of different private label brands. In March 2001, the Company acquired the “DRYPERS®” brand and continues to maintain regional distribution on same. The “DRYPERS®” brand is a full-featured premium product including all of the features of the leading national brands to deliver premium product performance to the quality conscious consumers. The “FITTI®” brand is a full-featured value product, recognized for its unique wetness indicator, a cute print that fades away when the diaper becomes wet. The “FITTI®” brand name is also used with the Company’s disposable training pants and the DRI-NITE JUNIOR disposable youth pants. The Company’s pant products feature tear-away side panels, soft cloth-like covers and comfortable waist and hip elastic and the unique “back tag” feature. The “FITTI®” training pants were the first North American product in this segment to offer the Company’s unique wetness indicators.

The Company continues to expand its private label diaper business throughout North America with such customers as Wal-Mart, Walgreens Drugs, Eckerd Drug, Kroger, Giant Eagle, A&P, Topco, Meijer, Aldi, Amway/Quixtar, Federated Foods, DeMoulas and Medline Industries. The Company is one of very few full line manufacturers capable of producing and marketing a full range of disposable baby diapers as well as training pants and youth pants. This advantage should enhance the Company’s sales and private label partnership opportunities moving into the future. Sales grew steadily with expanded private label sales and distribution through Wal-Mart Stores in 2003.

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The Company’s primary focus on adult incontinence products is the development of profitable private label partnerships with selected retailers and institutional distributors such as Walgreens Drug and Medline Industries. The Company’s focus is on the adult brief products, offering a wide range of product and feature alternatives. The Company was the first to bring disposable adult pants to the North American market and the Company will continue to explore innovative product opportunities that will make a positive difference in this category and bring better solutions to the incontinence user.

ii. Sales and Marketing

Disposable baby diapers account for more than 90% of the baby diaper changes in North America. The market can be divided into several segments: brands that are advertised and sold nationally (Premium Brands); brands that are not widely advertised and are sold regionally (Value Brands); and baby diapers that are sold under private label brands (Corporate Brands). The nationally advertised brands account for around 80% of all sales. The Company maintains a good distribution base on its “DRYPERS®” and “FITTI®” brands. The Company’s “DRYPERS®” and “FITTI®” brand training pants have enjoyed excellent consumer acceptance. The new “DRYPERS®” training pant is the first one in the value segment to offer stretchy side panels similar to the leading national brand. The Company was also first to offer wetness indicators on their training pants. The Company’s DRI-NITE JUNIOR youth pant brand is gaining market share in the fast growing youth pant segment. This segment now accounts for more than 3% of total category sales.

The Company services the North American market from three manufacturing facilities. These facilities are located in Oconto Falls, Wisconsin, Marion, Ohio and Vancouver, Washington. The Oconto Falls adult incontinence manufacturing plant is to be closed in 2004. The Company commissions a national network of independent brokers and non-food sales representatives to sell directly to retailers and distributors/wholesalers. These brokers and sales representatives, managed by the Company’s direct sales management team, serve as the Company’s agents within defined territories to monitor sales, implement trade promotions and handle the required merchandising activities and responsibilities. The Company’s direct sales management team is responsible for the Company’s marketing and headquarter sales functions. The Company remains committed to its marketing philosophy of direct servicing of its customers and accounts by the sales management personnel. This allows the Company to provide a high degree of category expertise and education to the trade and to be able to promptly respond to trade and market needs. In addition, the strategic locations of its North American manufacturing facilities has enabled the Company to achieve average shipping transit time of one to two days for most North American destinations and an excellent focus on supply chain management.

Private Label. This segment of the Company’s business is the major volume area and area of potential growth. The Company continues to strengthen its existing private label partnerships with major retailers such as Wal-Mart, Kroger, Eckerd Drug, Walgreens, A&P, Giant Eagle, Amway/Quixtar, Aldi, Federated, Topco, and by adding new products in both areas of disposable baby diapers and training pants. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories. The Company has positioned itself very well with an advanced line-up of premium products that are better suited to meet the needs of the North American retailers than most of its competitors. The Company recognizes that the private label segment remains somewhat more insulated than that of the typical “value” brands from the aggressive price/promotional strategies of the advertised brands, due to the

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protective/defensive posture that major retailers tend to take when it comes to protecting their corporate brand franchise. The Company is one of a limited number of manufacturers capable of supplying a full range of quality disposable baby diapers, training pants, and youth pants and has a proven track record for delivering quality products, category expertise and customer service.

Branded Products. Due to the intense price and promotional pressure by the advertised brands, combined with a declining birth rate in the U.S. market, the “value brand” segment continues to shrink. By the end of 2003, the combined share of the Company’s “DRYPERS®” and “FITTI®” brands was roughly 1.5% of the total units of disposable baby diapers and training pants sold in grocery outlets throughout North America. The Company continues to pursue a hybrid marketing program on the “DRYPERS®” brand. This hybrid is a combination of “every day low price” (“EDLP”) and targeted consumer and trade marketing, designed to increase sales while enhancing their marketing return on investment. The grocery sector represents around 45% of the over $4 billion United States retail market. In certain markets, such as New York/New Jersey, the nation’s largest retail market, the Company believes that the “FITTI®” brand share is much greater than conventional market share tracking companies would indicate. This is because a much higher percentage of “FITTI®” diapers and training pants are sold through urban wholesalers and inner city retailers that typical market research does not track. The Company concentrates its efforts and marketing activities in providing wholesalers and retailers with above average category profits through the use of packaging with greater shelf impact, consumer preferred pre-priced packaging, creative promotional support, creative consumer marketing vehicles, efficient distribution, electronic data interchange and a high level of customer service. The Company has maintained its strategy of providing the best EDLP on its “FITTI®” brand, offering the consumer “the best product for the price” all the time. The Company provides consumers with quality products at affordable price, unique product features and consistent value. The Company has worked to maintain its branded business with a concentrated effort against a primary diaper selling class of trade: grocery with key retail partners such as Shoprite, Pathmark, and Super Valu. Some distribution and sales gains have been made in other non-grocery outlets such as Freds Dollar Stores and the U.S. military. The Company continues to benefit from new product ideas and unique retailer profit opportunities to the disposable baby products segment.

The Company recognizes that private brands represent more than 30% of the category sales in adult incontinence with steady growth at retail and it is this sector of adult incontinence where the greatest retail sales opportunity exists. The Company will continue to target this private brand segment with a range of superior products in terms of product features and performance. The Company’s strategy is to provide products to the marketplace that are superior to other available products and that are also more affordable than the advertised brands. The drug store trade still represents the majority of adult incontinence retail sales with approximately 50% share of the over $600 million category. Growth potential for the entire category remains high as the population continues to age, people who are incontinent become more open to treatment solutions and better products are developed.

Institutional Volume and Activity. The institutional providers supply adult incontinence products to medical care facilities, nursing homes, extended care facilities and home health care outlets. It is worth noting that the institutional market still represents approximately 60% of the total adult incontinence volume in North America or more than $800 million in sales. The adult category represents an area of significant sales and distribution growth for the Company, and significant gains have been captured. Since its launch in 1996, the adult category volume now represents more than 10% of the

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Company’s total sales. The Company enjoys an excellent working relationship with Medline Industries, Inc., one of North America’s premier institutional suppliers of medical related products

b. Asia

i. Products

The Company manufactures disposable baby diapers primarily under its own brands in Asia. The Company’s leading brands are “FITTI®” and “PET PET®”, and economy brands are “FITTI® Basic”, BABY LOVE®”, “COSIFITS®”, and “BABY JOY®”. The Company also manufactures private labels on a selective basis. Both “FITTI®” and “PET PET®” enjoy substantial market share, are well supported by advertising and promotional activities, and are priced strategically lower than the major U.S. national and the Japanese brands sold in Asia. The Company’s economy brands are basic products targeted to compete strictly on price and value with local brands.

The Company manufactures and distributes adult incontinence products under its own brands “DISPO 123™”, “HANDY™” and “CERTAINTY®”. The Company also manufactures adult incontinence products in private labels. The “DISPO 123™” product is an ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure system and stand-up leg gathers, “HANDY™” and “CERTAINTY®” has similar features as “DISPO 123™” except for the stand-up leg gathers and slight specifications change.

ii. Sales and Marketing

The Company continues to command one of the leading market positions in the mature markets in both Hong Kong and Singapore. The Company enjoys first-mover advantages and localization of manufacturing and distribution base in most of the markets in the Asian region and has established invaluable brand image and strong positions for the Company’s products. The Company continues to focus on expansion of sales in the PRC, Thailand, Malaysia and Indonesia by capitalizing on the increasing usage of disposable baby diapers that are well supported by strategic pricing and effectively designed advertising and promotional activities. The Company also sells its products in Brunei and, to a lesser extent, India, Vietnam, Philippines and Pakistan.

The volume of disposable baby diaper usage varies significantly in different markets, depending to a large extent on the level of per capita disposable incomes. The disposable baby diaper usage is relatively high in Hong Kong and Singapore. Although these two mature markets contracted due to economic downturn and outbreak of SARS, the Company has been able to pursue strategies to maintain its market share in these markets. Disposable baby diaper usage is relatively low in other Asian developing countries, but the Company believes that the usage will increase as income levels in these countries continue to increase.

In Asia, the Company identified the PRC, Thailand, Malaysia and Indonesia as the key markets that will expand rapidly in the next decade. The Company’s strategy is to offer a premium branded product targeted to compete with major U.S. and Japanese brands and to offer economy brands to compete in the fastest growing segment of the markets. The

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Company also ensures flexibility in product features, packaging and marketing functions to satisfy the ever-changing needs and trends of the different markets in Asia.

In Hong Kong, the Company has its own direct sales force. Its products are sold in all major pharmacy outlets and department stores which account for 65% of all disposable baby diaper sales, while the remaining 35% are sold in major retail supermarket and hypermarket chains such as Park ‘N Shop, Wellcome and China Resources Company. The disposable baby diaper market in Hong Kong has contracted due to low birth rates, and a weak economy. Around 90% of the Company’s disposable baby diapers sales in Hong Kong are sales of “FITTI®” and “PET PET®” brands of products which collectively have approximately 25% share of the market. The “FITTI®” and “PET PET®” brands are supported by advertising and promotion programs, which not only impact sales in the local market but also in the Pearl River Delta area of Guangdong province in the PRC.

In the PRC the Company’s leading brands are distributed in hypermarkets, supermarket chains, department stores and independent retail stores in most of the provinces, such as Guangdong, Fujian, Zhejiang, Jiangsu, Shandong, Shanxi, Hebei, Shaanxi, Liaoning, Jilin and major municipals and cities, such as Guangzhou, Shenzhen, Shanghai, Shantou, Zhongshan, Tianjin and Beijing. To cope with the rapid development of foreign invested hypermarkets and state-owned supermarket chains in the PRC, the Company has good relationships with the major players like Carrefour, Wal-mart, Metro, Trust-Mart and Makro, as well as Hualian, Century Lianhua, and others. The Company’s products are listed and sold in these hypermarkets and supermarket chains. The Company’s sales operation in Beijing directly services the Beijing and Tianjin markets and expands sales and distribution to northern and northeastern markets such as Shandong, Shanxi and Liaoning provinces and other cities. The Company’s sales and marketing office in Shanghai not only directly services the Shanghai market and serves as a logistic center for the markets in the eastern part of the PRC, but also oversees the nationwide market in the PRC. The Company also has two sales offices in Wuhan and Chengdu focuses on the expansion of its distribution network to the provinces and cities in the Central and Western part of the PRC, such as Wuhan, Chengdu, Sichuan, Chongqing, Yunan, Hunan and Hubei. The Company has expanded its distribution network to 28 provinces, 3 municipals and over 200 cities in the PRC. The Company’s sales expansion in the PRC is well supported by its strategic products and pricing together with customized advertising and promotion programs. The Company estimates that the current usage of disposable baby diapers in the PRC is around 4% and will grow in accordance with the anticipated rapid economic growth of the country.

In Malaysia, the Company’s “FITTI®” and “PET PET®” brands are one of the leading brands in the market, coupled with the benefits of a domestic manufacturing facility in Selangor, Malaysia, the Company is able to compete with U.S. and Japanese major brands. The Company’s economy brands, “FITTI® Basic” expanded rapidly and have gained a significant share in the economy segment of the market by 6%. The Company’s products are distributed nationwide by its own sales forces directly to the major chain stores such as Tesco, Makro, Jusco, Giant and Carrefour, as well as to the other secondary chain stores, independent supermarkets and to lower-end retail outlets.

In Thailand, although the usage of disposable baby diapers is relatively low, the disposable baby diaper market has been growing rapidly in the recent few years. The Company’s major brands in the market are “FITTI®”, “PET PET®”, “BABY LOVE®” and “FITTI® Basic”. The Company’s sales have been increasing with the growth of the market and

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from the expansion of the Company’s distribution networks throughout the country. Over 60% of the Company’s sales in Thailand were in the Bangkok metropolitan area, with the rest of the sales coming from the suburban provinces. The Company’s products are distributed to supermarkets and department stores by its own nationwide sales force. The Company has been able to capitalize on the market growth and sustained a market share of about 22% in 2003. The Company also manufactures private label products for a supermarket chain. The Company’s adult incontinence products are distributed to hospitals, supermarkets and department stores. AC Neilsen reported the market share of the Company’s adult incontinence products was approximately 65% in 2003. The Company is also expanding its sales of adult incontinence products in other Asian markets.

The Company’s brands “FITTI®” and “PET PET®” are the leading brands in the Indonesian market. With the joint venture manufacturing facility near Jakarta, the Company is able to reduce its product costs as a result of an import duty exemption on raw materials and minimize the adverse effect of currency fluctuation. The Company’s products are sold in all major hypermarkets and supermarket chains and its major competitors in the market are imported U.S. and Japanese major brands and a local brand.

In Singapore, the disposable baby diaper market is mature but relatively small. The Company sells and distributes its products, of which 89% were branded products and 11% were private label products, by its own sales force in major retail chains, department stores and hypermarkets.

The Company presently does not plan to export its products to Japan, Taiwan and Korea because current non-tariff barriers and complex distribution arrangements make entry into these markets too expensive for imported products.

In countries that have high rates of import duties on products and high risk of currency fluctuation, the Company believes that it is more efficient and economical to service their markets through domestic manufacturing facilities. The Company presently has manufacturing facilities in Hong Kong, Zhongshan, PRC, Thailand, Indonesia and Malaysia.

c. Europe

i. Products

The Company manufactures and markets branded and private label disposable baby diapers in the United Kingdom. The Company’s brands currently in production are “FITTI®”, “COSIFITS®” and “CARES®”. “FITTI®” is a value brand baby diaper with full features such as leg gathers, wetness indicator, cloth-like back-sheet, extra-dry sub-layer and mechanical fasteners. “COSIFITS®” and “CARES®” are economy brands featuring frontal tape and an extra-dry sub-layer.

ii. Sales and Marketing

The U.K. retail disposable baby diaper market in 2003 was approximately $730 million. The Company estimates approximately 90% of the market was branded products from P&G and KC and the remainder is comprised of various

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private label brands of retailers supplied by European diaper manufacturers.

The Company focused on selling its branded products to regional retailers and wholesalers by offering a value-oriented product with good profit margins and a high level of service. The Company also produces its own label for certain U.K. grocery chains.

6. Dependent Patents, Licenses and Contracts

a. Patents, Trademarks and Licenses

Brand identification is an important element in marketing the Company’s products, and the Company recognizes the importance of its trademarks to the success of its business. The Company has registered its major trademarks or has applications pending in each of the major markets in which its products are sold, and it has applications pending in several other countries for many of its other trademarks. As the Company decides to pursue opportunities in new markets, it seeks registration of the trademarks under which it will market its products in those countries.

The Company has licenses to use certain patented technology relating to certain features of the disposable diapers it manufactures. In 1997, P&G claimed that certain of the Company’s diaper products infringe P&G’s patents and demanded payment for past infringement and an agreement to pay future royalties. The Company and P&G reached settlement of this claim for the United States market in 1998. On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian regions after December 31, 2000 ($216,000, $546,000 and $531,000 for the year ended December 31, 2003, 2002 and 2001, respectively). The agreement encompasses fixed payments totaling $300,000 relating to the period prior to January 1, 2001 and payment of royalties based on a percentage of sales of certain products in the Asian Pacific region beginning January 1, 2001.

On September 12, 2003, the Company entered into another agreement with P&G to resolve any possible dispute between the parties related to the patent. This agreement grants a royalty bearing, non-exclusive right for certain products produced by the Company’s North American region.

b. Contracts

The Company is a contract manufacturer for certain customers to supply private label products for baby disposable diapers and adult incontinence products.

The Company entered into financial contracts with certain Banks and Financial Institutions for various financing facilities of revolving working capital lines, equipment leasing and term loans.

In March 2001, one of the Company’s U.S. subsidiaries (the “Subsidiary”) entered into an amended financing agreement with its existing financial institution (the “Senior Lender”) under which the Subsidiary received a term loan of $11

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million (the “Term Loan”), a capital expenditure line of up to $5 million, and a revolving credit facility (based on the lesser of a percentage of eligible accounts receivable and inventory or $15 million). Such financing was entered into in connection with the Subsidiary’s purchase of certain assets of the North American operations of Drypers Corporation. The full amount of the $11 million Term Loan was borrowed, with interest payable at the LIBOR for one portion of the loan and prime plus 2.75% per year for the other portion. These loans are divided into three separate terms loan and repayable in monthly installments of principal in the amount of $183,300 plus interest and are collateralized by the Subsidiary’s assets. In addition, the Subsidiary had outstanding borrowings of approximately $6.6 million and $5.8 million of the $15.0 million revolving credit facility as of December 31, 2003 and 2002, respectively. These amounts were recorded as a component of short-term borrowings in the Company’s Consolidated Balance Sheets. The Company had approximately $8.4 million and $9.2 million available for additional borrowings under the revolving credit facility at December 31, 2003 and 2002 respectively.

Among other things, the Senior Lender Loan agreement contains certain restrictive covenants, including the maintenance of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and tangible net worth, and places limitations on acquisitions, dispositions, capital expenditures, and additional indebtedness. At December 31, 2002, the Company was not in compliance with the fiscal year ended financial statements delivery time period covenants. This violation was waived by the Senior Lender on March 28, 2003.

In connection with the waiver of this covenant violation, the Senior Lender and the Company amended the Term Loan agreement to extend the fiscal year ended financial statements delivery time period and re-establish the minimum EBITDA and tangible net worth covenants on June 19, 2003. The Company also entered into amendment of the Term Loan agreement with the Senior Lender to reflect the recent changes in the U.S. tax law on October 15, 2003.

Under the Sale and Purchase Agreement between DSG International Limited (“DSGIL”) and Castle Harlan Australian Mezzanine Partners Pty. Limited (“CHAMP”), dated November 11, 2002, CHAMP agreed to purchase and DSGIL agreed to sell its Australian subsidiaries. The gross value of the transaction was A$53 million (approximately US$29.6 million). The transaction closed on December 6, 2002.

7. Competition

The disposable baby diaper industry is dominated world-wide by the brands of two major U.S. manufacturers: P&G and KC. The market position of these manufacturers, relative to the Company, varies from one geographic area to another, but due to their substantial financial, technical and marketing, manufacturing, logistics and personnel resources, both of these major manufacturers have the ability to exert significant influence and gain substantial market share in any of their marketing areas. Despite the disparity in relative strength, however, the Company has been able to secure its position in the face of very strong competition from the industry leaders by remaining innovative, flexible and financially responsible.

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a. North America

The North American disposable baby diaper market remains dominated by the brands of the two major U.S. manufacturers: P&G and KC. Their combined market share of the disposable baby diaper market is 83%; including the disposable training pant, youth pant and swim pant products. During 2003, total category unit sales are declining at a rate of about 4% and dollar sales at a rate of about 8%, with volume continuing to shift from the grocery and drug classes of trade to the dollar store and mass merchandisers. Consumers continue to move to larger packages for a lower price and more savings. These two major manufacturers continued their strategy of driving their business with aggressive retail pricing, rather than competing solely on the basis of consumer-driven marketing programs and product innovations. Retail pricing pressure remained intense in the disposable diaper and training pant categories throughout 2003. A number of major retailers remain concerned with the negative impact that the advertised brand’s strategy has had on their own private label sales and margins, and some continue to take corrective actions like raising national brand retail price and reducing branded store keeping units (sku) to protect their own brands. All of the moves made by the advertised national brands have resulted in lower retail prices and the narrowing of retail price spreads between the advertised brands and private label offerings. In an effort to compete with the leading U.S. retailer, others have relied on low entry level price points and diluted profit margins.

The continued moves by the major manufacturers to keep retail prices depressed, promote aggressively and keep the retailers satisfied with minimal margins in favor of sales volume, have put serious sales and margin pressure on smaller brand and private label manufacturers. In response to this competitive activity, the Company has reallocated its promotional spending and has maintained a strategy in line with EDLP, targeted trade promotions, enhanced product features and tightened cost controls. This strategy on its core “FITTI®” and “DRYPERS®” brands has allowed the Company to protect its share in some critical markets and expand its private label base of business.

In the adult incontinence arena, the Company is in a good competitive position, having the capability to provide key retailers and consumers with product technology that is superior to what some other manufacturers can currently provide. There is an added advantage that comes from the demand for better products in order to meet the performance and comfort requirements of incontinent consumers.

b. Asia

The Company’s main competition in Asia comes from the brands of the P&G and KC, and several manufacturers from Japan and Taiwan. The Company believes that it has been able to maintain a significant share of the Asian market due to its longer presence and well established brands in that region and the logistical advantage which results from the strategic location of its manufacturing operations.

c. Europe

In the United Kingdom, the disposable baby diaper market continues to be dominated by P&G. The Company estimates that P&G has a market share of approximately 52%, and KC has a market share of approximately 38%. Both companies continued to heavily promote and discount their brands in the U.K. market. Due to such consistent promotion activities, the private label and miscellaneous brands have been reduced to approximately 10% market share.

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8. Government Regulations

a. Customs and Import Duties

Some of the raw materials used in manufacturing the Company’s products are subject to import duties at varying rates in the countries in which the Company’s manufacturing facilities are located. However, import duties on raw materials do not represent a significant part of the cost of the finished product and, in most cases, the import duties are refundable if the finished goods are exported from the countries of manufacture.

Imports of finished products to some of the markets are subject to import duties at various rates. However, such duties are usually incorporated in the selling price of the finished product.

b. Environment

The Company believes that operations at all of its manufacturing facilities are conducted in compliance with applicable environmental laws, and that none of the material substances used or disposed of by the Company in its manufacturing operations are considered to be toxic or hazardous substances under such laws.

The Company closely monitors environmental laws and regulations pertaining to disposal of solid waste, which includes household refuse, packaging and paper materials, and yardwaste, in addition to disposable diapers, in each of the markets in which its products are sold. The Company is not aware of any such laws or regulations which would have a material adverse effect on the Company’s business as presently conducted and proposed to be conducted. A number of states in the United States have passed legislation that is intended to discourage the use of disposable products such as beverage containers, certain packaging materials and disposable diapers, or to encourage the use of non-disposable or recyclable products. The Company believes that it will not have to make any changes to its products to comply with presently existing environmental laws and regulations in the markets in which its products are sold.

The Company endeavors to develop products which are environmentally responsible by closely monitoring world-wide developments in various raw material components and actively works with suppliers to develop and market products utilizing such components.

c. Insurance

All of the Company’s plant, machinery and inventories are covered by fire and extended coverage insurance. The Company maintains product liability insurance in amounts it believes to be adequate in all its operations, except for its operations in Asia where local manufacturers customarily do not carry product liability insurance because the risk of product liability lawsuits is considered to be slight.

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C. Organizational Structure

The Company’s significant subsidiaries are:

Name	Country of incorporation	Ownership interest
Advance Medical Supply Company Limited	Thailand	80%
Associated Hygienic Products Inc.	Wisconsin, USA	100%
Associated Hygienic Products LLC	Delaware, USA	100%
Disposable Soft Goods (Malaysia) Sdn. Bhd.	Malaysia	100%
Disposable Soft Goods (S) Pte Limited	Singapore	100%
Disposable Soft Goods (UK) Plc.	U.K.	100%
Disposable Soft Goods (Zhongshan) Limited	Zhongshan, PRC	100%
Disposable Soft Goods Limited	Hong Kong	100%
DSG (Malaysia) Sdn. Bhd.	Malaysia	100%
DSG (Shanghai) Manufacturing Limited	Shanghai, PRC	100%
DSG International (Thailand) Limited	Thailand	80%
PT DSG Surya Mas Indonesia	Indonesia	60%
Shuiling Holding Company Limited	British Virgin Islands	75%
Shanghai DSG MegaThin Company Limited	Shanghai, PRC	75%

D. Description of Property

The Company now operates nine manufacturing facilities, with plants located in: the United States at Marion, Ohio, Vancouver, Washington and Oconto Falls, Wisconsin; the PRC at Hong Kong and Zhongshan, Guangdong; Chesterfield, U.K.; Bangkok, Thailand; Cikande, Indonesia and Selangor, Malaysia.

Over the years, the expansion in the Company’s Thailand operations has outgrown the existing manufacturing facility. As a result, the Company purchased land of approximately 240,000 square feet in Saraburi, Thailand in 2002 and started building construction in 2003. The Company will relocate its Thailand operation to the new facility in the third quarter of 2004.

The Company’s joint venture investment in China acquired land of approximately 130,000 square feet in Waigoaqiao, Shanghai, PRC. As Chinese law prohibits foreigners or foreign entities to have land ownership, this land was acquired with a 50 years land use rights only. In addition, the Company purchased another land of approximately 200,000 square feet adjacent to the land purchased by Shanghai joint venture investment for the near future facility expansion. Presently, there is no plan to start the building construction.

On March 20, 2003, the Board of Directors of the Company authorized the purchase of the London residence of Mr. Wang, for its fair market value of $12.3 million as determined by an independent appraiser. The net proceeds of this transaction of $5.7 million was used by Mr. Wang to repay a portion of the shareholder loan due to the Company. The Board of Directors authorized Mr. Wang and his wife’s use and lease of this London property from the Company at a market rate determined by an independent appraiser of $36,000 per month.

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The Company utilizes an aggregate of approximately 1,358,295 square feet of space in its manufacturing operations. The Company believes that its plant facilities are adequate for its present operations.

The Company operates 25 productive disposable baby diaper, training pants and adult incontinence machines. The gross productivity of the machines ranges from 350 pieces to 600 pieces per minute for disposable baby diapers, 100 pieces to 150 pieces per minute for training pants and adult incontinence products. The productivity of the machines is dependent on the machine types, sizes and packing configurations of the products.

The following table summarizes the physical properties that are used by the Company in its manufacturing and distribution operations:

Location	Use	Approximate size (Sq. feet)	Owned/ leased	Lease expiration date
Marion, OH	Manufacturing	440,000	Leased	Oct. 2007
Shanghai, PRC	Manufacturing	202,305	Leased	Jun. 2052
Cikande, Indonesia	Manufacturing	174,000	Leased	Sep. 2027
Oconto Falls, WI	Manufacturing	165,684	Owned	Will be closed in 2004
Vancouver, WA	Manufacturing	134,732	Leased	Sep. 2006
Selangor, Malaysia	Manufacturing	130,681	Leased	Nov. 2004
Shanghai, PRC	Manufacturing	129,672	Leased	Jun. 2052
Zhongshan, PRC	Manufacturing	122,321	Leased	Oct. 2044
Bangkok, Thailand	Manufacturing	68,805	Owned	N/A
Chesterfield, U.K.	Manufacturing	65,000	Leased	May 2008
Hong Kong, PRC	Manufacturing	57,072	Leased	Jun. 2005
Duluth, GA	Office	226,625	Owned	N/A
Bangkok, Thailand	Office	22,822	Leased	Dec. 2004
Singapore	Office	16,500	Leased	Aug. 2005
Shanghai, PRC	Office	3,875	Leased	Apr. 2005
London, U.K.	Office	3,500	Owned	N/A
London, UK	Residence	10,000	Owned	N/A
Duluth, GA	Office	2,250	Leased	May 2006
Beijing, PRC	Office	2,140	Leased	Oct. 2005
Shanghai, PRC	Office	1,275	Leased	Jan. 2005
Guangzhou, PRC	Office	725	Leased	May 2005
Wuhan, PRC	Office	689	Leased	Jul. 2004

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Item 5. Operating and Financial Review and Prospects.

A. Operating Results

The information required is contained in the Consolidated Statements of Operations of the Annual Report to Shareholders, and is incorporated herein by reference.

B. Liquidity and Capital Resources

The information required is contained in the Operating and Financial Review and Prospects of the Annual Report to Shareholders, and is incorporated herein by reference.

C. Research and Development, Patents and Licenses

The Company actively monitors trends in the United States and Europe in relation to changes in product features, consumer preferences, and the impact of environmental laws and regulations on the disposable diaper industry. Although the Company does not devote substantial expenditure to research and development, it constantly seeks to improve its products by substitution of materials and components, and of product features, to systematically improve the performance of its diapers for better absorbency and improved leakage protection. In particular, the Company monitors world-wide developments in various raw material components to enable the Company to take advantage of the latest developments, and in certain cases the Company has worked closely with suppliers to pioneer the use of such materials in the manufacture of disposable diapers.

D. Trend Information

1. Industry Trends

The Company believes that the most significant industry trends are:

• fluff wood pulp costs and other raw material costs have edged up in 2003 in the average of 5% to 7%. It is anticipated that these raw material costs will continue to increase in 2004 possibly the same margin as 2003. The margin may be adversely affected if selling prices are not adjusted or if such adjustments significantly trails the cost increases;

• increasing demand for cloth-like breathable back-sheet, elasticated ear patch with mechanical closure system, and thin absorbent core products, which the Company is meeting through machine modifications and product development effort;

• the domination of industry leaders in most of the markets putting pressure on retailers’ margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins in the current highly competitive market conditions.

The Company is unable to predict whether the industry trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative.

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2. Inventory Practice and Order Backlog

The disposable diaper industry is generally characterized by prompt delivery by manufacturers and rapid movement of the product through retail outlets. The lead-time between placing an order and shipment to the local customer averages five to ten days. The Company maintains varying levels of raw materials and finished products inventory depending on lead-time and shipping schedules. The Company’s inventory levels generally vary between three to eight weeks. Due to the short lead-time between order and delivery of products, the Company does not maintain a significant backlog.

E. Off Balance Sheet Arrangements

Not applicable.

F. Contractual Obligations

As of the year ended December 31, 2003, the Company’s contractual obligations and commitments were summarized as follows:

	Payment due by year
	Total		2004		2005		2006		2007		2008 and thereafter
	(Dollars in thousands)
Short-term borrowings	$	15,583	$	15,583	$	—	$	—	$	—	$	—
Long-term debt		20,382		6,215		2,169		2,670		220		9,108
Operating leases		5,860		2,182		1,608		1,262		729		79
Purchase of license use right		1,000		500		500		—		—		—
Joint venture investment		11,736		11,462		274		—		—		—
Investment in PRC		1,127		—		1,127		—		—		—
Capital expenditures		2,750		2,750		—		—		—		—
Raw materials purchase obligations		10,356		10,356		—		—		—		—
Total	$	68,794	$	49,048	$	5,678	$	3,932	$	949	$	9,187

Over the last few years, the Company’s cash requirements have been primarily provided by internally generated funds and bank borrowings. In the opinion of the Company, the cash on hand of $20.3 million plus expected cash flow from operating activities is sufficient to fund its liquidity, contractual obligations and commitments needs for the next twelve months. However, the Company may require additional borrowings in order to finance expansion, capital expenditure, other investments or other business requirements. Additional information on short-term borrowings, long-term debt and commitments and contingencies is set out in Notes 11 and 12 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders.

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In April 2003, the Company entered into a joint venture agreement with Mitsubishi Corporation and Japan Absorbent Technology Institute of Japan to establish a manufacturing facility in Shanghai, PRC. The joint venture will engage in manufacturing disposable hygiene related products. The Japanese joint venture partners will provide the proprietary patents, related technology and certain raw materials. The paid up capital of the investment is $5.0 million and the Company owns a 75% interest in the joint venture company. The Company is accounting for the operation of the joint venture on a consolidated basis of accounting.

In 2003, the Company acquired a land use right for approximately 130,000 square feet of land for 50 years in Waigoaqiao, Shanghai for $1.2 million and commenced construction of the manufacturing equipment with down payments of $3.8 million. The Company commenced the building construction in 2004. The total capital commitment for the construction of the machine equipment and building is $11.7 million as of December 31, 2003.

In August 2001, the Company signed a license agreement to purchase a license use right for $2.5 million from the Japanese joint venture partners for the right to manufacture and use technology know-how and distribute and sell the products in certain territories for a 20 years period from the first payment in 2002. As of year ended December 31, 2003, the Company has paid a total of $1.5 million deposit for the license rights and recorded this amount as other assets in the consolidated balance sheet. The remainder of $1.0 million will be paid in 2004. Amortization of the license use right is based on the remaining life span of 20 years commence from the date of operation of the joint venture. As of December 31, 2003, no amortization has been provided.

The Company has committed a maximum of $20.3 million in the investment for the entire joint venture project in Shanghai. The total payment made by the Company was $5.3 million as of December 31, 2003. The remaining maximum commitment will be spent and paid in 2004 and 2005. In the event that the maximum financial obligation is exceeded, the joint venture parties shall decide individually whether or not to increase additional financing arrangement for the project.

The Company has a total capital expenditure commitment of $2.7 million for the construction of a building in Thailand and $22,000 for acquisition of spare parts in a United States facility as of year ended December 31, 2003. In addition, the Company is required to further inject share capital of $1.1 million to its wholly owned manufacturing facility before 2005.

Item 6. Directors, Senior Management and Employees.

A. Directors and Senior Management

The directors and executive officers of the Company are:

Name	Age	Present position
Brandon Wang	58	Director, Chairman of the Board and President
Johnny Tsui	63	Director, Vice President and Secretary
Patrick Tsang	58	Director and Vice President
Terence Leung	53	Director and Vice President
Peter Chang	57	Director, Vice President, and Chief Financial Officer
Owen Price	77	Director
Anil Thadani	58	Director

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Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang’s sister. Peter Chang is married to Brandon Wang’s sister.

Brandon Wang founded the Company in Hong Kong in 1973 and has been a director and the Company’s Chairman and Chief Executive Officer since that time. Mr. Wang is a graduate of St. Francis Xavier’s College in Kowloon, Hong Kong.

Johnny Tsui helped Brandon Wang establish the Company in 1973 and has served as a director and Vice President of the Company since that time. In September 1995, he was appointed as Secretary of the Company. He has also served as Chief Operating Officer of the Company’s Asian operations since 1991.

Patrick Tsang has been a director of the Company since 1980, and was appointed a Vice President in January 1992. He was Secretary of the Company from March 1992 to September 1995. In 1988, he started up the Company’s Australian operations. Since July 1993 he has also served as Chief Operating Officer of the Company’s European operations. Mr. Tsang has a Ph.D. in Engineering from the University of London. He also attended a Management Science course at Imperial College, London.

Terence Leung was the Company’s Chief Financial and Accounting Officer from 1988 to 2001. He was appointed a director in 1991 and a Vice President in January 1992. Before joining the Company in 1978, Mr. Leung worked as an accountant with several major trading corporations in Hong Kong. Mr. Leung is a chartered public accountant in the United Kingdom and Hong Kong.

Peter Chang was the Chief Operating Officer of the Company’s U.S. operations from 1988 to 2001. Mr. Chang became a director in 1991 and a Vice President in January 1992 and currently serves as Chief Financial Officer and Chairman of the Company’s North American operations. Prior to joining the Company, Mr. Chang held various engineering and management positions with major U.S. airlines, based in New York. Mr. Chang has a Master’s Degree in Operations Research from Kansas State University. Mr. Chang was appointed as Chief Financial Officer on January 17, 2004.

Owen Price became a director in April 1994. In 1993, he retired as the Managing Director of Dairy Farm International Holdings Limited which he joined in 1974. Prior to that time, he had 27 years experience with a large Australian retailer, Woolworths Ltd., where he started as an Executive Trainee and worked his way to become Chief Executive in 1971. He has served on a number of retail councils in different countries and has been an adviser to the Australian government on trade matters. He is a director of numerous companies in the Asia-Pacific region including three

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other listed public companies: Dairy Farm International Holdings Limited, Cycle And Carriage Limited (alternate director), and The Hour Glass Limited.

Anil Thadani advises the Company on financial matters, corporate strategy and development, and was a director of the Company from 1989 until April 1995, when he resigned as a result of his interest in the going private transaction. He was re-elected to the Board in September 1995. Mr. Thadani is the Chairman of Schroder Capital Partners (Asia) Limited, a direct investment company, which he founded in July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior to this, he was the Managing Director and a founding partner of Arral & Partners Limited, a private investment company based in Hong Kong. He is also a director of numerous companies, some of which are public listed companies in Singapore, Thailand and India. Mr. Thadani has a Master’s Degree in Chemical Engineering from the University of Wisconsin, Madison, and an M.B.A. from the University of California at Berkeley.

OTHER KEY MANAGEMENT PERSONNEL

In addition to the above-named officers and directors, the following persons hold key management positions with the Company:

George Jackson was appointed to the position of Chief Executive Officer of the Company’s North American operations in March 2001. Prior to that, Mr. Jackson was Chief Executive of the Company’s Australian operation from mid 1997 to 2001. Mr. Jackson joined the Company in 1987 and prior to his transfer to Australia, he was the National Sales Manager with the Company’s U.S. operations. Prior to joining the Company, he held various management positions in accounting and manufacturing with Weyerhaeuser Company. He holds a B.A. degree in Business Administration – Accounting (1977) from the University of Washington, Seattle, WA.

Patrick Wong was promoted in 2001 to Chief Operating Officer of the Company’s South East Asian region. Mr. Wong graduated from Centro Escolar University (Philippines) as a Doctor of Dentistry in 1982. He started his career in sales and marketing in 1984 as a detailman in the pharmaceutical industry in Hong Kong. In 1990, Mr. Wong worked for U.S. Secure Co. Ltd., a Hong Kong company engaged in the marketing of disposable adult diapers in Hong Kong. Mr. Wong joined the Company’s Hong Kong operation in 1993 as Marketing Manager (Asia Pacific) for Thailand, Philippines and Indonesia markets. He was promoted to Executive Director of DSG International (Thailand) Ltd. in 1994 and transferred to Thailand in the same year for the establishment of the Company’s Thailand operation. From 1997 to 2001, he worked for the Company’s Hong Kong operation to establish its Health Care Division.

Steven Pankow has been the Executive Vice President of Sales & Marketing for the U.S. operations since 2001. Mr. Pankow served as Vice President of Sales & Marketing for the U.S. operations from 1987 until 2001. Prior to joining the Company, Mr. Pankow held a number of sales management positions with major companies including Johnson & Johnson, Inc. and Duracell, Inc. He has more than 28 years experience in the sales and marketing of consumer products. Mr. Pankow has a B.A. degree in business management from Northeastern Illinois University in Chicago.

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B. Compensation

In 2003 the aggregate remuneration paid by the Company and its subsidiaries to all directors and senior managers of the Company listed in this Form 20-F report as a group (11 persons) for services in all capacities was approximately $6,301,253.

C. Board Practices

All directors are elected for a one-year term at the Annual Meeting of the shareholders. The appointment of all officers is subject to the discretion of the Board of Directors.

The Executive Committee of the Board of Directors consists of Brandon Wang, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The Executive Committee has authority to take any action, other than appointment of auditors, election and removal of directors and appointment of officers, which can be taken only by the Board of Directors.

Neither the Company nor any of its subsidiaries provide post-retirement benefits for directors upon termination of employment.

During 2003, the Company’s Audit Committee consisted of Anil Thadani, and Owen Price. Mr. Thadani is qualified and has been designated as the committee’s financial expert. Mr. Thadani and Mr. Price are considered independent as defined in Rule 10A-3b(1)(i) of the Securities Exchange Act of 1934. The principal functions of the Audit Committee are (i) to select and to engage the independent auditors to be employed by the Company; (ii) to consult with the independent auditors with regard to the plan of audit; (iii) to review, in consultation with the independent auditors, their audit report or proposed audit report; (iv) to consult with the independent auditors with regard to the adequacy of the Company’s internal accounting controls, and (v) to approve the audit fees and any non-audit services performed by the independent auditors. The Company’s Audit Committee met three times in 2003.

Pursuant to Section 406 of the Sarbanes-Oxley Act, the Company adopted a code of ethics during 2002. A copy of this code of ethics is attached as Exhibit 10.1 to this Form 20-F in the form of the “Company’s Business Code of Conduct Policy”. This policy covers all of the Company’s employees and in particular has been adopted for senior financial officers, including its principal financial officer and any persons performing similar functions.

During 2003, the Audit Committee approved the compensation for Brandon Wang, Chairman and Chief Executive Officer of the Company.

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D. Employees

The Company had a total of approximately 1,536 full time employees at its manufacturing facilities as of December 31, 2003:

	2003	2002	2001
North America	457	543	700
Asia	1,042	1,005	906
Europe	31	44	60
Total	1,536	1,592	1,666

The Company does not have a significant number of temporary employees.

The Company considers its relationships with its employees to be good in all of its plants, and none of the Company’s plants has ever experienced any material work stoppage.

The Company believes that all of its manufacturing facilities are in compliance with applicable occupational, health and safety legislation.

E. Share Ownership

For information concerning the beneficial ownership of the Company’s Ordinary Shares by Directors and Senior Management and major shareholders, see Item 7 of this Report.

During March 2002, the Company filed a Form S-8 Registration Statement for 1,500,000 shares on March 21, 2002 establishing an Equity Participation Plan (the “Option Plan”). On March 19, 2003, the Company granted the executive directors and senior management 1,175,000 restricted shares and 175,000 options to purchase shares of the Company under this Option Plan.

Item 7. Major Shareholders and Related Party Transactions.

A. Major Shareholders

As of December 31, 2003, the total number of record holders was 31, of which 19, representing 35.06% of the Company’s Ordinary Shares, were in the United States.

The Company is not owned or controlled by another corporation or by any foreign government. The following table sets forth information regarding beneficial ownership of the Ordinary Shares of the Company by each person who on December 31, 2003 is known by the Company to own 5% or more of the Company’s outstanding Ordinary Shares and by all directors and officers as a group.

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	Ordinary shares beneficially owned
Name of beneficial owner	Number		Percent
10% or more shareholders (Brandon Wang)	3,321,680	(1)	45.76	%
Directors and officers as a Group (7 persons)	4,788,680	(1)	65.98	%
Johnny Tsui	434,000		5.98	%
Peter Chang	324,000		4.46	%
Patrick Tsang	322,000		4.44	%
Terence Leung	317,000		4.37	%
Anil Thadani	70,000		0.96	%
Owen Price	—		—

⁽¹⁾ Includes 140,580 Ordinary Shares owned by Brandon Wang’s wife, Eileen Wang, as to which he disclaims beneficial ownership.

Brandon Wang and four other members of Management own more than 50% of the Company’s outstanding Ordinary Shares and, acting together, are able to control the election of the Board of Directors, and thus the direction and future operations of the Company, including decisions regarding acquisitions and other business opportunities, the declaration of dividends and the issuance of additional Ordinary Shares and other securities, in each case without the supporting vote of any other shareholder of the Company. In addition, Brandon Wang is a controlling shareholder of the Company and thus may be deemed to be a parent of the Company under the rules and regulations of the Securities Exchange Act of 1934.

The Company knows of no arrangements the operation of which may at a subsequent date result in a change in control of the Company.

B. Related Party Transactions

The following table sets forth the aggregate amount of loans made by the Company to Brandon Wang, the founder, principal shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary since January 1, 1996:

	Loan balance at beginning of year		Loans extended		Loans repaid		Balance at end of year
	(dollars in thousands)
Year ended December 31, 2003	$	8,551	$	—	$	8,551	$	—
Year ended December 31, 2002	$	10,744	$	1,868	$	4,061	$	8,551
Year ended December 31, 2001	$	11,612	$	3,046	$	3,914	$	10,744

During 2003 Mr. Brandon Wang, the Company’s Chief Executive Officer, and a Trust controlled by him repaid the entire shareholder loan, which had an outstanding balance of $8.6 million on December 31, 2002. To repay the shareholder loan, Mr. Wang used funds from a shareholder dividend paid by the Company in March 2003, shares sold back to the Company and net proceeds from the sale of his London residence.

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On March 19, 2003, 375,000 restricted shares were granted to Mr. Wang under the Company’s Equity Participation Plan. These restricted Ordinary Shares were considered bonus shares that had a six-month vesting period from the date of grant. After expiration of the vesting period on September 23, 2003, Mr. Wang sold these restricted Ordinary Shares back to the Company at the prevailing market price of $7.01 per share. Mr. Wang received payment of $5.00 per share ($1.875 million) at the time of the share repurchase. The Company has a remaining balance of $754,000 due Mr. Wang on the 375,000 restricted Ordinary Shares of $2.01 per share as of year ended December 31, 2003.

On March 20, 2003, the Board of Directors of the Company authorized the purchase of the London residence of Mr. Wang, for its fair market value of $12.3 million as determined by an independent appraiser. The net proceeds of this transaction of $5.7 million was used by Mr. Wang to repay a portion of the shareholder loan due to the Company. The Board of Directors authorized Mr. Wang and his wife’s use and lease of this London property from the Company at a market rate determined by an independent appraiser of $36,000 per month.

During 2003, 2002 and 2001, Mr. Wang and a trust controlled by him repaid $8.6 million, $4.1 million and $3.9 million, respectively, to the Company. In 2002 and 2001, the Company advanced $1.9 million and $3.0 million, respectively, to Mr. Wang and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Mr. Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes bearing interest at a rate equal to 1.5% over LIBOR or such other rate that the Board of Directors and the borrower shall agree in writing. Interest of $81,000, $230,000 and $445,000 was charged on these advances in 2003, 2002 and 2001, respectively.

As a result of these series of transactions and the remaining payable balance of $754,000 due to shares repurchased from Mr. Wang, the Company had a balance of $1.2 million payable to Mr. Wang and a Trust controlled by him as of December 31, 2003. At December 31, 2002, the Company classified the balance owed by Mr. Wang and a Trust controlled by him of $8.6 million as a reduction from shareholders’ equity.

1. Interest of Experts Counsel

Not applicable.

Item 8. Financial Information.

A. Consolidated Statements and Other Financial Information

Our Consolidated Financial Statements are set forth under Item 18.

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DIVIDENDS AND DIVIDEND POLICY

The Company announced on March 21, 2003 the payment of a 70-cent dividend which related to the receipt of proceeds in connection with the sale of the Australian subsidiaries to shareholders of record on April 11, 2003. The dividend was paid on April 25, 2003. The Company did not pay any dividends in 2002 and 2001.

It is the Company’s general policy to determine the actual annual amount of future dividends based upon the Company’s growth during the preceding year. Future dividends will be in the form of cash or stock or a combination of both. There can be no assurance that any dividend on the Ordinary Shares will be declared, or if declared, what the amounts of dividends will be or whether such dividends, once declared, will continue for any future period.

LEGAL PROCEEDINGS

The Company and its subsidiaries are, from time to time, involved in routine legal matters incidental to their business. The Company settled the R&L lawsuit and the Rhonda Tracy claim for $4.2 million and $375,000 in April and March 2002, respectively. The Company is currently not defending itself in any significant litigation matters. Although it cannot be certain, in management’s opinion, none of the legal proceedings in which the Company is currently involved, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition or results of operation.

B. Significant Changes

The information required is contained in Notes 3, 4, 15, 21, 23 and 24 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, and is incorporated herein by reference.

Item 9. Stock Price History.

A. Listing Details

The Company’s Ordinary Shares are listed on the NASDAQ National Market System under the trading symbol DSGIF, and are not listed for trading in any foreign trading market.

ORDINARY SHARE PRICE:

	2003		2002		2001		2000		1999
High	$	8.250	$	4.220	$	7.906	$	7.000	$	10.625
Low		3.390		1.110		3.450		4.000		2.750

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	2004				2003				2002
Quarter	High		Low		High		Low		High		Low
First	$	7.700	$	4.500	$	5.980	$	3.390	$	4.220	$	3.190
Second		—		—		6.060		3.500		3.499		2.011
Third		—		—		8.000		4.260		2.860		1.110
Fourth		—		—		8.250		4.200		3.590		1.700

	May 2004		Apr 2004		Mar 2004		Feb 2004		Jan 2004		Dec 2003
High	$	4.970	$	5.430	$	6.590	$	7.000	$	7.700	$	7.740
Low		3.300		4.260		4.500		5.281		6.290		6.200

B. Plan of Distribution

Not applicable.

Item 10. Other Information.

A. Share Capital

The Company’s authorized share capital consists of 20,000,000 Ordinary Shares, $0.01 par value per share. At May 31, 2004, there were 7,258,316 Ordinary Shares of the Company outstanding, all of which were fully paid.

B. Memorandum and Articles of Association

The following is a brief description of the rights of holders of fully paid Ordinary Shares. This description does not purport to be complete and is qualified in its entirety by reference to the Memorandum and Articles of Association of the Company, which have been previously filed as an exhibit, and to the relevant provisions of the British Virgin Islands International Business Companies Act.

1. General

All of the issued Ordinary Shares are credited as fully paid and non-assessable, except that a share issued for a promissory note or other written obligation for payment of a debt may be subject to forfeiture, and accordingly no further contribution of capital may be required by the Company from holders of Ordinary Shares. Under British Virgin Islands (“BVI”) law, non-residents of the BVI may freely hold, vote and transfer their Ordinary Shares in the same manner as BVI residents.

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2. Dividends

Holders of Ordinary Shares are entitled to participate in the payment of dividends in proportion to their holdings. The Board of Directors may declare and pay dividends in respect of any accounting period out of the profits legally available for distribution. Dividends, if any, will be paid in U.S. dollars.

The Company’s dividend policy will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. For a discussion of taxation of dividends, see “Taxation”.

The Company announced on March 21, 2003 the payment of a 70-cent dividend in relation to the sale of the Australian subsidiaries to shareholders of record on April 11, 2003. The dividend was paid on April 25, 2003.

3. Voting Rights

In order to avoid certain adverse U.S. income tax consequences to the Company, the voting rights of any shareholder who holds more than 10% of the Company’s outstanding shares will be suspended as to shares held by such shareholder in excess of 10% of the Company’s outstanding shares (“Excess Shares”). Excess Shares are not counted as voting shares for purposes of establishing a quorum at shareholders’ meetings. However, the Board of Directors has discretion to exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company’s outstanding shares by such shareholder will not result in the Company being classified as a controlled foreign corporation (“CFC”), foreign personal holding company (“FPHC”) or personal holding company (“PHC”) within the meaning of the U.S. Internal Revenue Code (“Code”). See “Taxation”; “Restrictions on Transfer and Voting; Redemption of Ordinary Shares”.

Every shareholder who is present in person or by proxy at a meeting of the Company shall have one vote for each Ordinary Share of which he is the holder. A poll may be demanded by the chairman of the meeting, or by any shareholder present in person or by proxy.

The Articles of Association of the Company make no provision for cumulative voting. Accordingly, the controlling shareholders have a sufficient number of Ordinary Shares to elect all of the Company’s directors.

4. Restrictions on Transfer and Voting; Redemption of Ordinary Shares

The Company’s Memorandum and Articles of Association contain certain provisions which are intended to avoid situations in which the Company may be classified as a CFC, FPHC or PHC. See “Taxation”. These provisions are intended only to avoid the adverse U.S. income tax consequences which would result from such classification.

The following is a summary of the relevant provisions of the Memorandum and Articles:

(i) Restricted Transfers of Ordinary Shares. The Board of Directors may, but is not obliged to, refuse to register the transfer of any of the Ordinary Shares of the Company if, in the opinion of the Board, such transfer might cause the Company to be classified as a CFC, FPHC or PHC.

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(ii) Restrictions on Voting Rights. In the event that any person holds more than 10% of the Company’s outstanding shares, any shares in excess of 10% of the Company’s outstanding shares shall be “Excess Shares”, which shall not be entitled to any voting rights and shall not be considered voting shares for purposes of establishing a quorum. However, the Board of Directors may exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company’s outstanding shares by such shareholder will not result in the Company being classified as a CFC, FPHC or PHC. In addition, these restrictions on voting rights do not apply to shares acquired in a cash tender offer for all outstanding shares of the Company where a majority of the outstanding shares of the Company are duly tendered and accepted pursuant to such cash tender offer.

(iii) Disclosure of Certain Information to the Company. Any person who directly owns 5% or more of the Company’s outstanding shares is required to file with the Company, within 60 days of the end of the Company’s taxable year (which is currently the calendar year) and prior to any transfer of shares by or to such person, an affidavit setting forth the number of shares (1) owned directly by such person or by a nominee of such person, and (2) owned indirectly or constructively by such person by reason of the attribution rules of Sections 542, 544 and 958 of the Code or by reason of application of the attribution rules of Rule 13(d) of the U.S. Securities Exchange Act of 1934 (“Exchange Act”). The affidavit filed with the Company must set forth all the information required to be reported (1) in returns of shareholders required to be filed under U.S. Income Tax Regulations Section 1.6035-1 (including shareholder related information for inclusion in IRS Form 5471), and (2) in reports required to be filed under Section 13(d) of the Exchange Act. All shares held by any person who fails to comply with this reporting requirement shall be deemed Excess Shares and shall be subject to the voting restrictions and redemption provisions described herein.

(iv) Redemption of Ordinary Shares. The Company may, in the discretion of the Board of Directors, redeem any Excess Shares at a price equal to (1) the average of the high and low sales price of the shares on the last business day prior to the redemption date on the principal national securities exchange on which such shares are listed or admitted to trading, or (2) if the shares are not listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the National Quotation Bureau Incorporated or similar organization selected from time to time by the Company, or (3) if not determinable as aforesaid, as determined in good faith by the Board of Directors.

The directors of the Company, in a meeting held on January 6, 1992, resolved that the principal shareholder, Brandon Wang, is exempt from the foregoing restrictions. The directors have also approved exemption of certain institutional shareholders from the foregoing restrictions as the Board was satisfied that such exemption would not have any of the adverse tax consequences described above.

5. Rights of Shareholders under British Virgin Islands Law may be less than in U.S. Jurisdictions

The Company’s corporate affairs are governed by its Memorandum 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 Management and the rights of the Company’s shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. The rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or

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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 by the Board of Directors or the principal shareholders than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. In addition, it is unlikely that the courts of the British Virgin Islands would enforce, either in an original action or in an action for enforcement of judgments of U.S. courts, liabilities which are predicated upon the securities laws of the United States. See “Description of Securities”.

6. Directors

Under the Company’s Articles of Association, the subscribers to the Memorandum of Association must appoint the first directors, and thereafter the directors may be appointed by the shareholders, or by the directors to fill a vacancy or as an addition to the existing directors. Directors may be removed, with or without cause, by a resolution of the shareholders of the Company, or with cause by a resolution of the other directors.

7. Powers of Directors

The business and affairs of the Company is managed by the directors of the Company who exercise all such powers of the Company as are not by the Act or by the Memorandum or these Articles required to be exercised by the members of the Company, subject to any delegation of such powers as may be prescribed by a resolution of members; but no requirement made by a resolution of members shall prevail if it be inconsistent with the Articles nor shall such requirement invalidate any prior act of the directors which would have been valid if such requirement had not been made.

The directors may, by a resolution of directors, appoint any person, including a person who is a director, to be an officer or agent of the Company. The resolution of directors appointing an agent may authorize the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company.

Every officer or agent of the Company has such powers and authority of the directors, including the power and authority to affix the Seal, as are set forth in the Articles or in the resolution of directors appointing the officer or agent, except that no officer or agent has any power or authority with respect to the matters requiring a resolution of directors under the Memorandum, the Articles, or the Act.

The continuing directors may act notwithstanding any vacancy in their body, save that if their number is reduced to their knowledge below the number fixed by or pursuant to these Articles as the necessary quorum for a meeting of directors, the continuing directors or director may act only for the purpose of appointing directors to fill any vacancy that has arisen or for summoning a meeting of members.

The directors may, by resolution of directors exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed, or as security for any debt, liability or obligation of the Company or of any third party.

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All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as shall from time to time be determined by resolution of directors.

The Company may determine by resolution of directors to maintain at its registered office a register of mortgages, charges and other encumbrances in which there shall be entered the following particulars regarding each mortgage, charge and other encumbrance: (a) the sum secured; (b) the assets secured; (c) the name and address of the mortgagee/chargee or other encumbrancer; (d) the date of creation of the mortgage, charge or other encumbrance; and (e) the date on which the particulars specified above in respect of the mortgage, charge or other encumbrance are entered in the register.

The Company may further determine by a resolution of directors to register a copy of the register of mortgages, charges or other encumbrances with the Registrar of Companies.

8. Quorum

The quorum required to constitute a valid general meeting of shareholders consists of shareholders present in person or by proxy holding at least a majority of all issued Ordinary Shares entitled to vote. If a meeting is adjourned for lack of quorum, it will stand adjourned to the next business day at the same time and place or to such other day and at such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting at least one-third of the shares entitled to vote at the meeting, the shareholder or shareholders present shall be a quorum. However, a meeting convened on the requisition of the shareholders shall be dissolved if a quorum is not present at the first meeting.

9. Resolutions

Resolutions may be adopted at shareholders’ meetings by the affirmative vote of a simple majority of the Ordinary Shares entitled to vote thereon.

Certain actions may be taken by a resolution of the directors. Such actions include an amendment of the Company’s Memorandum and Articles of Association, an increase or reduction in the Company’s authorized capital, and a change in the Company’s name.

10. Rights in a Winding-up

Holders of Ordinary Shares are entitled to participate in proportion to their holdings in any distribution of assets after satisfaction of liabilities to creditors in a winding-up.

11. Authorized but Unissued Shares

Under the Company’s Memorandum and Articles of Association, there are 12,741,684 authorized but unissued Ordinary Shares as of year ended December 31, 2003. Those additional authorized but unissued Ordinary Shares may be

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utilized for a variety of corporate purposes, including future public or private offerings to raise additional capital or for facilitating corporate acquisitions. The Company issued 1,175,000 shares pursuant to the Equity Participation Plan (see Note 17 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders), then repurchased and cancelled 905,800 shares during 2003. The Company does not currently have any plans to issue additional Ordinary Shares.

12. Transfers of Ordinary Shares

The Company’s Memorandum and Articles of Association do not restrict the transferability of fully paid Ordinary Shares, except that the Board of Directors may refuse to register the transfer of any of the Ordinary Shares if, in the opinion of the Board, such transfer might result in the Company becoming a CFC, FPHC or PHC. See “Restrictions on Transfer and Voting; Redemption of Ordinary Shares”.

13. New Issues of Ordinary Shares

Under the Company’s Articles of Association, the Board of Directors is authorized to exercise the power of the Company to offer, allot, grant options over or otherwise dispose of all of the remaining unissued Ordinary Shares of the Company, which comprise 12,741,684 Ordinary Shares as of December 31, 2003. The Board of Directors may, without further shareholder action, increase the number of authorized shares of the Company.

In addition the Board of Directors may, without further shareholder action, designate any of the authorized but unissued Ordinary Shares as preferred shares by amending the Company’s Memorandum of Association. Upon filing such amendment with the BVI Registrar of Companies, the Board of Directors would have authority to fix the dividend rights and rates, voting rights, redemption provisions and liquidation preference, all of which may take precedence over comparable rights of the existing Ordinary Shares.

In March 2002, the Company registered under the Securities Exchange Act of 1933 1,500,000 Ordinary Shares under its Equity Participation Plan (the “Option Plan”).

The Company issued 1,175,000 Ordinary Shares in 2003, see Note 17 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders.

14. Merger; Dissenters’ Rights

BVI law provides for mergers whereby there occurs either an absorption by one company of another company and the simultaneous dissolution of the other company, or the formation of a new company that absorbs two companies and the automatic dissolution of both absorbed companies. BVI law provides for compulsory acquisition or appraisal of the interests of a shareholder who objects to the transfer of the ownership or assets of a company.

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Under section 83 of the BVI International Business Companies Act, a shareholder of a company incorporated under the Act has the right to object to a proposed merger of the Company. If the shareholder complies fully with the requirements of section 83 and the merger is approved by a majority of shareholders, the dissenting shareholder may require the Company to pay fair value (as agreed or appraised) for his shares.

Pursuant to section 83 (11) of the Act, a shareholder who chooses to enforce dissenting shareholders’ rights may not enforce other remedial rights to which he might otherwise be entitled by virtue of his holding shares, except that the shareholder shall retain the right to institute proceedings to obtain relief on the ground that the merger is illegal.

15. Joint Shareholders

If two or more persons who hold shares jointly are present at a meeting in person or by proxy they must vote as one. Dividends and notices may be paid or sent, in the case of joint holders, to any one of the persons named as joint shareholders in the register of members.

16. Fiduciary Responsibilities

Under U.S. law majority and controlling shareholders generally have certain “fiduciary” responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in U.S. jurisdictions.

While BVI law does permit a shareholder of a BVI company to sue its directors derivatively (i.e., in the name of and for the benefit of the Company) and to sue the Company and its directors for his benefit and for the benefit of others similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders in a U.S. company.

17. Indemnification of Officers and Directors

Under its Memorandum and Articles of Association, the Company is authorized to indemnify any person who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being a director, officer or agent of the Company, provided such person acted in the best interests of the Company and, in the case of a criminal proceeding, such person had no reasonable cause to believe that his conduct was unlawful. The Company is obliged to indemnify any director, officer or agent of the Company who was successful in any proceeding against reasonable expenses incurred in connection with the proceeding, regardless of whether such person met the standard of conduct described in the preceding sentence.

18. Transfer Agent and Registrar

Mellon Investor Services, LLC serves as the Transfer Agent and Registrar for the Ordinary Shares.

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C. Material Contracts

The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which the Company or any subsidiary of the Company is a party, for the two years immediately preceding the filing of this report, and which are filed as Exhibits hereto:

Loan and Security Agreement between Associated Hygienic Products LLC as borrower and Foothill Capital Corporation as lender dated March 14, 2001 and as amended under which the lender agrees to make a term loan, a capital expenditure line and revolver advances to the borrower up to $27.5 million. See “Dependent Patents, Licenses and Contracts” in Item 4.B.6. and Notes 11 and 12 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders.

Short Term Financing Agreement between DSG International Limited as borrower and Breakers Investment Holding Limited as lender dated March 14, 2001 under which the lender agrees to make a term loan of $15.0 million to the borrower. DSG International Limited granted the lender 314,510 warrants priced at $0.01 per share. The loan was repaid in September 2001.

Sale and Purchase Agreement between Associated Hygienic Products LLC as buyer and Drypers Corporation as seller dated February 20, 2001 under which and pursuant to the order the U.S. Bankruptcy Court based in Houston, Texas the buyer agrees to buy and the seller agrees to sell its North American assets. The gross value of assets acquired was $39.6 million, which was subsequently reduced by $3.7 million due to a working capital adjustment. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, “Business Combinations”. This transaction closed on March 14, 2001.

Sale and Purchase Agreement between DSG International Limited and certain of its subsidiaries (the “Seller”) and Castle Harlan Australian Mezzanine Partners Pty. Limited (the “Purchaser”), the Purchaser agrees to purchase and the Seller agrees to sell its Australian subsidiaries. The gross value of the transaction was A$53 million (approximately $29.6 million). The transaction closed on December 6, 2002.

D. Exchange Controls

There are no exchange control restrictions on payment of dividends, interest, or other payments to non-resident holders of the Company’s securities or on the conduct of the Company’s operation in Hong Kong, where the Company’s principal executive offices are located or the British Virgin Islands, where the Company is incorporated. Other jurisdictions in which the Company conducts operations may have various exchange controls and the Company believes that such controls will not have a material effect on the Company’s liquidity or cash flow.

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E. Taxation

The following discussion is a summary of certain anticipated U.S. federal income tax and BVI tax consequences of ownership of Ordinary Shares. The discussion does not address all possible tax consequences relating to ownership of Ordinary Shares and does not purport to describe the tax consequences applicable to all categories of owners, some of which may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other national (e.g., non-U.S. and non-BVI) tax laws. Accordingly, each shareholder should consult its own tax advisor regarding the particular tax consequences to it of its ownership of the Ordinary Shares.

This summary is based upon current laws and regulations and relevant interpretations of these laws and regulations, all of which are subject to change, possibly with retroactive effect. We cannot assure you that a later change in law will not significantly alter the tax considerations that we describe in this summary. We have not requested a ruling from the Internal Revenue Service with respect to any of the United States federal income tax consequences described herein. As a result, there can be no assurance that the Internal Revenue Service will not disagree with or challenge any of the conclusions described below.

1. United States Federal Income Taxation

The following is a summary of the material United States federal income tax consequences, as of the date of this document, of the ownership of our Ordinary Shares by shareholders who are “United States persons” and who hold such Ordinary Shares as capital assets, as determined under applicable United States tax rules (“U.S. Investors”). Under the Internal Revenue Code of 1986, as amended (the “Code”), a shareholder is a “United States person” if such shareholder is:

• a citizen or resident of the United States;

• a corporation created or organized in or under the laws of the United States or any political subdivision thereof;

• an estate, the income of which is subject to United States federal income taxation regardless of its source; or

• a trust that is subject to the supervision of a court within the United States and the control of one or more United States persons or that has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

This summary does not address the United States federal income tax consequences applicable to shareholders that are subject to special treatment under the United States federal income tax laws, including shareholders that are:

• dealers in securities or currencies;

• traders in securities that elect to use a mark-to-market method of accounting for your securities holdings;

• financial institutions;

• insurance companies;

• tax-exempt organizations;

• persons liable for alternative minimum tax;

• persons holding Ordinary Shares as part of a hedging, integrated or conversion transaction, constructive sale or straddle;

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• persons owning, actually or constructively, 10% or more of our voting stock or 10% or more of the voting stock of any of our non-United States subsidiaries (a “10% Shareholder”), or

• persons whose functional currency is not the United States dollar.

If a partnership holds Ordinary Shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Partners of partnerships that hold Ordinary Shares should consult their own tax advisors concerning the particular United States federal income tax consequences to them of the ownership and disposition of Ordinary Shares.

The gross amount of distributions received with respect to Ordinary Shares by a U.S. Investor will generally be treated as dividend income to such shareholder if the distributions are made from the Company’s current or accumulated earnings and profits, calculated according to United States federal income tax principles. Such income will be includible in the U.S. Investor’s gross income on the day such distribution is actually or constructively received. A U.S. Investor that is a corporation will not be entitled to claim a dividend received deduction (generally allowed to United States corporations in respect of dividends received from other United States corporations) with respect to distributions received with respect to the Ordinary Shares.

Certain dividends received from a foreign corporation before January 1, 2009 by a U.S. Investor that is an individual with respect to shares that are readily tradable on an established securities market in the United States may be subject to reduced rates of taxation. The Company believes that it’s Ordinary Shares, which are listed on the NASDAQ, are readily tradable on an established securities market in the United States. There can be no assurance that our Ordinary Shares will continue to be readily tradable on an established securities market in later years. Individuals that do not meet a minimum holding period requirement during which they are not protected from this risk of loss or that elect to treat the dividend income as “investment income” pursuant to section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of the trading status of our Ordinary Shares. U.S. Investors that are individuals should consult their own tax advisors regarding the application of these rules in their particular circumstances.

A U.S. Investor that sells or otherwise disposes of Ordinary Shares will recognize capital gain or loss in an amount equal to the difference between the amount realized for the shares and such shareholder’s adjusted tax basis such shares (generally the cost of obtaining such shares reduced by an previous distributions by the Company that are not characterized as dividends under the rules described above). For foreign tax credit limitation purposes, this gain or loss will generally be treated as United States source. U.S. Investors that are individuals may be eligible for reduced rates of taxation if the Ordinary Shares being sold or otherwise disposed of have been held for more than one year. The ability to deduct capital losses is subject to limitations.

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Various provisions contained in the Code impose special taxes in certain circumstances on non-U.S. corporations and their shareholders. The following is a summary of certain provisions which could have an adverse impact on the Company and the U.S. Investors:

a. Personal Holding Companies

Sections 541 through 547 of the Code relate to the classification of certain corporations (including foreign corporations) as personal holding companies (“PHCs”) and the consequent taxation of such corporations on certain of their U.S.-sourced income (including certain types of foreign sourced income which are effectively connected with the conduct of a U.S. trade or business) to the extent amounts at least equal to such income are not distributed to their shareholders. A PHC is a corporation (i) more than 50% of the value of the stock of which is owned, directly or indirectly, by five or fewer individuals (without regard to their citizenship or residence), and (ii) which, if a foreign corporation, receives 60% or more of such U.S.-related gross income, as specially adjusted, from certain passive sources (such as dividends, interest, royalties or rents). If the Company is classified as a PHC, a tax will be levied at the rate of 15% on the Company’s undistributed U.S. taxable income.

While more than 50% of the Ordinary Shares may be treated as owned (either directly or indirectly) by five or fewer individuals, the Company intends to cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with such corporation’s immediate U.K.-resident parent corporation, to distribute any amounts which would otherwise be characterized as “undistributed personal holding company income” in the hands of either corporation with the intent that such distributions would cause such distributed amounts to lose their character as “United States source” taxable income subject to the PHC tax.

b. Foreign Personal Holding Companies

Sections 551 through 558 of the Code relate to foreign personal holding companies (“FPHCs”) and impute undistributed income of certain foreign corporations to U.S. persons who are shareholders of such corporations. A foreign corporation will be classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or residents, directly or indirectly own more than 50% of the corporation’s stock (measured either by voting power or value) (the “shareholder test”) and (ii) the Company receives 60% or more of its gross income (regardless of source), as specially adjusted, from certain passive sources (the “income test”).

The Company believes that it is not currently and has not been a FPHC for any taxable year since its formation because for each such year either or both of the income test and the shareholder test were not met. It is possible that subsequent events would cause the Company to meet either or both of the income test and the shareholder test. The Company believes, however, it is unlikely that the shareholder test would be met, especially in view of the inclusion of certain transfer restrictions in the Company’s governing documents. See “Description of Securities”.

If the Company is classified as a FPHC after application of the shareholder test and the income test, a pro rata portion of its undistributed income would be imputed to its shareholders who are U.S. persons (including U.S. corporations) and would be taxable to such persons as a dividend, even if no cash dividend is actually paid. In that event (promptly after receiving an opinion of counsel or final determination) the Company intends to distribute to its shareholders sufficient amounts so that U.S. shareholders would receive cash at least equal to the product of 150% of the highest federal income tax rate which could apply to any U.S. shareholder and the amount of the dividend that would otherwise be imputed to them. If

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the Company is classified as a FPHC in the year preceding the death of a shareholder, the Ordinary Shares held by such shareholder would obtain a tax basis equal to the lesser of their fair market value or their tax basis in the hands of the decedent.

c. Passive Foreign Investment Companies

Sections 1291 through 1297 of the Code relate to passive foreign investment companies (“PFICs”) and impose an interest charge on “excess distributions” made by a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross income for the taxable year is passive income as defined under Section 954(c) of the Code (the “passive income test”), or (ii) 50% or more of the average value (or adjusted tax basis if the corporation is a CFC) of the assets held by the corporation during the taxable year consist of assets that produce or are held for the production of passive income (the “passive asset test”). Certain look-through rules take into account the assets and activities of related corporations from which the foreign corporation either receives income or in which it holds an interest. Although a determination whether a corporation is a PFIC is made annually, in general, once a corporation has been classified as a PFIC, it cannot thereafter lose its status as a PFIC.

A distribution from a PFIC will generally be characterized as an excess distribution to the extent such distribution, when combined with all other distributions received by the U.S. Holder in such taxable year, exceeds 125% of the average distributions received by such shareholder in the three preceding taxable years (or its holding period if shorter). Once the amount of the excess distribution is determined, it is allocated ratably to all days in the shareholder’s holding period for the shares of the PFIC. Amounts allocated to the current year or a year prior to the date upon which the corporation was a PFIC are included in the shareholder’s income as ordinary income. Amounts allocated to prior years in which the corporation was a PFIC are subject to the highest rate of tax for the year to which allocated, and each of the resulting amounts of tax is subject to an interest charge as if it were an underpayment of taxes for such tax year.

The Company does not believe that it should, in the current year or any prior year, be classified as a PFIC. Under Section 1296(c) of the Code for purposes of determining PFIC status, a foreign corporation is deemed to hold its proportionate share of the assets and to receive directly its proportionate share of the income of its subsidiaries in which it owns 25 percent or more of the stock (determined by value). The Company, through its more than 25 percent owned subsidiaries, is engaged in substantial manufacturing activities and holds few assets (and receives little income) which would be classified as passive assets or would be classified as passive income under the applicable authorities.

d. United States Information Reporting and Backup Withholding

In general, unless a shareholder is an exempt recipient such as a corporation, information reporting will apply to dividends paid in respect of the Ordinary Shares or the proceeds received on the sale, exchange or redemption of those Ordinary Shares paid to a shareholder within the United States and, in some cases, outside of the United States. Additionally, if a shareholder fails to provide such shareholder’s taxpayer identification number, or fails either to report in full dividend and interest income or to make certain certifications, such shareholder will be subject to “backup withholding” at a 28% rate. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such

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shareholder’s United States federal income tax liability, provided that such shareholder furnishes the required information to the United States Internal Revenue Service.

2. British Virgin Islands Taxation

Under the laws of the BVI as currently in effect, a holder of Ordinary Shares who is not a resident of the British Virgin Islands is exempt from BVI income tax on gains realized during that year on sale or disposal of such shares; the British Virgin Islands does not impose a withholding tax on dividends paid by the Company.

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer taxes, stamp duties or similar charges in the BVI.

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands, nor is any such treaty or convention currently being negotiated.

F. Dividends and Paying Agents

Mellon Investor Services, LLC serves as the Company’s Dividend Disbursing Agent.

G. Statement by Experts

Not applicable.

H. Documents on Display

The Annual Report on Form 20-F of DSG International Limited as filed with the Securities and Exchange Commission and Exhibits thereto and documents referenced therein will be made available upon written request to the Company’s Principal Executive Office.

Item 11. Quantitative and Qualitative Disclosures about Market Risk.

A. Currency Fluctuation

1. Exchange Rate Information

The Consolidated Financial Statements of the Company are prepared in U.S. dollars. The financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52.

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The Pound Sterling, Euro, Singapore dollar, Thai Baht, and Indonesian Rupiah are convertible into U.S. dollars at freely floating rates. The Hong Kong dollar and Malaysian Ringgit are pegged to and allowed to fluctuate within a narrow range against the value of the U.S. dollar. There are currently no restrictions on the flow of such currencies, except Renminbi and Malaysian Ringgit, between such countries and the United States.

Fluctuations in the value of foreign currencies cause U.S. dollar translated amounts to change in comparison with previous periods and, accordingly, the Company cannot quantify in any meaningful way, the effect of such fluctuations upon future income. This is due to the number of currencies involved, the constantly changing exposure in these currencies, and the fact that all foreign currencies do not react in the same manner against the U.S. dollar.

The Company is unable to predict whether the trends noted above would have a material effect in its future financial condition or results of operations and, if so, whether such an effect will be positive or negative.

2. Exchange Rate Fluctuation

	2003			2002
	High	Low	Average	High	Low	Average
First quarter
Australian dollar	1.70	1.64	1.67	1.96	1.90	1.94
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.77	1.73	1.75	1.85	1.83	1.84
Thai Baht	42.95	42.76	42.84	44.07	43.35	43.75
Indonesian Rupiah	8,908.00	8,876.00	8,896.33	10,320.00	9,655.00	10,075.00
Swiss Franc	1.37	1.35	1.36	1.71	1.67	1.69
Pound Sterling	0.64	0.61	0.63	0.71	0.70	0.70
Euro	0.93	0.92	0.93	1.16	1.14	1.15
Hong Kong dollar	7.80	7.80	7.80	7.80	7.80	7.80
Renminbi	8.28	8.28	8.28	8.28	8.28	8.28
Second quarter
Australian dollar	1.61	1.50	1.55	1.84	1.77	1.79
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.77	1.73	1.75	1.80	1.77	1.79
Thai Baht	42.90	41.39	42.10	43.24	41.53	42.40
Indonesian Rupiah	8,675.00	8,279.00	8,413.00	9,316.00	8,730.00	8,943.67
Swiss Franc	1.36	1.30	1.34	1.63	1.48	1.56
Pound Sterling	0.63	0.61	0.61	0.69	0.65	0.67
Euro	0.90	0.85	0.87	1.11	1.01	1.06
Hong Kong dollar	7.80	7.80	7.80	7.80	7.80	7.80
Renminbi	8.28	8.28	8.28	8.28	8.28	8.28
Third quarter
Australian dollar	1.54	1.48	1.51	1.85	1.82	1.83
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.76	1.74	1.75	1.78	1.75	1.76
Thai Baht	42.04	40.19	41.13	43.38	42.23	42.62
Indonesian Rupiah	8,535.00	8,389.00	8,476.33	9,108.00	8,867.00	8,996.67
Swiss Franc	1.40	1.33	1.36	1.50	1.48	1.49
Pound Sterling	0.63	0.60	0.62	0.65	0.64	0.64
Euro	0.91	0.87	0.88	1.02	1.02	1.02
Hong Kong dollar	7.80	7.78	7.79	7.80	7.80	7.80

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Renminbi	8.28	8.28	8.28	8.28	8.28	8.28
Fourth quarter
Australian dollar	1.41	1.34	1.38	1.80	1.77	1.78
Malaysian Ringgit	3.80	3.80	3.80	3.80	3.80	3.80
Singapore dollar	1.74	1.70	1.72	1.77	1.73	1.76
Thai Baht	39.94	39.66	39.84	43.50	43.21	43.34
Indonesian Rupiah	8,537.00	8,465.00	8,499.00	9,233.00	8,940.00	9,049.67
Swiss Franc	1.34	1.24	1.29	1.49	1.39	1.45
Pound Sterling	0.59	0.56	0.58	0.64	0.62	0.64
Euro	0.86	0.80	0.83	1.02	0.96	0.99
Hong Kong dollar	7.77	7.76	7.76	7.80	7.80	7.80
Renminbi	8.28	8.28	8.28	8.28	8.28	8.28

3. Forward-Looking Statements

Certain written and oral statements made by the Company and its management may be considered “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this Annual Report on Form 20-F, public releases of information and other filings with the Securities and Exchange Commission. Generally, words such as “anticipate”, “estimate”, “will”, “project”, “expect”, “believe” and similar expressions identify forward-looking statements. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience or our present expectations. Therefore, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including without limitation to those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.

B. Foreign Currency Risk

As of December 31, 2003, the Company had no open forward contracts or option contracts. The Company’s cash on hand as of December 31, 2003 was $20,282,000 of which $5,797,000 equivalent was held in various foreign currencies, such as Hong Kong dollar, Renminbi, Thai Baht, Malaysian Ringgit, Indonesian Rupiah, Singapore dollar, Euro and Pound Sterling. The U.S. dollar equivalents of the cash in foreign currencies may vary subject to exchange rate fluctuation.

The Company may elect to hedge the foreign currency risk or review the hedging strategy as and when required and the Company cannot be assured that it will not suffer losses in the future as a result of the hedging activities.

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C. Interest Rate Fluctuations

The Company’s interest expenses and income are sensitive to change in interest rates. The Company had short-term debts and long-term debts of $35,965,000 as of December 31, 2003, bearing various rates of interest, any fluctuation in the interest rate will have direct impact on the Company’s interest expenses.

The Company will be exposed to interest rate fluctuations on any borrowings under the various loan facilities and any change in interest rate could affect its results of operations and cash flows. The potential effect of a hypothetical 0.5% increase in interest rate for year 2003 outstanding indebtedness would be a reduction in net income of approximately $180,000.

Item 12. Description of Securities Other than Equity Securities.

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

At December 31, 2002, the Company’s U.S. operation was not in compliance with the fiscal year ended audited financial statements delivery time period covenants. This violation was waived by the Senior Lender on March 28, 2003.

In 2002, the Company’s Wisconsin operation was not in compliance with the requirement to file its audited financial statements within 120 days to the finance company and the existing covenant violation was subsequently waived.

The Company also violated the covenant of the Senior Lender Loan requiring the submission of audited financial statements within 90 days of December 31, 2002. The Senior Lender issued a waiver with respect to this violation.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.

Not applicable.

Item 15. Controls and Procedures

A. Evaluation of disclosure controls and procedures

Within the 90 days prior to the date of this annual report on Form 20-F, we evaluated the effectiveness of the design and operation of our disclosure and procedures (“disclosure controls”), and our internal controls and procedures for financial reporting (“internal controls”). Disclosure controls mean those controls and other procedures that are designed for the

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purpose of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Internal controls are procedures designed for the purpose of providing reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. This evaluation was performed under the supervision and with the participation of management including our Chief Executive Officer and Chief Financial Officer.

Immediately following the signature pages of this annual report are “certifications” of our Chief Executive Officer and Chief Financial Officer, which are required to be furnished by SEC rules adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. The information discussed in this section of our annual report relates to the evaluations of disclosure controls and internal controls referenced in these certifications and should be read in conjunction with these certifications.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the reality of resource constraints; accordingly the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and possible misstatements due to fraud or error, if any, within our company have been detected. Among the inherent limitations in controls are the potential for erroneous judgments and decisions or simple errors or mistakes in the chain of recording, processing, summarizing or reporting information. Additionally, controls can be circumvented by the intentional acts of individuals or multiple persons acting in concert, or by management override. The design of any system of controls also is based in part on assumptions about the likelihood of future events, and we can give no assurance that our controls as designed will succeed in achieving their stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

In conjunction with its 2003 audit of our financial statements, our independent accountants Deloitte & Touche LLP, identified certain items they described as “reportable conditions,” relating primarily to the controls over the financial reporting process. The Company is implementing improvements to its policies and is evaluating the Company’s internal controls, both to prepare our Company to comply with the new annual internal controls certification that will be required as of December 31, 2005 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rulemaking, as well as to assist the Company in conforming to certain “best practices” recommendations with respect to internal controls generally.

In accordance with SEC requirements, our Chief Executive Officer and Chief Financial Officer note that, since the date of their above-referenced evaluation, otherwise than as discussed above, there have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Based on the evaluation discussed above, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the disclosures and limitations noted above, our disclosure controls are effective to timely alert management, including the Chief Executive Officer and Chief Financial Officer, to material information relating to its consolidated subsidiaries, required to be included in the Company’s reports filed under the Securities Exchange Act of 1934.

B. Change in internal controls

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out this evaluation.

Item 16. [Reserved]

Item 16A. Audit Committee Financial Expert.

The Company’s Board of Directors determined that one member of the Audit Committee, Mr. Anil Thadani, an independent executive non-director, qualifies as “Audit Committee Financial Expert” as defined by Item 401 (h) of Regulation S-Km adopted pursuant to the Securities Exchange Act of 1934. Mr. Thadani is the Chairman of Schroder Capital Partners (Asia) Limited, a direct investment company, which he founded in July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior to this, he was the Managing Director and a founding partner of Arral & Partners Limited, a private investment company based in Hong Kong. He is also a director of numerous companies, some of which are public listed companies in Singapore, Thailand and India. Mr. Thadani has a Master’s Degree in Chemical Engineering from the University of Wisconsin, Madison, and an M.B.A. from the University of California at Berkeley.

The other member of the audit committee, Mr. Owen Price is an independent non-executive director.

Item 16B. Code of Ethics.

The Company has adopted a Business Code of Conducts and Complaint Policies in the Company. The Business Code of Conducts and Complaint Policies are contained in Item 19C. and attached as Exhibit 10.1 and 10.2.

Item 16C. Principal Accountant Fees and Services.

Deloitte & Touche LLC served as our independent principal public accountant in the year ended December 31, 2003 while Deloitte Touche Tohmatsu, Hong Kong served as our independent principal public accountant in the year ended

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December 31, 2002 and 2001, for which the audited financial statements appear in this 20-F report and Annual Report to Shareholders. The auditor is elected annually at the Annual General Meeting. The Audit Committee will propose in the Annual General Meeting convene on November 17, 2004 that Deloitte & Touche LLC be elected as the auditors for 2004.

The following tables set forth the aggregate fees for professional services and other services rendered by Delotte & Touche LLC and Deloitte Touche Tohmatsu to the Company in 2003 and 2002. All these fees incurred in 2003 were approved by Audit Committee.

	For the years ended December 31,
	2003		2002
Audit fees (1)	$	559,777	$	411,000
Audit related fees (2)		—		58,000
Tax fees (3)		196,885		311,000
Other fees (4)		7,680		125,000
Total	$	764,342	$	905,000

⁽¹⁾ Audit fees consist of fess billed for the annual audit of the Company’s consolidated financial statements and statutory financial statements of the Company’s subsidiaries. They also include fees billed for other audit services that only the independent auditors reasonably can provide and attestation services relating to the review of documents filed with the SEC.

⁽²⁾ Audit related fees consist of fees billed for assurance and services that are related to the employee benefits plans and the Equity Participation Plan.

⁽³⁾ Tax fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for tax refund; tax consultations, tax advisory on transfer pricing and requests for rulings or technical advice from tax authorities; and tax planning services.

⁽⁴⁾ All other fees include business advisory service fees.

The Audit Committee is responsible, among other matters, for the oversight of the independent auditors subject to the relevant regulation of the SEC. The Audit Committee has adopted a policy regarding approval of audit and permissible non-audit services provided by the independent auditors.

Requests or applications to provide services that require specific approval by the Audit Committee are submitted to the Audit Committee by both the independent auditors and the Chief Financial officer.

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

Not applicable.

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

Not applicable.

PART III

Item 17. Financial Statements.

Financial statements are presented in Item 19.A.

Item 18. Financial Statements.

The information required by Item 18 is contained in Item 19.A.

Item 19. Financial Statements and Schedules and Exhibits.

A. Financial Statements

The following financial statements are contained in the Annual Report to Shareholders at the pages referred to below, which pages are incorporated herein by reference:

	Page
Management Report	27
Report of independent registered public accounting firm	28
Consolidated Balance Sheets as of December 31, 2003 and 2002	29-30
Consolidated Statements of Operations and Comprehensive Income for the three years ended December 31, 2003	31-32
Consolidated Statements of Cash Flows for the three years ended December 31, 2003	33-34
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2003	35
Notes to Consolidated Financial Statements	36-62

B. Financial Statement Schedule

No financial statement schedules are provided because the information is not required or is contained in the Notes to Consolidated Financial Statements of the Annual Report to Shareholders.

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C. Exhibit Index

Exhibit Number	Description
4.1	Eighth Amendment to Loan Agreement between Associated Hygienic Products LLC and Wells Fargo Foothill, Inc. (formerly known as Foothill Capital Corporation) dated October 15, 2003
4.2	Seventh Amendment to Loan Agreement between Associated Hygienic Products LLC and Wells Fargo Foothill, Inc. (formerly known as Foothill Capital Corporation) dated June 19, 2003
4.3	Sixth Amendment & Waiver to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated November 14, 2002, (incorporated by reference included as Exhibit 4.4 with Form 20-F filed June 16, 2003)
4.4	Fifth Amendment & Waiver to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated April 17, 2002, (incorporated by reference included as Exhibit 3.8 with Form 20-F filed June 14, 2002)
4.5	Fourth Amendment & Waiver to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated December 19, 2001, (incorporated by reference included as Exhibit 3.6 with Form 20-F filed June 14, 2002)
4.6	Third Amendment & Waiver to Loan Agreement between Associated Hygienic Products LLC and Foothill Capital Corporation dated September 10, 2001, (incorporated by reference included as Exhibit 3.5 with Form 20-F filed June 14, 2002)
4.7	Land Sales Agreement No. 003/2002 dated October 31, 2002 between S I L Industrial Land Co. Ltd. and DSG International (Thailand) Co. Ltd (incorporated by reference included as 4.1 with Form 20-F filed June 16, 2003)
4.8	Sales and Purchase Agreement dated December 6, 2002 between DSG International Limited and Castle Harlan Australian Mezzanine Partners Pty. Limited (incorporated by reference included as 4.2 with Form 20-F filed June 16, 2003)
4.9	Joint Venture Agreement dated February 10, 2003 between DSG International Limited, Mitsubishi Corporation and Japan Absorbent Technology Institute (incorporated by reference included as 4.3 with Form 20-F filed June 16, 2003)
10.1	The Company’s Audit Committee Policy for Handling Financial Report Process Complaints Policy No. I-DSGILAF-003-101003
10.2	The Company’s Business Code of Conduct Policy No. I-DSGILAF-001-123102, (incorporated by reference included as Exhibit 10.1 with Form 20-F filed June 16, 2003)
10.3	Press Release issued on Form 6-K, (incorporated by reference filed on March 24, 2003-No.000-19804; Film No. 03613241)
11	Computation of Net Income Per Ordinary Share
13	2003 Annual Report to Shareholders
23	Independent Auditors’ Consent
99.1	Certification by the Company’s Chief Financial Officer as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002

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99.2	Certification by the Company’s Chief Executive Officer as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002
99.3	Certification by the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002
99.4	Certification by the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirement of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has duly caused the Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Duluth, Georgia, on June 25, 2004.

DSG INTERNATIONAL LIMITED
	By	/s/    PETER CHANG
		Peter Chang
		Chief Financial Officer

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EX-4.1

EXHIBIT 4.1

EIGHTH AMENDMENT TO LOAN AGREEMENT

This EIGHTH AMENDMENT TO LOAN AGREEMENT (this “Amendment”) is entered into as of October 15, 2003, among ASSOCIATED HYGIENIC PRODUCTS LLC, a Delaware limited liability company (“Borrower”), the Lenders signatory hereto, and WELLS FARGO FOOTHILL, INC. (formerly known as Foothill Capital Corporation), a California corporation, in its capacity as administrative agent (“Agent”) for the Lenders.

W I T N E S S E T H:

WHEREAS, Borrower, the Lenders and Agent have entered into that certain Amended and Restated Loan and Security Agreement dated as of March 14, 2001, as amended by that certain First Amendment to Loan Agreement effective as of May 28, 2001, that certain Second Amendment to Loan Agreement effective as of July 5, 2001, that certain Third Amendment and Waiver to Loan Agreement dated as of September 10, 2001, that certain Fourth Amendment to Loan Agreement dated as of December 19, 2001, that certain Fifth Amendment to Loan Agreement dated as of April 17, 2002, that certain Sixth Amendment to Loan Agreement dated as of November 14, 2002, and that certain Seventh Amendment to Loan Agreement dated as of June 19, 2003 (as amended and as the same may hereafter be modified, amended, restated or supplemented from time to time, the “Loan Agreement”), pursuant to which the Lenders have agreed to make loans and other financial accommodations to Borrower from time to time; and

WHEREAS, Borrower has requested that Agent and the Lenders amend the provisions of Section 16.17 of the Loan Agreement to add certain language reflecting recent changes in the IRC regarding the tax disclosure exception to confidentiality provisions; and

WHEREAS, Agent and the Lenders have agreed to the requested amendment on the terms and conditions provided herein;

NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree that all capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement and further agree as follows:

1. Amendment to Loan Agreement. Section 16.17 of the Loan Agreement is hereby amended and modified by adding the following paragraph to the end of such Section:

“Anything contained in this Agreement or in any other Loan Document to the contrary notwithstanding, the obligations of confidentiality contained herein and therein, as they relate to the transactions contemplated hereby,

shall not apply to the federal tax structure or federal tax treatment of such transactions, and each party hereto (and any employee, representative, or agent of any party hereto) may disclose to any and all Persons, without limitation of any kind, the federal tax structure and federal tax treatment of such transactions (including all written materials related to such tax structure and tax treatment). The preceding sentence is intended to cause the transactions contemplated hereby to not be treated as having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the IRC, and shall be construed in a manner consistent with such purpose. In addition, each party hereto acknowledges that it has no proprietary or exclusive rights to the tax structure of the transactions contemplated hereby or any tax matter or tax idea related thereto.”

2. No Other Amendments or Waivers. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Agent or the Lenders under the Loan Agreement or any of the other Loan Documents, nor constitute a waiver of any provision of the Loan Agreement or any of the other Loan Documents. Except for the amendments set forth above, the text of the Loan Agreement and all other Loan Documents shall remain unchanged and in full force and effect and Borrower hereby ratifies and confirms its obligations thereunder. This Amendment shall not constitute a modification of the Loan Agreement or any of the other Loan Documents or a course of dealing with Agent or the Lenders at variance with the Loan Agreement or the other Loan Documents such as to require further notice by Agent or the Lenders to require strict compliance with the terms of the Loan Agreement and the other Loan Documents in the future, except as expressly set forth herein. Borrower acknowledges and expressly agrees that Agent and the Lenders reserve the right to, and do in fact, require strict compliance with all terms and provisions of the Loan Agreement and the other Loan Documents. Borrower has no knowledge of any challenge to Agent’s or any Lenders’ claims arising under the Loan Documents, or to the effectiveness of the Loan Documents.

3. Conditions Precedent to Effectiveness. This Amendment shall become effective as of the date hereof when, and only when, Agent shall have received counterparts of this Amendment duly executed and delivered by Borrower and the Lenders.

4. Representations and Warranties of Borrower. Borrower represents and warrants as follows:

(a) Borrower is a limited liability company organized, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this

2

Amendment and all other jurisdictions in which the failure to be so qualified reasonably could be expected to constitute a Material Adverse Change;

(b) The execution, delivery, and performance by Borrower of this Amendment and the Loan Documents to which it is a party, as amended hereby, are within Borrower’s limited liability company powers, have been duly authorized by all necessary limited liability company action and do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of Borrower’s members or any approval or consent of any Person under any material contractual obligation of Borrower;

(c) The execution, delivery, and performance by Borrower of this Amendment and the Loan Documents to which it is a party, as amended hereby, do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person;

(d) This Amendment and each other Loan Document to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally; and

(e) No Default or Event of Default exists.

5. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. In proving this Amendment in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signatures delivered by a party by facsimile transmission shall be deemed an original signature hereto.

6. Reference to and Effect on the Loan Documents. Upon the effectiveness of this Amendment, on and after the date hereof each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to “the Loan Agreement” “thereunder,” “thereof or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby.

3

7. Costs, Expenses and Taxes. Borrower agrees to pay on demand all costs and expenses in connection with the preparation, execution, and delivery of this Amendment, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for Agent with respect thereto and with respect to advising Agent as to its rights and responsibilities hereunder. Borrower hereby acknowledges and agrees that Agent may, without prior notice to Borrower, charge such costs and fees to Borrower’s Loan Account pursuant to Section 2.6(d) of the Loan Agreement, which amounts shall constitute Advances under the Loan Agreement and shall accrue interest at the rate then applicable to Advances thereunder.

8. Governing Law. This Amendment shall be deemed to be made pursuant to the laws of the State of Georgia with respect to agreements made and to be performed wholly in the State of Georgia, and shall be construed, interpreted, performed and enforced in accordance therewith.

9. Loan Document. This Amendment shall be deemed to be a Loan Document for all purposes.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

4

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the day and year first written above.

BORROWER:	ASSOCIATED HYGIENIC PRODUCTS LLC
	By:	/s/ George H. Jackson III
	Name:
	Title:
AGENT and LENDER:	WELLS FARGO FOOTHILL, INC., as Agent and a Lender
	By:
	Name:
	Title:

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the day and year first written above.

BORROWER:	ASSOCIATED HYGIENIC PRODUCTS LLC
	By:
	Name:
	Title:
AGENT and LENDER:	WELLS FARGO FOOTHILL, INC., as Agent and a Lender
	By:	/s/ Kristy S. Loucks
	Name:	Kristy S. Loucks
	Title:	Vice President

EX-4.2

EXHIBIT 4.2

SEVENTH AMENDMENT TO LOAN AGREEMENT

This SEVENTH AMENDMENT TO LOAN AGREEMENT (this “Amendment”) is entered into as of June 19, 2003, among ASSOCIATED HYGIENIC PRODUCTS LLC, a Delaware limited liability company (“Borrower”), the Lenders signatory hereto, and WELLS FARGO FOOTHILL, INC. (formerly known as Foothill Capital Corporation), a California corporation, in its capacity as administrative agent (“Agent”) for the Lenders.

W I T N E S S E T H:

WHEREAS, Borrower, the Lenders and Agent have entered into that certain Amended and Restated Loan and Security Agreement dated as of March 14, 2001, as amended by that certain First Amendment to Loan Agreement effective as of May 28, 2001, that certain Second Amendment to Loan Agreement effective as of July 5, 2001, that certain Third Amendment and Waiver to Loan Agreement dated as of September 10, 2001, that certain Fourth Amendment to Loan Agreement dated as of December 19, 2001, that certain Fifth Amendment to Loan Agreement dated as of April 17, 2002, and that certain Sixth Amendment to Loan Agreement dated as of November 14, 2002 (as amended and as the same may hereafter be modified, amended, restated or supplemented from time to time, the “Loan Agreement”), pursuant to which the Lenders have agreed to make loans and other financial accommodations to Borrower from time to time; and

WHEREAS, Borrower is required to deliver audited financial statements for Borrower and its Subsidiaries for each fiscal year no later than 90 days after the end of each of its fiscal years pursuant to Section 6.3(b) of the Loan Agreement; and

WHEREAS, Borrower has requested that Agent and the Lenders amend the provisions of Section 6.3(b) of the Loan Agreement to permit the delivery of such financial statements no later than 105 days after the end of each of its fiscal years; and

WHEREAS, pursuant to Section 7.20(a)(iii) of the Loan Agreement. Agent shall establish the quarterly minimum EBITDA and minimum Net Worth covenants for each fiscal year of Borrower based upon the Business Plan provided by Borrower for such fiscal year and using the same methodology as utilized for the 2001 and 2002 fiscal year EBITDA and Net Worth covenants; and

WHEREAS, Borrower has requested that Agent and the Lenders amend the provisions of Section 7.20(a)(iii) to provide that Agent shall establish the financial covenants for the second, third and fourth quarters of fiscal year 2003 based upon 80% of the revised financial projections submitted to Agent on May 5, 2003; and

WHEREAS, Agent and the Lenders have agreed to the requested amendments on the terms and conditions provided herein;

NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree that all capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement and further agree as follows:

1. Amendments to Loan Agreement.

(a) Section 6.3(b) of the Loan Agreement is hereby amended and modified by deleting “90” therefrom and in place thereof inserting “105”.

(b) Section 7.20(a)(iii) of the Loan Agreement is hereby amended and modified by adding the following to the end of such Section:

Notwithstanding the foregoing, the quarterly minimum EBITDA and minimum Net Worth covenants for fiscal year 2003 shall be as follows:

(x) Minimum EBITDA. EBITDA, measured on a fiscal quarter-end basis, shall not be less than the required amount set forth in the following table for the applicable period set forth opposite thereto:

Applicable Amount	Applicable Period
N/A	For the 3 month period ending March 31, 2003
($368,880)	For the 6 month period ending June 30, 2003
$1,979,120	For the 9 month period ending September 30, 2003
$3,577,840	For the 12 month period ending December 31, 2003

(y) Tangible Net Worth. Tangible Net Worth shall be at least the required amount set forth in the following table as of the applicable date set forth opposite thereto:

Applicable Amount	Applicable Period
N/A	as of March 31, 2003
($9,282,079)	as of June 30, 2003
($7,062,711)	as of September 30, 2003
($5,492,245)	as of December 31, 2003

2

2. No Other Amendments or Waivers. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Agent or the Lenders under the Loan Agreement or any of the other Loan Documents, nor constitute a waiver of any provision of the Loan Agreement or any of the other Loan Documents. Except for the amendments set forth above, the text of the Loan Agreement and all other Loan Documents shall remain unchanged and in full force and effect and Borrower hereby ratifies and confirms its obligations thereunder. This Amendment shall not constitute a modification of the Loan Agreement or any of the other Loan Documents or a course of dealing with Agent or the Lenders at variance with the Loan Agreement or the other Loan Documents such as to require further notice by Agent or the Lenders to require strict compliance with the terms of the Loan Agreement and the other Loan Documents in the future, except as expressly set forth herein. Borrower acknowledges and expressly agrees that Agent and the Lenders reserve the right to, and do in fact, require strict compliance with all terms and provisions of the Loan Agreement and the other Loan Documents. Borrower has no knowledge of any challenge to Agent’s or any Lenders’ claims arising under the Loan Documents, or to the effectiveness of the Loan Documents.

3. Conditions Precedent to Effectiveness. This Amendment shall become effective as of the date hereof when, and only when, Agent shall have received:

(a) counterparts of this Amendment duly executed and delivered by Borrower and the Lenders;

(b) an amendment fee from Borrower in the amount of $10,000 (the “Amendment Fee”), for the benefit of the Lenders on a pro-rata basis, which fee shall be fully earned and non-refundable when paid; and

(c) such other information, documents, instruments or approvals as Agent or Agent’s counsel may reasonably require.

4. Representations and Warranties of Borrower. Borrower represents and warrants as follows:

(a) Borrower is a limited liability company organized, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this Amendment and all other jurisdictions in which the failure to be so qualified reasonably could be expected to constitute a Material Adverse Change;

(b) The execution, delivery, and performance by Borrower of this Amendment and the Loan Documents to which it is a party, as amended hereby, are within Borrower’s limited liability company powers, have been duly authorized by all necessary limited liability company action and do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or

3

other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of Borrower’s members or any approval or consent of any Person under any material contractual obligation of Borrower;

(c) The execution, delivery, and performance by Borrower of this Amendment and the Loan Documents to which it is a party, as amended hereby, do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person;

(d) This Amendment and each other Loan Document to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally; and

(e) No Default or Event of Default exists.

5. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. In proving this Amendment in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signatures delivered by a party by facsimile transmission shall be deemed an original signature hereto.

6. Reference to and Effect on the Loan Documents. Upon the effectiveness of this Amendment, on and after the date hereof each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof” or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to “the Loan Agreement” “thereunder,” “thereof” or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby.

7. Costs, Expenses and Taxes. Borrower agrees to pay on demand all costs and expenses in connection with the preparation, execution, and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for Agent with respect thereto and with respect to advising Agent as to its rights and responsibilities hereunder and thereunder. Borrower hereby acknowledges and agrees that Agent may, without prior notice to Borrower, charge such costs and fees and the Amendment Fee to Borrower’s Loan Account pursuant to Section 2.6(d) of the Loan

4

Agreement, which amounts shall constitute Advances under the Loan Agreement and shall accrue interest at the rate then applicable to Advances thereunder.

8. Governing Law. This Amendment shall be deemed to be made pursuant to the laws of the State of Georgia with respect to agreements made and to be performed wholly in the State of Georgia, and shall be construed, interpreted, performed and enforced in accordance therewith.

9. Loan Document. This Amendment shall be deemed to be a Loan Document for all purposes.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

5

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the day and year first written above.

BORROWER:	ASSOCIATED HYGIENIC PRODUCTS LLC
	By:	/s/ George H. Jackson III
	Name:	George H. Jackson III
	Title:	CHIEF EXECUTIVE OFFICER
AGENT
and LENDER:	WELLS FARGO FOOTHILL, INC., as Agent and a Lender
	By:	/s/ Kristy S. Loucks
	Name:	Kristy S. Loucks
	Title:	Vice President

SEVENTH AMENDMENT

TO LOAN AGREEMENT

EX-10.1

EXHIBIT 10.1

DSG International Limited

Audit Committee

Policy For Handling Financial

Reporting Process Complaints

DSG International Limited (“DSGI” or the “Company”) is committed to providing all of its employees with a fair and “open” environment in which to voice complaints about any improprieties discovered in the workplace related to financial reporting and questionable practices. The Company has established a formal procedure and administrative framework in which the employee is able to voice the discovery of any improper conduct, behavior, action or doubtful practice, which constitutes the basis for the complaint. This policy sets forth a framework that will allow the employee access to proper channels within the Company to have the complaint brought to the attention of those individuals responsible for resolution of any breach of policy or practice in this area.

Guiding Principle: The Company encourages each of its employees to report any conduct, behavior or practice he or she perceives to represent a breach of a Company policy, infraction of the Company Business Code of Conduct or violation of law.

Defining the basis of a Complaint: It is difficult to define all types of situations that may give rise to the basis of a complaint for which an employee feels the need to “speak up.” However a proper channel of communication is being made available to respond to these complaints. The following are examples of behavior or practices expressly prohibited by the Company that may invoke the need for an employee to utilize the “speak up” communication channel within DSGI that handles these types of complaints.

Examples:

• use of questionable accounting methods to record the Company’s financial transactions

• conflicts of interest

• fraud

• receipt of “kick-backs” from suppliers/vendors or any other entity or individual not here-to-for mentioned, but engaged in conducting normal course of business activities with the Company

• submission of false reports

• improper reporting of information of any kind

• mis-use of proprietary information (“intellectual property”) to “outsiders”

• retaliation of any kind toward an employee for submitting a Concern Response Form under this policy

The list of items above is not an all-inclusive list of activities, actions or events that might initiate an employee complaint. The list is intended to provide examples of typical activities that are prohibited by the Company. If as a result of the investigative process the complaint is satisfactorily proven legitimate the Company will take the appropriate actions to rectify the situation. The actions taken by the Company in response to any complaint can result in substantial negative consequences to the violator of any policy. It should be noted that the Company takes this process and policy very seriously. The Company will make every effort through the use of independent and impartial resources to evaluate each concern brought forward in the form of a complaint. Any decision reached by the Company after review and acceptance by the Audit Committee will be final.

Policy No. I-DSGILAF-003-101003 1

Getting Started: Each employee should become familiar with the Company’s policies, practices and regulations that affect his or her job. If you are unsure about reporting an incident you should ask yourself whether the activity in question complies with the law, violates the DSGI Business Code of Conduct or does not reflect the use of sound accounting practices. There is no time limit on reporting a concern, but timely reporting will aid the investigative process of the factual information presented.

How to Report a Concern/Complaint: You should initially speak to your supervisor. If you are uncomfortable communicating with your supervisor you should then approach your local human resource department representative. If you are concerned about approaching either of these sources you can either email or write a letter directly to the Company’s Audit Committee Chairman. A special email address has been established for this purpose. The email address is DSGCOMPLT@YAHOO.COM and can only be accessed by the Audit Committee Chairman or his “independent designee”.

Processing a Complaint:

• The human resource department will provide you with a form to record the concern/complaint. (A copy of the Concern Response Form is a part of this policy.)

• State the facts with as much specific information as possible so that your allegations are clearly stated and can be properly investigated.

• These “Concern Response Forms” will be logged onto a worksheet that will be used to monitor the response time from the date the initial concern was recorded.

• The Company will provide the employee with a preliminary response to the concern submitted on the “Concern Response Form” within five (5) business days.

• The employee will be brought up to date on a bi-weekly basis as to the status of the Company’s response.

• In no case will the Company take more than forty-five (45) days to provide the employee with a final decision in response to a concern filed under this policy.

• All allegations/concerns will be investigated only when properly submitted.

• Confidentiality will be maintained within the limits of the law.

Defining the Concern Response Procedure: It is the responsibility of the Company to ensure that it acts impartially in responding to all concerns brought forth by its employees under this policy. The impartial review process will include bringing all concern response forms to the attention of the Company’s Audit Committee. The Audit Committee is comprised of independent members of the Company’s Board of Directors. The Company will present its position on each concern response form to the Audit Committee and recommend or describe a course of action. The investigative process used to research the complaint and any changes required to Company policy to prevent any reoccurrence of the infraction will be provided to the Audit Committee in writing. The Audit Committee will make a final determination that may include changing the Company prescribed course of action and report the decision back to the employee. Record of the actions taken as a result of the review process will be recorded as a part of the Audit Committee’s meeting minutes. In accordance with this policy the Company will maintain records of all complaints brought forward under this policy by its employees for a period of three (3) years.

The Company as a public entity has the responsibility to act ethically and remain in compliance with all laws and regulations to which it is subject. This policy will help to demonstrate the Company’s accountability for its conduct by having a complaint handling policy in place to have employees voice concerns.

Policy No. I-DSGILAF-003-101003 2

DSG International Limited

Financial Reporting Complaint Policy

Concern Response Form

Date of Submission ___________________________________________

Location ___________________________________________________

*Name of person submitting concern _____________________________

Time of Incident Being Reported ________________________________

Description of the Concern

*Employee Signature ______________________________________________________________________________________

Date _________________________

Human Resource Representative Signature _____________________________________________________________________

* This is not required. If the individual initiating the concern wishes to remain anonymous the Company will grant the individual anonymity. If anonymity is desired please either write directly to or email the DSGI Audit Committee Chairman at the address below.

Anil Thadani, DSG International Limited Audit Committee Chairman

9 Raffles Place, #10-02 Republic Plaza Tower 1, Singapore 048619

Email: DSGCOMPLT@YAHOO.COM

All Concern Response Forms will be handled confidentially.

Policy No. I-DSGILAF-004-101003

EX-11

EXHIBIT 11

COMPUTATION OF NET INCOME PER ORDINARY SHARE

	Year ended December 31,
	2003			2002			2001
	(in thousands except per share amounts)
Number of ordinary shares
Ordinary shares outstanding, beginning of year		6,989			6,989			6,675
Ordinary shares issued		1,175			—			314
Ordinary shares repurchased and cancelled		(906	)		—			—
Ordinary shares outstanding, end of year		7,258			6,989			6,989
Weighted average shares outstanding during the year
Basic		7,514			6,989			6,721
Diluted		7,652			6,989			6,721
Loss from continuing operations	$	(8,680	)	$	(355	)	$	(29,529	)
Income from discontinued operations		—			17,600			1,966
Net income (loss)	$	(8,680	)	$	17,245		$	(27,563	)
Income (loss) per share:
Continuing operations
Basic	$	(1.16	)	$	(0.05	)	$	(4.39	)
Diluted(1)		(1.16	)		(0.05	)		(4.39	)
Discontinued operations		—			2.52			0.29
Income (loss) per share	$	(1.16	)	$	2.47		$	(4.10	)

⁽¹⁾ The restricted shares and stock options outstanding at December 31, 2003 have not been included in the computation of diluted earnings per share because to do so would be anti-dilutive for the year ended December 31, 2003.

EX-13

Exhibit 13

ABOUT THE COMPANY

DSG International Limited (the “Company”) is a global company specialized in manufacturing and distribution of disposable baby diapers, training pants and adult incontinence products. The Company now has nine manufacturing plants established in Hong Kong, the United States, England, the People’s Republic of China (“PRC”), Thailand, Indonesia and Malaysia. The Company’s products are marketed and distributed throughout Asia, North America and Europe. Its principal brand names are “FITTI®”, “PET PET®”, “COSIFITS®”, “BABY LOVE®”, “BABYJOY®”, “DISPO 123^™”, “HANDY^™”, “CERTAINTY®”, “MERIT®” and “DRYPERS®”. These brands are synonymous with high quality and superior value, characteristics that the Company is dedicated to maintaining.

FINANCIAL HIGHLIGHTS

	Year Ended December 31,
	2003			2002			2001			2000			1999
(In US$ million except per share amounts)
Net sales	$	218.4		$	227.8		$	227.8		$	157.6		$	152.4
(Loss) income from continuing operations(1)	$	(8.7	)	$	(0.4	)	$	(29.5	)	$	(0.5	)	$	0.4
Income from discontinued operations	$	—		$	17.6		$	2.0		$	3.5		$	4.0
Net (loss) income(1)	$	(8.7	)	$	17.2		$	(27.5	)	$	3.0		$	4.4
Shareholders’ equity	$	53.1		$	59.0		$	39.0		$	63.4		$	70.3
Income (loss) per share
Continuing operations
Basic	$	(1.16	)	$	(0.05	)	$	(4.39	)	$	(0.08	)	$	0.07
Diluted(2)	$	(1.16	)	$	(0.05	)	$	(4.39	)	$	(0.08	)	$	0.07
Discontinued operations	$	—		$	2.52		$	0.29		$	0.52		$	0.59
Net income (loss) per share	$	(1.16	)	$	2.47		$	(4.10	)	$	0.44		$	0.66

⁽¹⁾ Loss from continuing operations and net loss for the year ended December 31, 2003 includes a charge of $3.9 million related to stock-based compensation expense.

⁽²⁾ The restricted shares and stock options outstanding at December 31, 2003 have not been included in the computation of diluted earnings per share because to do so would be anti-dilutive for the year ended December 31, 2003.

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CONTENTS

THE DSG MANAGEMENT TEAM	3
Executive and Non-Executive Directors of DSG
TO OUR SHAREHOLDERS	4
Report on the highlights of 2003 and the outlook for 2004 by Brandon Wang, Chairman
OPERATIONS	6
Report of DSG’s operations worldwide in 2003
OPERATING AND FINANCIAL REVIEW AND PROSPECTS	9
SELECTED CONSOLIDATED FINANCIAL DATA	25
MANAGEMENT REPORT	27
by Peter Chang, Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	28
by Deloitte & Touche LLP
CONSOLIDATED BALANCE SHEETS	29
CONSOLIDATED STATEMENTS OF OPERATIONS	31
CONSOLIDATED STATEMENTS OF CASH FLOWS	33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY	35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	36
SHAREHOLDER INFORMATION	63
DSG COMPANIES	64
DSG Corporate addresses worldwide

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THE DSG MANAGEMENT TEAM

DSG EXECUTIVE DIRECTORS

Brandon S L Wang

Member of Executive Cabinet, Chairman and Chief Executive Officer

Johnny S L Tsui

Member of Executive Cabinet, Chief Operating Officer of Greater China and Company Secretary

Patrick K Y Tsang

Member of Executive Cabinet and Chief Operating Officer of Europe

Terence Y F Leung

Member of Executive Cabinet

Peter Chang

Member of Executive Cabinet, Chief Financial Officer and Chairman of North American operations

DSG NON-EXECUTIVE DIRECTORS

Anil Thadani

Chairman of Schroder Capital Partners (Asia) Limited, Hong Kong

Owen Price

Formerly Managing Director of Dairy Farm International Holdings, Hong Kong

(retired in 1993)

DSG OFFICERS

George Jackson

Chief Executive of North American operations

Patrick Wong

Chief Operating Officer – South East Asia

Steven Pankow

Executive Vice President of Sales & Marketing of North American operations

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TO OUR SHAREHOLDERS

The year 2003 brought with it one of the most difficult competitive environments experienced within our industry in recent history. While the Company was poised for incremental sales and profit growth, competitive pressures impaired our progress to achieve both of those objectives. However our operational objectives at our manufacturing facilities worldwide have been met with greater success. Initiatives relating to cost reductions and the implementation of improved product features across designated product offerings were realized as planned. The success of these initiatives will become the foundation for additional improvements anticipated in the coming year.

Financial Review

Net sales from continuing operations in 2003 of $218.4 million were lower than the comparable period in 2002 of $227.8 million. In 2003, the Company recorded a net loss of $8.7 million compared to a net income of $17.2 million in 2002. The decline in sales in 2003 from 2002 occurred primarily in our North American operations. In North America declines resulted from a loss of branded volume that was not offset by the increase in the private label category. Also declines resulted from an overall reduction of close to 3% of total diaper consumption for the company and the industry as a whole. Net sales reflected a slight improvement over the prior year in all other regions. Despite facing a fierce competitive environment in our Asian region where competitors were willing to sacrifice price and margins to gain market share, our net sales improved.

The Company did not have any discontinued operations in 2003. Income from discontinued operations in 2002 was $17.6 million compared to $2.0 million in 2001. The dominant factor in the 2002 results was due to positive operating results of the Company’s Australian operations, which were sold in the fourth quarter of 2002 and the $14.8 million gain realized on the sale of the Company’s Australian subsidiaries.

Net loss in 2003 was $8.7 million compared to a net income of $17.2 million in 2002. The 2003 decline in net income compared to the previous year is the result of lower sales revenue, higher advertising and promotion costs, the recording of stock based compensation expense and offset by recognition of a gain in 2002 on the sale of the Company’s Australian subsidiaries.

Operations

North America

The Company’s North American operations have made significant progress over the past two years. The manufacturing facilities improved operating efficiencies through integration and rationalization. The overhead structure of the organization has been aligned to be flexible and responsive to the changing business environment. Competitive product offerings are available to consumers and there is a plan for future product development efforts to further improve our products. We expect continued North America improvement and success in the near future as market conditions improve.

Asia

The Asian markets faced its most substantial competitive pressure in 2003. These aggressive competitive conditions resulted in a smaller sales increase in this region as our competitors opted to gain market share by

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offering heavy price concessions. In an effort to remain competitive the Company will continue to tailor its sales and marketing efforts in these markets in the coming year. Thailand is a proven example of success with this strategy. In 2003, Thailand sales revenue grew by 11%. The planned opening of a new Thailand manufacturing facility in the third quarter of 2004 will help to solidify the Company’s competitive position in this market. The Company anticipates the effectiveness of this tailored sales and marketing approach to further improve results in this region in the coming year as it expects little change in the competitive market conditions.

Europe

In Europe, the Company has scaled back its operations. However, the U.K. operation continues to concentrate on both branded and private label disposable diapers for the U.K. market.

Outlook

The competitive market conditions within our industry in 2003 were difficult to negotiate. However our operations worldwide proved able to endure these conditions by adopting flexible strategies to respond to the changing competitive market pressures. Since these market conditions are expected to remain unchanged in 2004, our operations will attempt to identify opportunities to help gain competitive advantages. Our manufacturing facilities remain committed to producing a low cost high quality product for consumers. The sales and marketing organizations are focused on providing superior service to our customers. The sales and marketing organizations will also strive to better understand their individual markets with the expectation of enhancing our ability to anticipate change in consumer habits and preference for disposable diaper products. Accomplishing these goals will make the Company better prepared to deal with the challenges it will continue to face in 2004 and beyond. I remain confident that the long-term benefits of the aforementioned activities will eventually begin to reward us in our various markets.

On behalf of the entire DSGI management team I thank all shareholders for the continued support of our efforts to improve financial performance.

Brandon Wang

Chairman

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OPERATIONS

DSG International Limited and its subsidiaries, first established in Hong Kong in 1973, is one of the world leading companies specialized in manufacturing disposable baby diapers, training pants and adult incontinence products. The Company now operates nine manufacturing facilities in North America, Asia and Europe with extensive distribution activities around the world.

The principal raw materials for the Company’s disposable products are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene back-sheets, cloth-like breathable back-sheets, polypropylene non-woven liners, adhesive closure tapes, mechanical closure tapes, hot melt adhesive, elastic, aloe vera and tissue.

There are different marketing and distribution strategies for each geographic segment of the Company, however, the Company’s fundamental strategies are:

• producing high quality and value-added products for consumers.

• providing healthy profit margins to distributors and retailers.

• low cost manufacturer with continuous improvement.

• responding intelligently to change in the marketplace.

NORTH AMERICA

During the year, the Company continued its effort to strengthen the North American operations. All the programs, systems and other measures put in place to improve productivity, efficiency, product quality, customer service and operational effectiveness have shown positive results. However, the improvement was negated by the impact of unutilized manufacturing capacity caused by the continued decline of the disposable diaper category and strategic decisions made by the Company to focus its energy on private label opportunities and away from the declining proprietary brand opportunities. The Company has taken steps to reduce this over capacity and focus on improved productivity per person. The Company should see positive improvement in 2004.

Net sales for the year 2003 were $152.5 million compared with $161.5 million in 2002. The decrease in 2003 sales was attributable to the Company’s decision to exit lower margin business in the proprietary branded baby products sector and the continued decline in overall category dollar sales driven by the intense retail price war and reduced price spreads between the private label and the national brands. Operating income decreased by $1.1 million in year 2003 versus 2002. An overall reduction in net sales for private label and proprietary brands attributed to the Company carrying excess manufacturing capacity. In addition, the Company invested significantly in product materials and formulation to continue to keep pace with changes in the marketplace and to exceed consumers wants for more supreme like features.

The Company continued to expand its private label diaper and training pant business, while maintaining several key customers and markets on their branded business. Their FITTI® brand remains very strong in the leading U.S. retail markets of New York and New Jersey. On the private label side, the Company continued to strengthen its existing private label partnerships with major retailers like Wal-Mart USA, Wal-Mart Canada, Kroger, Walgreens, A&P, Meijer and Aldi. The Company has expanded its base of private label products by adding new distribution points with Wal-Mart USA. The Company continued to add new products in the area of disposable baby products. Included were new diapers with a wide “stretch-ear” fastening system and a Dry-Lock^™ dryness layer and the first training pant with the unique

- 6 -

“back tag” feature. A cloth-like breathable back-sheet, a consumer preferred feature was added as a standard feature on all baby products. Significant changes in materials and product formulation were made to provide faster absorbing and dryer-to-the-touch products. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories.

In the adult incontinence area, the Company continued to pursue the strategy of providing key retailers, institutions and consumers with product technology that is superior to what other manufacturers currently offer. The first jumbo pack “value” tier fitted briefs introduced by the Company in 2001 for the private label retailers has been well embraced by the consumers. As the result of this success, the Company is focusing its efforts to bring new programs to more retailers and their primary institutional provider.

In line with the Company’s global fundamental marketing strategies, the Company’s North American operations provide its customers high quality products and superior service with satisfactory profit margin.

The Company’s principal brand names in North America are DRYPERS® and FITTI® for disposable baby diapers and training pants.

ASIA

2003 was a challenging year for the Company in Asia. Due to a fierce competitive environment and the outbreak of Severe Acute Respiratory Syndrome (“SARS”), net sales in 2003 increased marginally by $0.2 million to $62.4 million. Due to the economic downturn and a drop in birth rate in Hong Kong and Singapore, the sales in these markets were negatively impacted and declined. However, the Company still recorded double digit sales growth in the People’s Republic of China (“PRC”) market due to the strong economic growth in spite of the intense competition. In 2003, sales in Thailand experienced a double-digit growth but were offset by a shortfall in the Malaysian and Indonesian markets due to intense competition. The Company increased its efforts in 2003 to build brand value in Asian markets with specifically targeted marketing and sales programs in the face of continue aggressive price discounting of competitive brands.

In the Asian market the Company provides consumers with a different range of products with price differentiation to maintain its competitiveness against other local brands. The Company also has flexibility in tailoring packaging, brand and product features to coincide with advertising and promotional activities. This feasibility helps to cope with different demands in various markets in the region. Although competition and pricing pressure has become more intense in the region, the Company believes that there is great potential for sales growth due to projected population growth figures and anticipated favorable currency rates. As a pioneer in the region, the Company has an advantage in entering and expanding in these markets by encouraging disposable diaper usage and establishing its brands at an early stage through strategic advertising and promotional activities.

The Company’s major brands for disposable baby diapers in Asia are FITTI®, PET PET®, COSIFITS®, FITTI® Basic, BABY LOVE® and BABYJOY®. Besides, the Company manufactures private label disposable baby diapers for some reputable retailers. The Company also produces and distributes adult incontinence products in Asia under the brand names DISPO 123^™, HANDY^™ and CERTAINTY®.

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EUROPE

The Company’s net sales in Europe were $3.5 million in 2003 compared to $4.1 million in 2002. The Company has scaled back its operations in Europe, but continues to market branded and private label disposable baby diapers. Operating loss for the year 2003 was $0.9 million which approximated the 2002 operating loss.

The Company’s brands in Europe for baby diapers are FITTI®, COSIFITS® and CARES®. The Company believes that the presence of its branded and private label disposable baby diapers in the United Kingdom can be maintained, but continues to evaluate its market strategy in this region. The Company acknowledges that based on the current size of its operations it will be difficult to penetrate the market share of Procter & Gamble and Kimberly-Clark.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with the selected consolidated financial data and the consolidated financial statements and related notes which appear elsewhere in this Annual Report.

General

The Company’s revenues are primarily derived from the manufacture and sale of disposable baby diapers, training pants and adult incontinence products in North America, Asia and Europe, both under its own brands and private label brands of major retailers.

The Company is not taxed in the British Virgin Islands where it is incorporated. The Company’s subsidiaries are subject to taxation in the jurisdictions in which they operate.

The consolidated financial statements of the Company are prepared in U.S. dollars, and the majority of its revenues are received and expenses are disbursed in U.S. dollars. Because certain of the Company’s subsidiaries account for their transactions in currencies other than U.S. dollars, the consolidated balance sheets contain foreign currency translation adjustments and the consolidated statements of operations contain realized exchange gains and losses due to exchange rate fluctuations.

The Company sold its Australian operations in December 2002. Consequently, the results of the Company’s Australian subsidiaries are presented as discontinued operations. References to the Company refer to its continuing operations, with the exception of the discussions regarding discontinued operations below.

Industry Trends

The Company believes that the most significant industry trends are:

• fluff wood pulp costs and other raw material costs had edged up in 2003. It is anticipated that these raw material costs will continue to increase in 2004. The margin may be adversely affected if selling prices are not adjusted or if such adjustments significantly trails the cost increases;

• increasing demand for cloth-like breathable back-sheet, elasticated ear patch with mechanical closure system, and thin absorbent core products, which the Company is meeting through machine modifications and product development effort;

• the domination of industry leaders in most of the markets putting pressure on retailers’ margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins in the current highly competitive market conditions.

The Company is unable to predict whether the industry trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

Forward-looking Statements

Certain written and oral statements made by the Company and its management may be considered “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this Annual Report on Form 20-F, public releases of information and other filings with the Securities and Exchange Commission. Generally, words such as “anticipate”, “estimate”, “will”, “project”, “expect”, “believe” and similar expressions identify forward-looking statements. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience or our present expectations. Therefore, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Risk Factors

Among the factors that have a direct effect on the results of operations and financial condition of the Company are the following:

1. Raw Material Cost

The Company has seen a significant price increase, in the range of 5% to 7%, among the major raw materials in 2003. It is anticipated that these raw material costs will continue to increase in 2004, particularly the woodpulp, super absorbent polymer and polypropylene, at the same pace as 2003. The operating results in all of our segments were affected adversely by this factor. Most raw materials used by the Company are commodities which are subject to price volatility caused by many unpredictable factors. In addition to, maintaining multiple sourcing, the Company has entered into various short-term supplying contracts to effectively manage the volatility on inventory supply and the pricing. While the Company continues to implement programs to drive the cost out, it is difficult to predict that these measures are adequate to offset the raw material increases in the future.

2. Branded Product Innovation

Patents and other intellectual property rights are an important competitive factor in the disposable diaper industry, mostly because of the industry emphasis on product innovations. Patents held by main competitors could severely limit the Company’s ability to keep up with branded product innovations, by prohibiting the Company from marketing product with comparable features.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

3. Pricing and Volumes

The market position of the Company’s main global competitors, The Procter & Gamble Company (“P&G”) and Kimberly Clark Corporation (“KC”), relative to the Company, varies from one geographic area to another; but due to their substantial financial, technical, marketing, manufacturing, logistics and personnel resources, both of these major competitors have the ability to exert significant influence in price and volume, and gain substantial market share in any of their markets. The Company has to respond to various marketing initiatives from its competitors. Initiatives such as frequent changes of piece count in the packages, have forced the Company to shorten the packaging life cycle in both its branded and private label business. The frequencies of pricing promotions along with product upgrades have increased particularly in the Company’s Asian markets. All of these activities have resulted in higher costs to the Company that impacted both its selling price and sales volumes in its markets. These market conditions may continue to have an adverse effect on the Company’s ability to realize the targeted selling price and maintain desired sales volumes.

4. Increased Cost

On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company’s products in the Asian Pacific and Australian region after December 31, 2000. A similar agreement with P&G was entered into in 1998 relating to the North American region that provides for payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within the North American region.

On September 12, 2003, the Company entered into another agreement with P&G to resolve any possible dispute between the parties related to a patent. This agreement grants a royalty bearing non-exclusive rights to use certain features for certain products produced by the Company’s North American region. The royalty fee is calculated based on percentage of the products sold.

The Company believes that the royalty being charged by P&G under its respective license agreements is approximately the same royalty that will be paid by its major competitors for similar patent rights. However, these royalties will continue to have an adverse impact on the Company’s future financial condition and results of operations as compared to pre-settlement.

5. Increased Financial Leverage

The Company has short and long-term debt of $36.0 million, bearing various interest rates as of December 31, 2003.

The existing level of the Company’s financial leverage as described above, could adversely affect the Company’s ability to obtain additional financing for working capital, acquisitions or other purposes and could make the Company more vulnerable to economic crisis in the different geographical markets and to competitive pressures from its main competitors.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

As a substantial portion of the Company’s available cash from operations will have to be applied to meet debt service requirements (see Notes 11 and 12), the Company’s liquidity could be affected as well as its ability to fund capital expenditures. Notwithstanding, the Company believes that its cash flow from operations and other sources of liquidity will be adequate to meet its requirements for working capital, capital expenditures, interest payment and scheduled principal payment for the foreseeable future. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There is no assurance that this additional financing could be obtained or if obtained would be on terms favorable for the Company.

6. Litigation Risk

As the Company operates in an industry in which patents are numerous and are enforced vigorously, the Company and its subsidiaries are from time to time involved in legal matters. The Company is currently not defending itself in any significant litigation matters. Although it cannot be certain, in management’s opinion, none of the legal proceedings in which the Company is currently involved, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition or results of operation.

Related Party Transactions

During 2003 Mr. Brandon Wang, the Company’s Chief Executive Officer, and a Trust controlled by him repaid the entire shareholder loan, which had an outstanding balance of $8.6 million on December 31, 2002. To repay the shareholder loan, Mr. Wang used funds from a shareholder dividend paid by the Company in March 2003, shares sold back to the Company and net proceeds from the sale of his London residence.

On March 19, 2003, 375,000 restricted shares were granted to Mr. Wang under the Company’s Equity Participation Plan. These restricted Ordinary Shares were considered bonus shares that had a six-month vesting period from the date of grant. After expiration of the vesting period on September 23, 2003, Mr. Wang sold these restricted Ordinary Shares back to the Company at the prevailing market price of $7.01 per share. Mr. Wang received payment of $5.00 per share ($1.875 million) at the time of the share repurchase. The Company has a remaining balance of $754,000 due Mr. Wang on the 375,000 restricted Ordinary Shares of $2.01 per share as of year ended December 31, 2003.

On March 20, 2003, the Board of Directors of the Company authorized the purchase of the London residence of Mr. Wang, for its fair market value of $12.3 million as determined by an independent appraiser. The net proceeds of this transaction of $5.7 million was used by Mr. Wang to repay a portion of the shareholder loan due to the Company. The Board of Directors authorized Mr. Wang and his wife’s use and lease of this London property from the Company at a market rate determined by an independent appraiser of $36,000 per month.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

During 2003, 2002 and 2001, Mr. Wang and a trust controlled by him repaid $8.6 million, $4.1 million and $3.9 million, respectively, to the Company. In 2002 and 2001, the Company advanced $1.9 million and $3.0 million, respectively, to Mr. Wang and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Mr. Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes bearing interest at a rate equal to 1.5% over LIBOR or such other rate that the Board of Directors and the borrower shall agree in writing. Interest of $81,000, $230,000 and $445,000 was charged on these advances in 2003, 2002 and 2001, respectively.

As a result of these series of transactions and the remaining payable balance of $754,000 due to shares repurchased from Mr. Wang, the Company had a balance of $1.2 million payable to Mr. Wang and a Trust controlled by him as of December 31, 2003. At December 31, 2002, the Company classified the balance owed by Mr. Wang and a Trust controlled by him of $8.6 million as a reduction from shareholders’ equity.

Results of Operations

1. Overall

On November 11, 2002, the Company entered into a definitive agreement to sell its Australian subsidiaries effective November 1, 2002 and the sale was completed on December 6, 2002. Accordingly, the operating results of the Australian subsidiaries for the ten-months ended October 31, 2002 have been segregated from the Company’s continuing operations and reported as a separate line item on the consolidated statement of operations in 2002. The Company has also recast its 2001 consolidated financial statements to present the operating results of these subsidiaries as discontinued operations.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

The following table sets forth the percentage of net sales represented by the specified components of income and expense for the years ended December 31, 2003, 2002 and 2001:

	Year Ended December 31,
	2003		2002		2001
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	75.2		74.8		78.3
Gross profit	24.8		25.2		21.7
Selling, general and administrative expenses	(27.4	)	(23.5	)	(25.7	)
Restructuring costs and impairment loss	—		(0.6	)	(2.8	)
Gain (loss) on disposals of property, plant and equipment	(0.1	)	0.1		(0.1	)
Settlement of legal cases	—		—		(2.0	)
Loss on disposal of subsidiaries	—		—		(0.3	)
Operating income (loss)	(2.7	)	1.2		(9.2	)
Interest expense	(0.7	)	(0.9	)	(2.0	)
Interest income	0.1		0.1		0.3
Exchange gain (loss)	0.2		0.2		(1.2	)
Other income (expense), net	0.1		—		(0.2	)
Income (loss) from continuing operations before income taxes and minority interests	(3.0	)	0.6		(12.3	)
Provision for income taxes	(0.5	)	(0.2	)	(0.5	)
Minority interest	(0.5	)	(0.5	)	(0.2	)
Loss from continuing operations	(4.0	)	(0.1	)	(13.0	)
Discontinued operations
Income from discontinued operations before income taxes (including gain on disposal of 6.8% in 2002)	—		8.3		0.9
Provision for income taxes (including tax on gain on disposal of 0.3% in 2002)	—		(0.6	)	—
Income from discontinued operations	—		7.7		0.9
Net income (loss)	(4.0	)%	7.6	%	(12.1	)%

2. Comparison of 2003, 2002 and 2001

Net sales of the Company in 2003 from the continuing operations were $218.4 million which was 4.1% lower than last year. The majority of the decline was in the Company’s North American business due to the decrease in branded label business that declined at a faster pace than the increase in private label business. The sales in Greater China (the PRC and Hong Kong) had a moderate growth of 12% in 2003. The sales growth in South East Asian markets was flat. Sales in the Thailand market showed remarkable growth but this was offset by sales declines of 9% due to intense pricing competition in the Malaysian and Indonesian markets. The volume continued to decrease by 10% in European markets in 2003.

- 14 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

The Company’s gross profit margin in 2003 from the continuing operations declined by 0.4% to 24.8% from 25.2% in 2002. The decline is attributable to the combination of lower sales volume and an unfavorable sales mix to lower margin products, especially in the North American business. Selling, general and administrative expenses as a percentage of net sales from continuing operations increased by 3.9% from 23.5% to 27.4% in 2003. This increase was mainly due to additional charges to the Company’s stock-based compensation expense of $3.9 million, transaction costs incurred on the purchase of the London property of $496,000 and a television advertising campaign of $1.5 million in the PRC.

The Company incurred an impairment loss of $78,000 on long-lived assets related to assets-held-for-sale in the North American operations in 2003 (see Notes 3 and 9 to the Company’s consolidated financial statements). Debt levels increased from $24.3 million as of year ended December 31, 2002 to $36.0 million as of year ended December 31, 2003. However, the interest expense decreased to $1.5 million in 2003 from $2.0 million in 2002 due to lower borrowing rates and the fact that debt levels were increased in the fourth quarter of 2003.

The Company’s net sales from the continuing operations in 2002 were $227.8 million which was equivalent with the corresponding period in 2001. The sales growth in North American and South East Asian markets were predominantly offset by the shortfall in the Company’s Greater China (the PRC and Hong Kong) markets and to a lesser extent by volume decreases in the European market due to the divestiture in 2001. The markets in both PRC and Malaysia were softened due to shifts in demand for product created by significant competitive pricing pressure from brand market leaders.

The Company’s gross profit margin from the continuing operations improved by 3.5% from 21.7% in 2001 to 25.2% in 2002. The improvement was primarily due to the elimination of excess production capacity and manufacturing overhead in the North American operations that resulted from the 2001 Drypers acquisition and improved manufacturing efficiencies in the South East Asian operations. Selling, general and administrative expenses as a percentage of net sales from the continuing operations reduced to 23.5% in 2002 compared with 25.7% in 2001 due to cost reduction efforts associated with completing the integration of the Drypers business into the Company’s North American operations. The Company recorded a $1.4 million impairment loss on long-lived assets related to the U.K. operations, Drypers trademarks and assets held-for-sale in the North American operations. The Company’s interest expense from the continuing operations in 2002 reduced significantly to $2.0 million from $4.4 million in 2001 due to reduced debt levels associated with the Drypers acquisition.

Net income from discontinued operations in 2002 was $17.6 million compared with $2.0 million in 2001. The Company realized a $14.8 million gain on the disposal of its Australian subsidiaries, which is equivalent to 6.8% of net sales. Including discontinued operations, the net income in the year 2002 was $17.2 million compared with a net loss of $27.6 million in 2001.

- 15 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

Discontinued Operations

The operating results from the discontinued operations of the Company’s Australian subsidiaries for the ten months period ended October 31, 2002 and the year ended December 31, 2001 were as follows:

	For the period January 1 to October 31, 2002			December 31 2001
	(Dollars in thousands)
Net sales	$	38,445		$	39,342
Cost of sales		(28,170	)		(30,296	)
Gross profit		10,275			9,046
Selling, general and administrative expenses		(6,467	)		(6,754	)
(Loss) gain on disposals of property, plant and equipment		(3	)		6
Operating income		3,805			2,298
Interest expense		(305	)		(254	)
Interest income		12			34
Exchange gain		8			5
Gain on disposal		15,525			—
Other expense, net		(68	)		(90	)
Income before income taxes		18,977			1,993
Provision for income taxes (including tax on gain on disposal of $692 in 2002)		(1,377	)		(27	)
Net income from discontinued operations	$	17,600		$	1,966

The net sales of the Company’s discontinued operations in Australia in 2002 were $38.4 million which reflect operating results for the 10 months ended October 31, 2002. Gross profit margin in 2002 was 26.7% compared with 23.0% in 2001. Selling, general and administrative expenses as a percentage of net sales was 16.8% in 2002 compared with 17.2% in 2001. As a result, operating income as a percentage of net sales in 2002 was 9.9% compared with 5.8% in 2001.

Geographic Segment Information

As the results of the Company’s operations differ significantly from one market to another, the following discussion considers the Company’s results in each of the geographic regions in which it operates. The tables below set forth the Company’s net sales and operating income in each geographic region in 2003, 2002 and 2001, and the percentage change over the preceding period:

- 16 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

1. North America

	Year Ended December 31,							Increase/(Decrease)
	2003		2002		2001			2003		2002		2001
	(Dollars in thousands)
Net sales	$	152,534	$	161,528	$	158,568		(5.6	)%	1.9	%	84.9	%
Operating income (loss)		3,239		4,290		(8,849	)	(24.5	)	—		—

The Company’s net sales were $152.5 million in 2003 compared with $161.5 million in 2002. Gross profit margin was 20.6% in 2003 compared with 22.5% in 2002. This decline is attributed to excess manufacturing capacity and the Company’s investment in the enhancement of product features and performance to meet competitive offerings in the marketplace. Selling, general and administrative expenses as a percentage of net sales in 2003 decreased to 19.0% from 19.9% a year ago. This decrease was attributable to the decrease in net sales as overall expenses fell year on year. Operating income for the year 2003 decreased by $1.1 million from the previous year to operating income of $3.2 million.

The Company’s net sales were $161.5 million in 2002 compared with $158.6 million in 2001. Gross profit margin was 22.5% in 2002 compared with 19.1% in 2001. In 2002, the Company aligned its manufacturing capacity with its net sales and focused on improvement to its manufacturing processes. This contributed to increased gross margin from the prior year. General and administrative expenses as a percentage of net sales in 2002 decreased to 19.9% from 24.1% a year ago. This decrease was attributable to the reduction of certain costs associated with completing the integration of the Drypers business into the Company’s North American operations, the reduction in bad debt expense related to a write off of $800,000 related to Ames Department Stores in 2001 and the overall reduction in administrative expenses in 2002. Operating income for the year 2002 increased by $18.6 million from the previous year’s loss to an operating profit of $4.3 million.

2. Asia

	Year Ended December 31,						Increase/(Decrease)
	2003		2002		2001		2003		2002		2001
	(Dollars in thousands)
Net sales	$	62,351	$	62,138	$	62,976	0.3	%	(1.3	)%	13.4	%
Operating income		2,317		4,543		5,119	(49.0	)	(11.3	)	11.1

The Company’s net sales in Asia increased marginally by 0.3% to $62.4 million in 2003. The lower baby birth rates and outbreak of SARS in Asia adversely impacted the sales in Hong Kong and Singapore. However, the sales in the PRC and Thailand recorded double-digit growth in 2003. The Company’s sales in the Malaysian market were negatively affected by intense price competition. However, the Company improved the gross profit margin in Malaysian operation by 1.9% in 2003 to 34.5% as a result of improved production efficiencies. On the other hand, selling, general and administrative expenses as a percentage of net sales increased to 30.8% in 2003 from 25.3% last year mainly due to increased advertising expenses of $2.0 million to build brand awareness in the PRC market. As a result, the operating income decreased by 49.0% to $2.3 million in 2003 from $4.5 million last year.

- 17 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

The Company’s net sales in Asia decreased by 1.3% to $62.1 million in 2002 compared to $63.0 million in 2001. The sales momentum continued in the Thailand and Indonesian markets but was offset by the shortfall in the Greater China and Malaysian markets due to the intense competition. The Company’s gross profit margin in 2002 was 32.6%, an improvement of 4.0% over prior year. The improvement was due to the completed localization of production facilities in the region in 2002. Selling, general and administrative expenses as a percentage of net sales in 2002 was 25.3% compared to 20.5% in 2001 due to the higher level of advertising programs spending in the PRC and Malaysian markets. Operating income for the year 2002 was $4.5 million, a drop of 11.3% compared to prior year.

3. Europe

	Year Ended December 31,									Increase/(Decrease)
	2003			2002			2001			2003		2002		2001
	(Dollars in thousands)
Net sales	$	3,525		$	4,131		$	6,225		(14.7	)%	(33.6	)%	(62.3	)%
Operating loss		(929	)		(876	)		(2,033	)	6.1		(35.6	)	(14.3	)

The Company’s net sales in Europe were $3.5 million in 2003 compared to $4.1 million in 2002. The Company has scaled back its operations in Europe, but continues to market branded and private label disposable baby diapers in the United Kingdom. The Company’s operating loss for the year 2003 was $0.9 million which increased 6.1% compared with last year.

The Company’s net sales in Europe were $4.1 million in 2002 compared to $6.2 million in 2001. The Company has scaled back its operations in Europe, but continues to market branded and private label disposable baby diapers in the United Kingdom. Operating loss for the year 2002 was $0.9 million compared with an operating loss of $2.0 million in 2001.

4. Corporate

	Year Ended December 31,									Increase/(Decrease)
	2003			2002			2001			2003		2002		2001
	(Dollars in thousands)
Operating loss	$	(10,453	)	$	(5,341	)	$	(5,244	)	95.7	%	1.8	%	5.2	%

The Company’s operating loss in corporate expense was $10.5 million in 2003 compared to $5.3 million in 2002. The increase was primarily due to a stock based compensation charge of $3.9 million in 2003 for the executive directors and officers and transaction costs of $0.5 million incurred for the purchase of the London residence property.

The Company’s operating loss in corporate expense was $5.3 million in 2002 compared to $5.2 million in 2001. The increase was primarily due to an impairment loss of $160,000 provided for the Company’s U.K. operation at the corporate level after impairment assessment.

- 18 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

5. Shanghai, PRC joint venture

	Year Ended December 31, 2003
	(Dollars in thousands)
Operating loss	$	(236	)

In April 2003, the Company entered into a joint venture agreement with Mitsubishi Corporation and Japan Absorbent Technology Institute of Japan to establish a manufacturing facility in Shanghai, PRC. The joint venture will engage in manufacturing disposable hygiene related products. The Japanese joint venture partners will provide the proprietary patents, related technology and certain raw materials. The invested capital of the investment is $5.0 million and the Company owns a 75% interest in the joint venture company.

The Company is accounting for the operation of the joint venture on a consolidated basis of accounting.

In 2003, the Company’s joint venture in Shanghai, PRC had a loss of $236,000 related to expenditures for office rental, personnel and traveling expenses during the initial set up stage of operations.

Liquidity and Capital Resources

The Company has cash and cash equivalent of $20.3 million at the year ended 2003, a decrease of $11.2 million from $31.5 million in 2002. The cash and cash equivalents were held by individual operations of the Company in their local currencies and were from time to time invested in interest bearing deposit accounts. The Company did not use any financial instruments for hedging.

Net cash provided by operating activities from continuing operations in 2003 was $2.0 million, including non-cash items of depreciation and amortization charge, provision for doubtful debts and stock-based compensation of $8.0 million, $1.2 million and $3.9 million, respectively. The decrease in cash flows was derived from a net increase in working capital components of $2.7 million from continuing operations in 2003 primarily due to a decrease in accounts payable and income tax payable of $7.5 million and $1.1 million, respectively, during 2003 and had offset by a reduction of inventories by $3.0 million and increase in accrued expenses of $1.0 million as of December 31, 2003.

- 19 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

Net cash used in investing activities from continuing operations in 2003 was $19.7 million. The Company invested $24.3 million in capital expenditures for the purchase of land in Thailand and Shanghai, PRC totaled $0.7 million, the purchase of the London property for $12.3 million, building construction-in-progress in Thailand of $0.5 million, and $5.8 million was used for the additions and modifications to machinery and equipment in the Company’s various continuing operations. In April 2003, the Company entered into a joint venture agreement with Mitsubishi Corporation and Japan Absorbent Technology Institute of Japan to establish a manufacturing facility in Shanghai, PRC. The joint venture will engage in manufacturing disposable hygiene related products. The Japanese joint venture partners will provide the proprietary patents, related technology and certain raw materials. The paid up capital of the investment is $5.0 million and the Company owns a 75% interest in the joint venture company. In 2003, the Company acquired a land use right in Waigoaqiao, Shanghai for $1.2 million and commenced construction of the manufacturing equipment with down payments of $3.8 million. The Company commenced the building construction in 2004. The total capital commitment for the construction of the machine equipment and building is $11.7 million as of December 31, 2003. In August 2001, the Company signed a license agreement to purchase a license use right for $2.5 million from the Japanese joint venture partners for the right to manufacture and use technology know-how and distribute and sell the products in certain territories for a 20 years period from the first payment in 2002. Royalty payments on products manufactured and sold by the joint venture are also required. As of year ended December 31, 2003, the Company has paid a total of $1.5 million deposit for the license rights and recorded this amount as other assets in the consolidated balance sheet. The remainder of $1.0 million will be paid in 2004 and 2005. Amortization of the license use right is based on the remaining life span of 20 years commencing from the date of the first royalty payment. In addition, the Japanese joint venture partners invested $1.3 million as a capital contribution in the joint venture company in 2003. The Company received full payment of shareholder loan of $8.6 million from Mr. Wang, the Chief Executive Officer of the Company, during 2003. The Company also paid a dividend of $5.7 million in 2003.

The Company utilized $15.6 million in short-term bank credit lines out of total available credit facilities of $32.3 million from continuing operations as of December 31, 2003. Short-term bank borrowings increased by $4.9 million in 2003 versus a decrease of $11.8 million during 2002. In addition, the Company increased long-term debts by $12.4 million but repaid $5.8 million during 2003. The weighted average interest rate on borrowings at the year ended 2003 was 5.45% (5.97% in 2002). The Company repurchased 905,800 Ordinary Shares for a total consideration of $5.3 million during 2003 of which 375,000 Ordinary Shares for consideration of $2.6 million were from Mr. Wang and the remainder were repurchased from an independent private investor. As a result of series of transaction and shares repurchase, the Company had a balance of $1.2 million payable to Mr. Wang and a trust controlled by him as of December 31, 2003.

- 20 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

Contractual Obligations and Commitments

As of the year ended December 31, 2003, the Company’s contractual obligations and commitments were summarized as follows:

	Payment due by year
	Total		2004		2005		2006		2007		2008 and thereafter
	(Dollars in thousands)
Short-term borrowings	$	15,583	$	15,583	$	—	$	—	$	—	$	—
Long-term debt		20,382		6,215		2,169		2,670		220		9,108
Operating leases		5,860		2,182		1,608		1,262		729		79
Purchase of license use right		1,000		500		500		—		—		—
Joint venture investment		11,736		11,462		274		—		—		—
Investment in PRC		1,127		—		1,127		—		—		—
Capital expenditures		2,750		2,750		—		—		—		—
Raw materials purchase obligations		10,356		10,356		—		—		—		—
Total	$	68,794	$	49,048	$	5,678	$	3,932	$	949	$	9,187

Over the last few years, the Company’s cash requirements have been primarily provided by internally generated funds and bank borrowings. In the opinion of the Company, the cash on hand of $20.3 million plus expected cash flow from operating activities is sufficient to fund its liquidity, contractual obligations and commitments needs for the next twelve months. However, the Company may require additional borrowings in order to finance expansion in Thailand and Shanghai, capital expenditure for the joint venture investment in Shanghai and additions and modifications to machinery and equipment, other investments or other business requirements.

Accounting Changes

New accounting standards adopted – The provisions of Emerging Issues Task Force (“EITF”) No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”, were adopted during 2002. The adoption of EITF No. 01-9 resulted in the reclassification of certain sales incentives previously classified as selling expenses to reductions from sales. These changes had no effect on the Company’s operating results. The amount of sales incentives included as a deduction from sales in accordance with EITF No. 01-9 was $21.5 million, $25.0 million and $26.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

In addition, as described in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

New accounting standards – In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addressed the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted this standard on January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position or results of operations.

- 21 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. A fundamental conclusion reached by FASB in this statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, this statement eliminates the definition and requirements for recognition of exit costs in EITF No. 94-3. This statement also established that fair value is the objective for initial measurement of the liability and the liability should be measured at fair value only when the liability is incurred. The Company adopted SFAS No. 146 effective January 1, 2003. The adoption of SFAS No. 146 did not have an impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 provides specific guidance identifying the characteristics of contracts that are subject to its guidance in its entirety from those only subject to the initial recognition and measurement provisions. The recognition and measurement provisions of FIN 45 were effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 effective January 1, 2003. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

The Company applied SFAS No. 123, “Accounting for Stock-Based Compensation”, to account for its stock-based compensation plans in 2003. Under this method accounting and disclosure requirements using a fair-value base method of accounting for stock-based employee compensation plans is used. Compensation expense attributable to fixed stock awards is recognized on a straight-line basis over the related vesting period.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation and Disclosure”, which amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based compensation. This statement is effective for financial statements for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company’s consolidated financial position or results of operations. In addition SFAS No. 148 amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosures in both annual and interim financial statements which are included in the notes to these consolidated financial statements.

The Company adopted the SFAS No. 148 “Accounting for Stock-Based Compensation and Disclosure” in conjunction with the grant of the restricted shares and stock options. The fair value of the restricted shares and stock options were estimated using the Black-Scholes Model. The assumptions used in the model included: fair market value of the Company shares at the date of grant of $3.72 per share, volatility rate of 90%, dividend yield of 0% for all periods, discount rates of 1.0% and 1.62% and vesting periods from six months to two years. As a result, the total stock-based compensation expense of the Plan was $4,371 and $427 for the restricted share and stock options respectively. Stock-based compensation expense of $3,733 and $168 for the restricted shares and stock options, respectively was charged in 2003 and deferred stock-based compensation of $638 for restricted shares was outstanding as of year ended December 31, 2003.

- 22 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

The restricted shares and stock options outstanding at December 31, 2003 have not been included in the computation of diluted earnings per share because to do so would be anti-dilutive for the year ended December 31, 2003.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”, which interprets Accounting Research Bulletin 51, “Consolidated Financial Statements”, and requires consolidation of certain entities in which the primary beneficiary has a controlling financial interest despite not having voting control of such entities. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment to Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of SFAS No. 149 did not have a material impact on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement establishes standards for how an issuer classifies and measures certain financial instruments. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement requires that certain financial instruments that, under previous guidance, could be accounted for as equity classified as liabilities, or assets in some circumstances. This statement does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The statement also requires disclosures about alternative ways of settling the instruments and the capital structure of entities whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial statements.

Significant Accounting Policies

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to bad and doubtful debts, inventories, income taxes, impairment of assets, 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 significant accounting policies encompass the more substantial judgments and estimates used in the preparation of the Company’s consolidated financial statements.

- 23 -

OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)

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 – Effective from January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, issued by FASB. In accordance with the guidelines of this accounting standard, goodwill and indefinite-lived intangible assets are no longer amortized, and instead, are assessed for impairment on at least an annual basis. Purchased intangible assets other than goodwill and indefinite-lived intangible assets are amortized over their estimated useful lives, and reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. As a result, declines in fair value of long-term assets would result in impairment charges which would impact future operating results.

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 be reasonably 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.

- 24 -

SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands except per share amounts)

	Year Ended December 31,
Statement of Operations Data	2003			2002			2001			2000			1999
Net sales(1)	$	218,410		$	227,797		$	227,769		$	157,613		$	152,355
Cost of sales		164,310			(170,422	)		(178,413	)		(117,711	)		(112,259	)
Gross profit		54,100			57,375			49,356			39,902			40,096
Selling, general and administrative expenses(2)		(59,815	)		(53,613	)		(58,561	)		(37,569	)		(38,405	)
Restructuring costs and impairment loss		(78	)		(1,390	)		(6,356	)		—			—
Gain (loss) on disposals of property, plant and equipment		(269	)		244			(199	)		223			921
Settlement of legal cases		—			—			(4,575	)		—			—
Gain (loss) on disposal of subsidiaries		—			—			(672	)		214			—
Operating income (loss)		(6,062	)		2,616			(21,007	)		2,770			2,612
Interest expense		(1,514	)		(1,966	)		(4,398	)		(1,471	)		(2,083	)
Interest income		319			328			677			816			751
Exchange gain (loss)		536			506			(2,801	)		(1,329	)		(1,068	)
Other income (expense)		44			(68	)		(459	)		45			562
Income (loss) from continuing operations before income taxes and minority interest		(6,677	)		1,416			(27,988	)		831			774
Provision for income taxes		(1,016	)		(502	)		(1,117	)		(1,255	)		(191	)
Minority interest		(987	)		(1,269	)		(424	)		(141	)		(122	)
(Loss) income from continuing operations		(8,680	)		(355	)		(29,529	)		(565	)		461
Discontinued operations
Income from discontinued operations before income taxes (including gain on disposal of $15,525 in 2002)		—			18,977			1,993			3,830			4,770
Provision for income taxes (including tax on gain on disposal of $692 in 2002)		—			(1,377	)		(27	)		(302	)		(796	)
Income from discontinued operations		—			17,600			1,966			3,528			3,974
Net income (loss)	$	(8,680	)	$	17,245		$	(27,563	)	$	2,963		$	4,435
Income (loss) per share :
Continuing operations
Basic	$	(1.16	)	$	(0.05	)	$	(4.39	)	$	(0.08	)	$	0.07
Diluted(3)		(1.16	)		(0.05	)		(4.39	)		(0.08	)		0.07
Discontinued operations		—			2.52			0.29			0.52			0.59
Net income (loss) per share	$	(1.16	)	$	2.47		$	(4.10	)	$	0.44		$	0.66
Weighted average number of shares outstanding
Basic		7,514			6,989			6,721			6,675			6,675
Diluted		7,652			6,989			6,721			6,675			6,675

- 25 -

SELECTED CONSOLIDATED FINANCIAL DATA - (Continued)

(in thousands)

The Company declared dividend of $0.70 per share during 2003.

⁽¹⁾ The amount of sales incentives included as a deduction from sales in accordance with EITF No. 01-9, “Accounting for Consideration Given by a Vendor or a Customer (Including a Reseller of the Vendor’s Products)”, was $21,470, $24,961, $26,686, $12,295 and $10,811 for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 respectively.

⁽²⁾ Selling, general and administrative expenses for the year ended December 31, 2003 includes a charge of $3,901 related to stock based compensation expense.

⁽³⁾ The restricted shares and stock options outstanding at December 31, 2003 have not been included in the computation of diluted earnings per share because to do so would be anti-dilutive for the year ended December 31, 2003.

	December 31,
Balance Sheet Data	2003		2002		2001		2000		1999
Working capital	$	13,171	$	27,956	$	3,144	$	32,423	$	36,000
Total assets		132,728		129,867		138,648		111,409		120,945
Long-term debt		14,167		9,197		13,218		5,577		11,894
Shareholders’ equity		53,120		59,032		38,981		63,447		70,302

- 26 -

MANAGEMENT REPORT

To the Shareholders of DSG International Limited

The financial statements of the Company published in this report were prepared by the Company’s management, which is responsible for their integrity and objectivity. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required. The financial information elsewhere in this Annual Report is consistent with that in the financial statements.

The Company maintains a system of internal accounting controls and procedures adequate to provide reasonable assurance at an appropriate cost/benefit relationship that its transactions are properly recorded and reported, its assets are protected and its established policies are followed. This system is maintained by the establishment and communication of policies and a qualified financial staff.

Our independent registered public accounting firm, Deloitte & Touche LLP, are appointed by the Audit Committee of the Board of Directors and ratified by our Company’s shareholders. Deloitte & Touche LLP conducts its audit of the Company’s consolidated financial statements in conformity with standards of the Public Company Accounting Oversight Board (United States). The report of the independent registered public accounting firm, based upon their audit of the consolidated financial statements of DSG International Limited is contained in this Annual Report.

The Audit Committee of the Board of Directors, comprised solely of independent outside directors, meets with the independent registered public accounting firm and representatives from management to evaluate the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting.

/s/ Peter Chang

Peter Chang

Chief Financial Officer

June 25, 2004

- 27 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and shareholders of DSG International Limited

We have audited the accompanying consolidated balance sheets of DSG International Limited and its subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 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 the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of their operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the accompanying consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

Deloitte & Touche LLP

Atlanta, Georgia

June 25, 2004

- 28 -

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,
	2003		2002
ASSETS
Current assets:
Cash and cash equivalents	$	20,282	$	31,505
Accounts receivable, less allowance for doubtful accounts of $2,774 in 2003 and $1,956 in 2002		28,970		28,982
Other receivables		1,596		1,820
Inventories		20,111		22,835
Prepaid expenses and other current assets		1,684		1,659
Income taxes receivable		260		181
Deferred income taxes		703		—
Total current assets		73,606		86,982
Property, plant and equipment – at cost:
Land		10,994		2,648
Buildings		20,722		7,669
Machinery and equipment		68,200		64,268
Furniture and fixtures		2,310		2,503
Motor vehicles		1,648		1,480
Leasehold improvements		2,644		1,208
Construction in progress		4,303		—
Total		110,821		79,776
Less: accumulated depreciation and amortization		58,038		50,510
Net property, plant and equipment		52,783		29,266
Related party loan receivable (Note 8)		248		373
Deferred income taxes		596		1,141
Other assets		2,279		8,440
Intangible assets		3,216		3,665
Total long-term assets		59,122		42,885
Total assets	$	132,728	$	129,867

- 29 -

CONSOLIDATED BALANCE SHEETS - (Continued)

(in thousands except shares and per share amounts)

	December 31,
	2003			2002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	15,583		$	10,597
Current portion of long-term debt		6,215			4,515
Accounts payable		19,941			27,035
Accrued advertising and promotion		7,635			4,956
Accrued payroll and employee benefits		2,583			3,271
Other accrued expenses		6,453			6,959
Income taxes payable		810			1,691
Deferred income taxes		—			2
Due to a shareholder (Note 13)		1,215			—
Total current liabilities		60,435			59,026
Long-term debt		14,167			9,197
Other non-current liability		303			—
Minority interest		4,703			2,612
Total liabilities		19,173			11,809
Commitments and contingencies (Note 15)
Shareholders’ equity:
Ordinary shares, $0.01 par value – authorized 20,000,000 shares; issued and outstanding 7,258,316 and 6,989,116 shares in 2003 and 2002 respectively		73			70
Additional paid-in capital		18,927			19,673
Retained earnings		40,951			55,346
Unearned stock-based compensation		(638	)		—
Accumulated other comprehensive loss		(6,193	)		(7,506	)
Less: Receivable from a shareholder (Note 13)		—			(8,551	)
Total shareholders’ equity		53,120			59,032
Total liabilities and shareholders’ equity	$	132,728		$	129,867

See accompanying notes to consolidated financial statements.

- 30 -

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

	Year Ended December 31,
	2003			2002			2001
Net sales	$	218,410		$	227,797		$	227,769
Cost of sales		164,310			(170,422	)		(178,413	)
Gross profit		54,100			57,375			49,356
Selling, general and administrative expenses		(59,815	)		(53,613	)		(58,561	)
Restructuring costs and impairment loss		(78	)		(1,390	)		(6,356	)
Gain (loss) on disposals of property, plant and equipment		(269	)		244			(199	)
Settlement of legal cases		—			—			(4,575	)
Loss on disposal of subsidiaries		—			—			(672	)
Operating income (loss)		(6,062	)		2,616			(21,007	)
Interest expense		(1,514	)		(1,966	)		(4,398	)
Interest income		319			328			677
Exchange gain (loss)		536			506			(2,801	)
Other income (expense), net		44			(68	)		(459	)
Income (loss) from continuing operations before income taxes and minority interests		(6,677	)		1,416			(27,988	)
Provision for income taxes		(1,016	)		(502	)		(1,117	)
Minority interest, net of tax of $318, $498 and $224 in 2003, 2002 and 2001, respectively		(987	)		(1,269	)		(424	)
Loss from continuing operations		(8,680	)		(355	)		(29,529	)
Discontinued operations
Income from discontinued operations before income taxes (including gain on disposal of $15,525 in 2002)		—			18,977			1,993
Provision for income taxes (including tax on gain on disposal of $692 in 2002)		—			(1,377	)		(27	)
Income from discontinued operations		—			17,600			1,966
Net income (loss)	$	(8,680	)	$	17,245		$	(27,563	)
Income (loss) per share:
Continuing operations
Basic	$	(1.16	)	$	(0.05	)	$	(4.39	)
Diluted		(1.16	)		(0.05	)		(4.39	)
Discontinued operations		—			2.52			0.29
Net income (loss) per share	$	(1.16	)	$	2.47		$	(4.10	)
Weighted average number of shares outstanding
Basic		7,514			6,989			6,721
Diluted		7,652			6,989			6,721

See accompanying notes to consolidated financial statements.

- 31 -

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Year Ended December 31,
	2003			2002		2001
Net income (loss)	$	(8,680	)	$	17,245	$	(27,563	)
Other comprehensive income
Foreign currency translation adjustments		1,313			613		854
Comprehensive income (loss)	$	(7,367	)	$	17,858	$	(26,709	)

See accompanying notes to consolidated financial statements.

- 32 -

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2003			2002			2001
Cash flows from operating activities
Net loss from continuing operations	$	(8,680	)	$	(355	)	$	(29,529	)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization		7,920			7,596			9,070
Provision for doubtful accounts		1,183			1,454			2,802
Stock-based compensation		3,901			—			—
Impairment loss on long-lived assets		78			1,390			2,514
(Gain) loss on disposals of property, plant and equipment		269			(244	)		199
Deferred income taxes		(115	)		(462	)		29
Minority interest		987			1,269			424
Warrant interest		—			—			1,372
Accrued bonus payable		303			—			—
Other		507			470			830
Changes in working capital components from continuing operations, net of effects from sale of subsidiaries and acquisition of a business:
Accounts receivable		(441	)		986			2,271
Other receivables		387			1,481			3,013
Inventories		3,021			6,952			3,421
Prepaid expenses and other current assets		243			(19	)		(1,285	)
Accounts payable		(7,478	)		2,894			16,875
Accrued expenses		1,026			(5,634	)		7,727
Income taxes payable		(1,072	)		881			(72	)
Net cash provided by operating activities from continuing operations		2,039			18,659			19,661
Net cash provided by (used in) operating activities from discontinued operations		—			4,729			(1,030	)
Net cash provided by operating activities		2,039			23,388			18,631
Cash flows from investing activities
Expenditures for property, plant and equipment		(24,326	)		(5,569	)		(1,596	)
Proceeds from disposals of property, plant and equipment		121			870			810
Advances to a shareholder		—			(1,868	)		(3,046	)
Repayments by a shareholder		8,551			4,061			3,914
Dividend paid		(5,715	)		—			—
Capital contribution from joint venture partners		1,250			—			—
Cost of acquisition, net of cash acquired		—			—			(35,878	)
Decrease (increase) in other assets		(751	)		283			(1,381	)
Net cash used in investing activities from continuing operations		(20,870	)		(2,223	)		(37,177	)
Net cash provided by (used in) investing activities from discontinued operations		—			20,720			(942	)
Net cash provided by (used in) investing activities		(20,870	)	$	18,497		$	(38,119	)

- 33 -

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(in thousands)

	Year Ended December 31,
	2003			2002			2001
Cash flows from financing activities
(Decrease) increase in short-term borrowings	$	4,935		$	(11,846	)	$	11,397
Increase in long-term debt		12,441			—			24,613
Repayment of long-term debt		(5,773	)		(7,113	)		(21,292	)
Issue of ordinary shares		—			—			3
Repurchase of shares		(5,282	)		—			—
Due to a shareholder for share repurchases		1,215			—			—
Dividend paid to minority shareholders		(146	)		(167	)		(107	)
Net cash (used in) provided by financing activities from continuing operations		7,390			(19,126	)		14,614
Net cash (used in) provided by financing activities from discontinued operations		—			(618	)		3,961
Net cash (used in) provided by financing activities		7,390			(19,744	)		18,575
Effect of exchange rate changes on cash and cash equivalents		218			—			(50	)
Increase (decrease) in cash and cash equivalents		(11,223	)		22,141			(963	)
Cash and cash equivalents, beginning of year		31,505			9,364			10,327
Cash and cash equivalents, end of year	$	20,282		$	31,505		$	9,364
Supplemental disclosures of cash flow information
Cash paid during the year for:
Continued operations:
Interest	$	1,547		$	1,874		$	1,799
Income taxes, net of tax refund		2,469			14			1,091
Discontinued operations:
Interest		—			305			255
Income taxes		—			385			167

Non-cash transactions

Additions to property, plant and equipment which were financed by a vendor loan and new capital leases during the year ended December 31, 2002 and 2001 totaled $1,837 and $7,263, respectively.

On December 31, 2003, the Company reclassified assets held-for-sale of $5,737 to property, plant and equipment because disposal of these assets was no longer probable (see Note 9).

- 34 -

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

	Ordinary shares					Additional paid-in capital			Retained earnings			Unearned stock based Compensation (Note 17)			Accumulated other comprehensive income (loss)			Receivable from shareholder (Note 13)			Total shareholders’ equity
	Shares		Amount
Balance at December 31, 2000	6,675		$	67		$	18,301		$	65,664		$	—		$	(8,973	)	$	(11,612	)	$	63,447
Issuance of shares	314			3			1,372			—			—			—			—			1,375
Net loss	—			—			—			(27,563	)		—			—			—			(27,563	)
Foreign currency translation adjustment	—						—			—			—			854						854
Net repayment of receivable from a shareholder	—			—			—			—			—			—			868			868
Balance at December 31, 2001	6,989			70			19,673			38,101			—			(8,119	)		(10,744	)		38,981
Net income	—			—			—			17,245			—			—			—			17,245
Foreign currency translation adjustment	—			—			—						—			613			—			613
Net repayment of receivable from a shareholder	—			—			—			—			—			—			2,193			2,193
Balance at December 31, 2002	6,989			70			19,673			55,346			—			(7,506	)		(8,551	)		59,032
Net loss	—			—			—			(8,680	)		—			—			—			(8,680	)
Issuance of restricted shares	1,175			12			4,527			—			(4,539	)		—			—			—
Amortization of unearned compensation	—			—			—			—			3,901			—			—			3,901
Repurchase of shares	(906	)		(9	)		(5,273	)		—			—			—			—			(5,282	)
Dividend paid	—			—			—			(5,715	)		—			—			—			(5,715	)
Foreign currency translation adjustment	—			—			—			—			—			1,313			—			1,313
Net repayment of receivable from a shareholder	—			—			—			—			—			—			8,551			8,551
Balance at December 31, 2003	7,258		$	73		$	18,927		$	40,951		$	(638	)	$	(6,193	)	$	—		$	53,120

See accompanying notes to consolidated financial statements.

- 35 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

1. ORGANIZATION AND BASIS OF PRESENTATION

The Company is incorporated in the British Virgin Islands. It operates through subsidiary companies located in North America, Australia, Asia and Europe which manufacture and distribute disposable baby diapers, adult incontinence and training pants products.

On November 11, 2002, the Company entered into a definitive agreement to sell its Australian subsidiaries as of November 1, 2002 and the sale was completed on December 6, 2002. Accordingly, the operating results of the Australian subsidiaries have been segregated from the Company’s continuing operations and reported as a separate line item on the consolidated statement of operations in 2002. The Company has also restated its prior years’ consolidated financial statements to present the operating results of these subsidiaries as discontinued operations (see Note 5).

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”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation — The consolidated financial statements include the assets, liabilities, revenues and expenses of all subsidiaries. Inter-company balances and transactions are eliminated in consolidation.

Cash and cash equivalents — Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts, commercial paper and time certificates of deposit with a maturity of three months or less when purchased.

Inventories — Inventories are stated at the lower of cost determined by the first-in, first-out method, or value determined by the market. Finished goods inventories consist of raw materials, direct labor, and overhead associated with the manufacturing process. The Company reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. The Company estimates reserves for inventory obsolescence and shrinkage based on management’s judgment of future realization. These reviews require management to assess customer and market demand. All inventories are valued using the first-in, first-out method.

Depreciation and amortization of property, plant and equipment — Depreciation is provided on the straight line method at rates based upon the estimated useful lives of the property, generally three to ten years except for buildings which are 40 years. Costs of leasehold improvements are amortized over the life of the related asset or the term of the lease, whichever is shorter.

Revenue recognition — The Company recognizes revenue and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on management’s judgments regarding the collectibility of the Company’s accounts receivable. Generally, the Company recognizes revenue when it ships its manufactured products or when it completes a service and title and risk of loss passes to its customers. Provisions for discounts, returns, allowances, customer rebates, and other adjustments are provided for in the same period the related revenues are recorded.

- 36 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

The provisions of Emerging Issues Task Force (“EITF”) No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” were adopted during 2002. The adoption of EITF No. 01-9 resulted in the reclassification of certain sales incentives previously classified as selling expenses to reductions from sales. These changes had no effect on the Company’s operating results. The amount of sales incentives included as a deduction from sales in accordance with EITF No. 01-9 was $21,470, $24,961 and $26,686 for the years ended December 31, 2003, 2002 and 2001, respectively.

Shipping costs — Shipping costs are recorded as a component of selling, general and administrative expenses and totaled $8,275, $9,194 and $9,235 for the years ended December 31, 2003, 2002 and 2001, respectively.

Income taxes — Income taxes are provided based on an asset and liability approach for financial accounting and reporting of income taxes. Deferred income tax liabilities or benefits are recorded to reflect the tax consequences in future years of differences between tax basis of assets and liabilities and the financial reporting amounts and operating loss carryforwards. A valuation allowance is recorded if it is more likely than not that some portion of, or all of, a deferred tax asset will not be realized.

Valuation of long-lived assets — The Company evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered not recoverable when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Losses on long-lived assets to be disposed of represent the excess of the carrying value over the fair value less disposal costs.

Effective from January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. The Company disposed of its Australian subsidiaries during 2002 and the respective operations were disclosed as discontinued operations pursuant to SFAS No. 144.

Foreign currency translation — The Company uses the United States dollar as its reporting currency. Assets and liabilities of foreign 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 foreign currency financial statements are reported as a separate component of shareholders’ equity. Gains or losses from foreign currency transactions are included in net income.

- 37 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Income or loss per share — The Company computes basic and diluted earnings or loss per share in accordance with SFAS No. 128, “Earnings per Share”. Basic earnings or loss per share are based on the weighted average number of Ordinary Shares outstanding. Diluted earnings or loss per share are based on the weighted average number of Ordinary Shares outstanding plus dilutive common stock equivalents. Diluted earnings or loss per share are not presented in 2003 and 2001 as the effect of the restricted shares and stock options and warrants outstanding during the years were antidilutive. There were no common stock equivalents outstanding during 2002.

Concentration of credit risk — The Company sells to distributors and retailers located in each of the countries in which it operates. The Company grants credit to all qualified customers on an unsecured basis but does not believe it is exposed to any undue concentration of credit risk to any significant degree.

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

Intangible assets – Intangible assets consist of Drypers Trademarks, patents, and private label customer relationships. Patents and private label customer relationships are amortized five to seven years using the straight-line method. Through December 31, 2001, the Drypers Trademarks were amortized over five to ten years.

Effective from January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. In accordance with SFAS No. 142, the Drypers Trademarks (an indefinite-life intangible asset) are no longer amortized but instead performs an impairment test at least annually. The Company’s annual impairment test was performed as of December 31, 2003 and did not result in an impairment charge.

- 38 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands except shares and per share amounts)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Net loss and loss per share for 2001 would have been as follows and assuming the non-amortization provisions of SFAS No. 142 were adopted:

	2001
Loss from continuing operations	$	(29,529	)
Goodwill amortization, net of tax		108
Trademark amortization, net of tax		164
Adjusted loss from continuing operations		(29,257	)
Income from discontinued operations		1,966
Goodwill amortization, net of tax		15
Adjusted income from discontinued operations		1,981
Adjusted net loss	$	(27,276	)
Adjusted income (loss) per share:
Continuing operations	$	(4.35	)
Discontinued operations		0.29
Net loss per share	$	(4.06	)

Stock-based compensation – The Company uses SFAS No. 123, “Accounting for Stock-Based Compensation”, to account for its stock-based compensation plans in 2003. Under this method, accounting and disclosure requirements reflect a fair-value base method of accounting for stock-based employee compensation plans. Compensation expense attributable to fixed stock awards is recognized on a straight-line basis over the related vesting period.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation and Disclosure”, which amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based compensation. In addition SFAS No. 148 amended the disclosure requirements of FASB Statement No. 123 to require prominent disclosures in both annual and interim financial statements which are included in the notes to these consolidated financial statements. This statement was effective for financial statements for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did not have an impact on the Company’s consolidated financial position or results of operations.

- 39 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

The Company adopted the SFAS No. 148 “Accounting for Stock-Based Compensation and Disclosure” in conjunction with the 2003 grant of restricted shares and stock options. The fair value of the restricted shares and stock options were estimated using the Black-Scholes Model. The assumptions used in the model included: fair market value of the Company shares at the date of grant of $3.72 per share, volatility rate of 90%, dividend yield of 0% for all periods, discount rates of 1.0% and 1.62% and vesting periods from six months to two years. As a result, the total 2003 stock-based compensation expense of the Plan was $4,371 and $427 for the restricted share and stock options respectively. Stock-based compensation expense of $3,733 and $168 for the restricted shares and stock options, respectively was charged in 2003 and deferred stock-based compensation of $638 for restricted shares was outstanding as of year ended December, 31, 2003.

New accounting standards – In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addressed the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted this standard on January 1, 2003. The adoption of SFAS No. 143 did not have an impact on the Company’s financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. A fundamental conclusion reached by FASB in this statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, this statement eliminates the definition and requirements for recognition of exit costs in EITF No. 94-3. This statement also established that fair value is the objective for initial measurement of the liability and the liability should be measured at fair value only when the liability is incurred. The Company adopted SFAS No. 146 effective January 1, 2003. The adoption of SFAS No. 146 did not have an impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 provides specific guidance identifying the characteristics of contracts that are subject to its guidance in its entirety from those only subject to the initial recognition and measurement provisions. The recognition and measurement provisions of FIN 45 were effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 effective January 1, 2003. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

- 40 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”, which interprets Accounting Research Bulletin 51, “Consolidated Financial Statements”, and requires consolidation of certain entities in which the primary beneficiary has a controlling financial interest despite not having voting control of such entities. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment to Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of SFAS No. 149 did not have a material impact on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement establishes standards for how an issuer classifies and measures certain financial instruments. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement requires that certain financial instruments that, under previous guidance, could be accounted for as equity classified as liabilities, or assets in some circumstances. This statement does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The statement also requires disclosures about alternative ways of settling the instruments and the capital structure of entities whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial statements.

Use of estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant management judgment is required in determining: the credit worthiness of customers and collectibility of accounts receivable; excess, obsolete or unsaleable inventory reserves; the potential impairment of long-lived assets including intangibles; the accounting for income taxes and the liability for self-insured claims. Actual results could differ from the Company’s estimates and the differences could be significant.

Reclassifications – Certain reclassifications have been made to prior-period amounts to conform with the 2003 presentation.

- 41 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

3. RESTRUCTURING COSTS AND IMPAIRMENT LOSS

The Company performed an impairment analysis over the assets-held-for-sale in the North American operations and recorded a $78 charge in 2003 (see Note 9).

In 2002, the Company also recorded an impairment losses totaling $1,390 comprised of $160, $576 and $654 related to its U.K. operation, Drypers trademark and assets held-for-sale in the United States operation, respectively.

As a result of the Drypers acquisition, the Company consolidated its operations in the United States and recorded restructuring costs of $6,356 during 2001. The components of these costs were as follows:

Write down of assets held for sale	$	2,514
Write off of discontinued inventory		1,547
Redundancy payment costs		1,137
Office closure and other costs		1,158
Total	$	6,356

Redundancy payments, office closure and other costs were recorded and related principally to the closure of the manufacturing facility located in Duluth, Georgia; a liability totaling $2,295 was recorded by the Company during 2001 relating to these costs. The carrying values of the manufacturing plant in Duluth along with certain equipment located therein, which are held for sale, were adjusted to their estimated fair value. In addition, in conjunction with these activities, management discontinued certain product offerings resulting in the write off of inventories on hand related to these discontinued lines and all discontinued inventories were disposed during 2002.

The redundancy payments related principally to the termination of approximately 326 employees at the Duluth facility; these employees were terminated in the first quarter of 2002. Office closure and other costs accrued in 2001 were substantially incurred during 2002. Activities related to accrued restructuring costs are summarized below:

	Redundancy payment costs			Office closure and other costs			Total
Provision recorded in 2001 and accrued balance at December 31, 2001	$	1,137		$	1,158		$	2,295
Costs incurred		(1,337	)		(1,158	)		(2,495	)
Changes in estimates recorded		200			—			200
Balance at December 31, 2002	$	—		$	—		$	—

- 42 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

4. DISPOSAL OF SUBSIDIARIES

Due to the decision made in 2001 to liquidate a business in Europe, the Company recorded a loss in 2001 of $672 relating to the write off of assets and the recording of closure and liquidation costs. The operating results of this business prior to the liquidation are included within the results of continuing operations in the accompanying 2001 consolidated statements of operations and were not significant.

Discontinued Operations

On November 11, 2002, the Company entered into a definitive agreement to sell its Australian subsidiaries effective November 1, 2002 and the sale was completed on December 6, 2002. Accordingly, the operating results of the Australian subsidiaries for the ten-months ended October 31, 2002 have been segregated from the Company’s continuing operations and reported as a separate line item on the consolidated statement of operations in 2002. The sale of these subsidiaries was completed for consideration of $29,608. The sale proceeds were reduced by the repayment of bank indebtedness of $6,345 and repayment of inter-company loans in the amount of $2,919, accruals of capital gain tax of $692, and certain other items. The gain on disposal totaled $14,833 (net of $692 taxes). All the sale proceeds were received by the Company in cash in 2002.

The net sales and income before income taxes of the discontinued operations of the Company’s Australian subsidiaries for the ten-month period ended October 31, 2002 and year ended December 31, 2001 were as follows:

	For the period October 31, 2002		For the year ended December 31 2001
Net sales	$	38,445	$	39,342
Income before income taxes (excluding gain on disposal of $15,525)	$	3,452	$	1,993

The amount of sales incentives included as a reduction from sales in accordance with EITF No. 01-09 was $5,842 and $5,980 for the ten months period ended October 31, 2002 and year ended December 31, 2001.

5. PROVISION FOR INCOME TAXES

Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The Company is not taxed in the British Virgin Islands where it is incorporated.

- 43 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

5. PROVISION FOR INCOME TAXES - continued

The components of income (loss) from continuing operations before income taxes and minority interest are as follows:

	2003			2002			2001
U.S.	$	(788	)	$	(788	)	$	(21,078	)
Foreign		(5,889	)		2,204			(6,910	)
	$	(6,677	)	$	1,416		$	(27,988	)

The provision for income taxes of continuing operations consists of the following:

	2003			2002			2001
Current
U.S.	$	(614	)	$	(135	)	$	29
Foreign		1,745			2,518			1,795
Benefit of loss carryforwards		—			—			—
Benefit of loss carryback		—			(1,419	)		(736	)
Deferred taxes		(115	)		(462	)		29
	$	1,016		$	502		$	1,117

A reconciliation between the provision for income taxes of continuing operations computed by applying the United States Federal statutory tax rate to income (loss) from continuing operations before taxes and minority interest and the actual provision for income taxes is as follows:

	2003			2002			2001
Provision for income taxes at statutory rate on income (loss) from continuing operations for the year	$	(2,295	)	$	495		$	(9,796	)
Effect of different tax rates applicable to foreign earnings		149			102			(258	)
Foreign losses which are not deductible		2,445			889			3,536
Foreign profits which are not taxable		(193	)		(464	)		1,779
Change in valuation allowance		265			883			6,110
Withholding tax on interest and royalty income		548			618			484
Benefit of loss carryback		—			(1,419	)		(736	)
Cessation of business		189			—			—
Other		(92	)		(602	)		(2	)
	$	1,016		$	502		$	1,117

- 44 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

5. PROVISION FOR INCOME TAXES - continued

The Company’s subsidiary incorporated in the People’s Republic of China (the “PRC”) is entitled to a two-year exemption from state and local income taxes commencing from the first profitable year of operations, which was 1998, followed by a 50% reduction in tax rates for the next three years. The year ended December 31, 2000 was the first year for the subsidiary to be under a 50% reduction in the prevailing tax rate. Since the subsidiary has operating losses since 2000, this tax holiday did not have any effect on the Company’s net income (loss) or earnings (loss) per share in 2003, 2002 and 2001.

Certain subsidiaries have operating loss carryforwards for income tax purposes which may be applied to reduce future taxable income. The loss carryforwards are available on a country by country basis and are not available for use except in the country in which the loss occurred. At December 31, 2003 the tax loss carryforwards by country and their future expiration dates are as follows:

	Total		2004- 2005		2006		2007		2008		2010 - 2022		Indefinite
United Kingdom	$	107,909	$	—	$	—	$	—	$	—	$	—	$	107,909
U.S.A. – Federal		13,953		—		—		—		—		13,953		—
U.S.A. – State		25,260		—		—		—		—		25,260		—
PRC		3,019		—		403		1,924		692		—		—
	$	150,141	$	—	$	403	$	1,924	$	692	$	39,213	$	107,909

Included in United Kingdom operating loss carryforwards for income tax purposes is approximately $74,242 relating to tax losses at the date of acquisition of a company acquired in 1993. Utilization of these losses will result in a reduction in future tax expense and is dependent on both the earning of sufficient otherwise taxable income in the relevant countries and the satisfaction of technical requirements of applicable law. In the case of the United Kingdom, this includes the requirement that there not be a “major change” in business activities.

In addition to the amounts above, the Company has a tax loss of $3,351 in 2003 ($3,353 in 2002) which is available for carryforward to offset capital gains in the United States. The Company has recorded a valuation allowance of an equal amount given the uncertainty of realizing the benefit of such losses.

In March 2002, the United States amended its regulations allowing the losses of 2001 to be carried back five years instead of its normal two years carryback period. As a result, the Company carried back $4,483 of its losses resulting in an additional benefit of $1,419. This benefit was recorded during 2002, the period in which the change was enacted.

- 45 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

5. PROVISION FOR INCOME TAXES - continued

Deferred income tax balances at December 31 are related to:

	2003						2002
	Assets			Liabilities			Assets			Liabilities
Inventories	$	12		$	—		$	1		$	—
Accounts receivable and prepaid expenses		654			—			179			—
Property, plant and equipment		—			(438	)		—			(1,236	)
Other		134			—			759			(225	)
Capital loss carrryforwards		1,357			—			1,357			—
Tax loss carryforwards		40,591			—			41,929			—
Valuation allowances		(41,011	)		—			(41,625	)		—
Total	$	1,737		$	(438	)	$	2,600		$	(1,461	)

At December 31, 2003, cumulative undistributed earnings of subsidiaries of the Company totaled $34,857. No provision for withholding taxes has been made because it is expected that such earnings will be reinvested indefinitely. The determination of the withholding taxes that would be payable upon remittance of these earnings and the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable.

6. INVENTORIES

Inventories by major categories are summarized as follows:

	2003		2002
Raw materials	$	10,670	$	10,589
Finished goods		9,441		12,246
	$	20,111	$	22,835

- 46 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

7. CAPITAL LEASES

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

	2003			2002
At cost:
Machinery and equipment	$	4,000		$	7,390
Motor vehicles		109			145
		4,109			7,535
Less: Accumulated amortization		(1,635	)		(1,981	)
Net book value	$	2,474		$	5,554

8. RELATED PARTY LOAN RECEIVABLE

The loan receivable is due from a minority shareholder of a subsidiary and is non-interest bearing.

During 2002, a repayment plan was agreed to with the minority shareholder. Under the agreement, the non-interest bearing loan is repayable in five equal annual installments beginning in 2002. At December 31, 2003 and 2002, the current portion of the note receivable of $124 is included in other receivables.

9. OTHER ASSETS

Other assets consist of the following:

	2003		2002
Assets held-for-sale	$	486	$	6,300
Prepayment of long-term loan fee		293		535
Deposit for a license use right (see Note 15)		1,500		625
Deposit for land		—		417
Deposits for new machinery		—		563
	$	2,279	$	8,440

- 47 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

9. OTHER ASSETS - continued

Assets held-for-sale relate to the manufacturing plant in Duluth, Georgia and certain equipment located therein (see Note 3). During 2003 and 2002, the Company reassessed the carrying value of assets held-for-sale due to market conditions, which resulted in an impairment charge recorded of $78 and $654 respectively. On December 31, 2003, management believed that the building, land, and leasehold improvements with a carrying amount of $5,737 would not be disposed of during 2004. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, since the Company no longer met the criteria for classification as held-for-sale, the Company reclassified the assets to assets held for use. Depreciation expense of $388 was recorded in 2003 for the depreciation expense that would have been recognized had the asset been continuously classified as held-for-sale.

In August 2001, the Company signed a license agreement to purchase a license use right for $2.5 million from the Japanese joint venture partners for the right to manufacture and use technology know-how and distribute and sell the products in certain territories for a 20 years period from the first payment in 2002. As of year ended December 31, 2003, the Company has paid a total of $1.5 million deposit for the license rights and recorded this amount as other assets in the consolidated balance sheet. The remainder of $1,000 will be paid in 2004 and 2005. Amortization of the license use right is based on the remaining life span of 20 years commence from the date of operation of the joint venture. As of December 31, 2003, no amortization has been provided.

10. INTANGIBLE ASSETS

Intangible assets consist of the following:

	2003			2002
Drypers trademarks	$	1,328		$	1,328
Patents		1,990			1,990
Private label customer relationship	$	1,150			1,150
		4,468			4,468
Less: Accumulated amortization		(1,252	)		(803	)
Net book value	$	3,216		$	3,665

The net carrying value of the Drypers Trademarks of $1,328 at December 31, 2003 and 2002, is net of accumulated amortization of $695 existing at January 1, 2002, the date of adoption of SFAS No. 142.

As a result of the adoption of SFAS No. 142, the Company no longer amortizes the Drypers Trademarks beginning January 1, 2002. Instead, these assets are assessed for impairment at least annually at December 31. During 2003, the Company performed its annual impairment test on the Drypers Trademarks and resulted in no impairment loss in 2003. An impairment loss of $576 was recorded in 2002. The fair value of these assets encompassed in the impairment test was determined using weighted average of relief from royalty, gross profit advantage and residual income method. Amortization expense relating to intangible assets with definite lives (patents and private label customer relationship) charged to income from operations for the years ended December 31, 2003, 2002 and 2001 was $449, $498 and $744, respectively.

- 48 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

10. INTANGIBLE ASSETS - continued

Estimated amortization expense of the patents and private label customer relationship for the next five years is as follows:

2004	$	449
2005		449
2006		448
2007		448
2008		94
Total	$	1,888

11. SHORT-TERM BORROWINGS

These include borrowings in the form of trade acceptances, loans and overdrafts with various banks:

	2003			2002
Credit facilities granted	$	32,272		$	28,651
Utilized	$	15,583		$	10,597
Weighted average interest rate on borrowings at end of year		5.45	%		5.97	%

The Company maintains short-term bank credit lines in each of the countries in which it operates. Interest rates are generally based on the banks’ prime lending rates and cost of funds and the credit lines are normally subject to annual review. The amounts outstanding as of December 31, 2003 and 2002 include $6,567 and $5,820, respectively, relating to the revolving credit facility provided by the Senior Lender discussed in Note 12. The credit facilities granted and utilized, excluding the revolving credit facility provided by the Senior Lender, totaled $17,272 and $9,016, respectively, at December 31, 2003 ($4,777 and $13,651, respectively, at December 31, 2002). At December 31, 2003 and 2002, amounts available for additional borrowings, excluding those available under the revolving credit facility provided by the Senior Lender discussed in Note 12, totaled $8,256 and $8,874, respectively. The revolving credit facility provided by the Senior Lender was $15,000 as of December 31, 2003 and 2002 of which $6,567 and $5,820 was utilized at December 31, 2003 and 2002 respectively. The Company had approximately $8,433 and $9,180 available for additional borrowings under the Senior Lender revolving credit facility at December 31, 2003 and 2002 respectively. At December 31, 2003 and 2002, borrowings of $7,340 and $7,005 were collateralized by the pledge of machinery and equipment, accounts receivable and inventory of subsidiaries with a book value of $38,633 and $28,119, respectively. In addition, borrowings of $840 and $846 are collateralized by the pledge of land and buildings with a net book value of $1,447 and $2,162 as of December 31, 2003 and 2002, respectively.

- 49 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

12. LONG-TERM DEBT

Long-term debt consists of:

	2003			2002
Term loans bearing interest at U.S. Prime rate plus 3.25% per annum (7.25% and 7.0% per annum at December 31, 2003 and 2002, respectively) principal payable in monthly installments of $272.8 plus accrued interest, through September 2004, secured by substantially all the assets of the Company’s Georgia, Ohio and Washington facilities	$	2,252		$	5,538
Loan from a finance company (the “Wisconsin Loan”) at London Inter-Bank Offered Rate (“LIBOR”) plus 3.0% per annum, principal payable in monthly installments of $41.7 plus accrued interest, 4.425% and 4.425% per annum at December 31, 2003 and 2002, respectively, maturing in October 2005, secured by substantially all the assets of the Company’s Wisconsin facilities		917			1,417
Mortgage loan bearing interest at LIBOR plus 1.25% per annum (2.4375% and 2.6875% per annum at December 31, 2003 and 2002, respectively), interest payable quarterly with entire principal due in November 2006		2,080			2,080
Equipment loan bearing interest at 7.0% per annum at December 31, 2003 and 2002, principal payable biannually of $612.5 plus accrued interest, through April 2005, secured by a machine in the Company’s Malaysian facility		919			1,531
Equipment loan bearing interest at 4.0% per annum, principal payable in monthly installments of $561.5 plus accrued interest, through March 2004, secured by a machine in the Company’s Washington facility		1,684			—
Bank loan bearing interest at Hong Kong Prime rate plus 1.5% (6.5% per annum at December 31, 2003), principal payable in monthly reducing balance plus accrued interest, through May 2006, secured by the Company’s machines in Zhongshan, PRC		792			—
Mortgage loan bearing interest at 5.64% per annum, interest payable quarterly with entire principal due in December 2008		8,667			—
Equipment loan bearing interest rate at 6.5% per annum, principal payable biannually of $110.3 plus accrued interest with entire principal due in March 2005		1,127			—
Capital leases bearing interest rates ranging from 4.5% to 6.5% per annum at December 31, 2003 (4.5% to 12.0% per annum in 2002) with maturity dates ranging from June 2004 through June 2006		1,944			3,146
Total		20,382			13,712
Current portion of long-term debt		(6,215	)		(4,515	)
Long-term debt, less current portion	$	14,167		$	9,197

- 50 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

12. LONG-TERM DEBT - continued

Maturities of long-term debt as at December 31, 2003 are as follows:

	Loans		Capital Leases		Total
Year ending December 31,
2004	$	5,362	$	853	$	6,215
2005		1,301		868		2,169
2006		2,446		223		2,669
2007		221		—		221
2008		8,887		—		8,887
2009 and thereafter		221		—		221
Total	$	18,438	$	1,944	$	20,382

The capital lease commitments amounts above exclude implicit interest of $74, $33 and $2 payable in the years ending December 31, 2004, 2005 and 2006, respectively.

In March 2001, one of the Company’s U.S. subsidiaries (the “Subsidiary”) entered into an amended financing agreement with its existing financial institution (the “Senior Lender”) under which the Subsidiary received a term loan of $11,000 (the “Term Loan”), a capital expenditure line of up to $5,000, and a revolving credit facility (based on the lesser of a percentage of eligible accounts receivable and inventory or $15,000). Such financing was entered into in connection with the Subsidiary’s purchase of certain assets of the North American operations of Drypers Corporation as discussed in Note 21. The full amount of the $11,000 Term Loan was borrowed, with interest payable at the LIBOR for one portion of the loan and prime plus 2.75% per year for the other portion. These loans are divided into three separate term loan and repayable in monthly installments of principal in the amount of $183.3 plus interest and are collateralized by the Subsidiary’s assets. In addition, the Subsidiary had outstanding borrowings of approximately $6,567 and $5,820 of the $15,000 revolving credit facility as of December 31, 2003 and 2002, respectively. These amounts were recorded as a component of short-term borrowings in the Company’s consolidated balance sheets (see Note 11). The Company had approximately $8,433 and $9,180 available for additional borrowings under the revolving credit facility at December 31, 2003 and 2002, respectively.

Among other things, the Senior Lender Loan agreement contains certain restrictive covenants, including the maintenance of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and tangible net worth, and places limitations on acquisitions, dispositions, capital expenditures, and additional indebtedness. At December 31, 2002, the Company was not in compliance with the fiscal year ended audited subsidiary financial statements delivery time period covenants. This violation was waived by the Senior Lender on March 28, 2003.

In connection with the waiver of this 2002 covenant violation, the Senior Lender and the Company amended the Term Loan agreement to extend the fiscal year ended audited subsidiary financial statements delivery time period and re-establish the minimum EBITDA and tangible net worth covenants on June 19, 2003. The Company also entered into amendment of the Term Loan agreement with the Senior Lender to reflect the changes in the U.S. tax law on October 15, 2003. The Company was in compliance with covenants in 2003.

- 51 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands except shares and per share amount)

13. RELATED PARTY TRANSACTIONS

During 2003 Mr. Brandon Wang, the Company’s Chief Executive Officer, and a Trust controlled by him repaid the entire shareholder loan, which had an outstanding balance of $8,551 on December 31, 2002. To repay the shareholder loan, Mr. Wang used funds from a shareholder dividend paid by the Company in March 2003, shares sold back to the Company and net proceeds from the sale of his London residence.

On March 19, 2003, 375,000 restricted shares were granted to Mr. Wang under the Company’s Equity Participation Plan. These restricted Ordinary Shares were considered bonus shares that had a six-month vesting period from the date of grant. After expiration of the vesting period on September 23, 2003, Mr. Wang sold these restricted Ordinary Shares back to the Company at the prevailing market price of $7.01 per share. Mr. Wang received payment of $5.00 per share ($1,875) at the time of the share repurchase. The Company has a remaining balance of $754 due Mr. Wang on the 375,000 restricted Ordinary Shares of $2.01 per share as of year ended December 31, 2003.

On March 20, 2003, the Board of Directors of the Company authorized the purchase of the London residence of Mr. Wang, for its fair value of $12,297 as determined by an independent appraiser. The net proceeds of this transaction of $5,747 was used by Mr. Wang to repay a portion of the shareholder loan due to the Company. The Board of Directors authorized Mr. Wang and his wife’s use and lease of this London property from the Company at a market rate determined by an independent appraiser of $36,000 per month.

During 2003, 2002 and 2001, Mr. Wang and a trust controlled by him repaid $8,551, $4,061 and $3,914, respectively, to the Company. In 2002 and 2001, the Company advanced $1,868 and $3,046, respectively, to Mr. Wang and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Mr. Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes bearing interest at a rate equal to 1.5% over LIBOR or such other rate that the Board of Directors and the borrower shall agree in writing. Interest of $81, $230 and $445 was charged on these advances in 2003, 2002 and 2001, respectively.

As a result of these series of transactions and the remaining payable balance of $754 due to shares repurchased from Mr. Wang, the Company had a balance of $1,215 payable to Mr. Wang and a Trust controlled by him as of December 31, 2003. At December 31, 2002, the Company classified the balance owed by Mr. Wang and a Trust controlled by him of $8,551n as a reduction from shareholders’ equity.

14. OTHER NON-CURRENT LIABILITIES

Other non-current liabilities relates to a accrued bonus payable to a Executive Vice President of Sales and Marketing of North American operations.

- 52 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

15. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries lease land, facilities and equipment under operating leases, many of which contain renewal options and escalation clauses. Rental expense under operating leases was $2,687 in 2003, $4,386 in 2002 and $3,582 in 2001.

At December 31, 2003, the Company and its subsidiaries were obligated under operating leases requiring minimum rentals as follows:

Year ending December 31,
2004	$	2,183
2005		1,607
2006		1,262
2007		729
2008 and thereafter		79
Total	$	5,860

In April 2003, the Company entered into a joint venture agreement with Mitsubishi Corporation and Japan Absorbent Technology Institute of Japan to establish a manufacturing facility in Shanghai, PRC. The joint venture will engage in manufacturing disposable hygiene related products. The Japanese joint venture partners will provide the proprietary patents, related technology and certain raw materials. The invested capital of the investment is $5.0 million and the Company owns a 75% interest in the joint venture company. The Company is accounting for the operations of the joint venture on a consolidated basis of accounting.

In 2003, the Company acquired a land use right for approximately 130,000 square feet of land for 50 years in Waigoaqiao, Shanghai for $1,236 and commenced construction of the manufacturing equipment with down payments of $3,754. The Company commenced the building construction in 2004. The total capital commitment for the construction of the machine equipment and building is $11,736 as of December 31, 2003.

In August 2001, the Company signed a license agreement to purchase a license use right for $2,500 from the Japanese joint venture partners for the right to manufacture and use technology know-how and distribute and sell the products in certain territories for a 20 years period from the first payment in 2002. Royalty payments on products manufactured and sold by the joint venture are also required. As of year ended December 31, 2003, the Company has paid a total of $1,500 deposit for the license rights and recorded this amount as other assets in the consolidated balance sheet. The remainder of $1,000 will be paid in 2004 and 2005. Amortization of the license use right is based on the remaining life span of 20 years commencing from the date of the first royalty payment. As of December 31, 2003, no amortization has been provided.

The Company has committed a maximum of $20,250 in the investment for the entire joint venture project in Shanghai. The total payment made by the Company was $5,250 as of December 31, 2003. Management expects the remaining commitment will be invested in 2004 and 2005. In the event that the maximum financial obligation is exceeded, the joint venture parties shall decide individually whether or not to increase additional financing arrangement for the project.

- 53 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands except shares and per share amounts)

15. COMMITMENTS AND CONTINGENCIES - continued

The Company has a total capital expenditure commitment of $2,728 for the construction of a building in Thailand and $22 for acquisition of spare parts in a United States facility as of year ended December 31, 2003. In addition, the Company is required to further inject share capital of $1,127 to its wholly owned manufacturing facility before 2005.

The Company and its subsidiaries are, from time to time, involved in routine legal matters incidental to their business. As discussed in Note 23, the Company settled the R&L lawsuit and the Rhonda Tracy claim for $4,200 and $375 in April and March 2002, respectively. The Company is currently not defending itself in any significant litigation matters. Although it cannot be certain, in management’s opinion, none of the legal proceedings in which the Company is currently involved, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition or results of operation.

16. EMPLOYEE BENEFIT PLANS

The Company’s United States subsidiary has established a 401(k) plan under which the Company matches employee contributions up to 5% of employees’ base compensation. The Company’s other international subsidiaries have defined contribution plans, covering substantially all employees, which are determined by the boards of directors of the subsidiaries. These plans provide for annual contributions by the Company from 2% to 22.5% of eligible compensation of employees based on length of service.

Total expense related to the above plans was $1,296 in 2003, $1,576 in 2002 and $1,662 in 2001.

17. STOCK BASED COMPENSATION

In March 2002, the Company adopted an Equity Participation Plan (the “Plan”). The Plan allows for the awarding of restricted shares, non-qualified stock options, incentive stock options and stock appreciation rights. The purpose of the Plan is to provide eligible employees of the Company an opportunity to acquire an equity interest in the Company. Subject to adjustment under the Plan, 1,500,000 Ordinary Shares are available for awards under the Plan and no more than 375,000 Ordinary Shares may be granted or awarded to a participant during a calendar year. There were no shares awarded under the Plan in 2002.

On March 19, 2003, the Company granted and issued 1,175,000 restricted shares and 195,000 stock options under the Plan to executive directors and key employees. Included in this amount were 375,000 restricted shares issued to Mr. Wang, the Company’s Chief Executive Officer. The vesting period of the restricted shares is six months for those awarded to Mr. Brandon Wang and one year for all others. The options vest over a period of two years.

- 54 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands except shares and per share amounts)

17. STOCK BASED COMPENSATION - continued

The following table summarizes stock option activity for year ended December 31, 2003:

	Shares outstanding	Weighted average exercise price
Outstanding at December 31, 2002	—		—
Granted	195,000	$	1.86
Outstanding at December 31, 2003	195,000	$	1.86

Information with respect to stock-based compensation plan stock options outstanding at December 31, 2003 is as follows:

Exercise price	Number outstanding at December 31, 2003	Weighted-average remaining contractual life (in years)	Weighted– average exercise price		Number exercisable at December 31, 2003	Weighted– average exercise price
$1.86	195,000	1.45	$	1.86	—	—

18. SUPPLEMENTARY INFORMATION

Valuation and qualifying accounts:

	Balance at beginning of year		Disposal of a subsidiary			Charged to cost and expenses		Deductions			Balance at end of year
Year ended December 31, 2003
Allowances for doubtful accounts	$	1,956	$	(60	)	$	1,183	$	(305	)	$	2,774
Provision for inventory obsolescence		1,761		(35	)		1,096		(1,522	)		1,300
	$	3,717	$	(95	)	$	2,279	$	(1,827	)	$	4,074
Year ended December 31, 2002
Allowances for doubtful accounts	$	2,921	$	(41	)	$	1,454	$	(2,378	)	$	1,956
Provision for inventory obsolescence		1,710		(104	)		645		(490	)		1,761
	$	4,631	$	(145	)	$	2,099	$	(2,868	)	$	3,717
Year ended December 31, 2001
Allowances for doubtful accounts	$	897	$	—		$	2,802	$	(778	)	$	2,921
Provision for inventory obsolescence		490		—			1,414		(194	)		1,710
	$	1,387	$	—		$	4,216	$	(972	)	$	4,631

Deductions relate to write-offs of accounts receivable as bad debts and disposals of inventories. In addition, the reversal of $300 allowance relating to the loan receivable recorded in 2002 (see Note 8) is included as a deduction in the table above.

- 55 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

19. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts and other receivables, loan receivable, receivable from shareholder, accounts payable, short-term borrowings, and long-term debt are reasonable estimates of their fair value. The interest rate on the Company’s long-term debt approximates that which would have been available at December 31, 2003 for debt of the same remaining maturities.

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 the amounts that the Company could realize in a current market exchange.

20. SEGMENT INFORMATION

The Company is engaged in one industry segment, the manufacturing and marketing of disposable hygienic products. However, the Company had four principal geographic segments before the disposal of the Australian subsidiaries in 2002, and three segments thereafter, for operating management purposes. The principal measures of operating performance are operating income (loss) and income (loss) before income taxes.

Within these industry segments, the Company derived its revenues of continuing operations from the following product lines for the years ended December 31, 2003, 2002 and 2001:

	2003		2002		2001
Products
Disposable baby diapers	$	169,214	$	180,646	$	179,206
Adult incontinence products		35,756		32,956		30,305
Training pants, youth pants and sanitary napkins		13,440		14,195		18,258
Total net sales from continuing operations	$	218,410	$	227,797	$	227,769

Certain financial information of continuing operations by geographic area are as follows:

	2003		2002		2001
Net sales
North America (principally the U.S.)	$	152,534	$	161,528	$	158,568
Asia		62,351		62,138		62,976
Europe		3,525		4,131		6,225
Net sales from continuing operations	$	218,410	$	227,797	$	227,769

Inter-segment sales were not significant.

- 56 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

20. SEGMENT INFORMATION - continued

	2003			2002			2001
Operating income (loss)
North America (principally the U.S.)	$	3,239		$	4,290		$	(18,849	)
Asia		2,317			4,543			5,119
Europe		(929	)		(876	)		(2,033	)
Corporate		(10,453	)		(5,341	)		(5,244	)
Shanghai, PRC joint venture		(236	)		—			—
Operating income (loss) from continuing operations	$	(6,062	)	$	2,616		$	(21,007	)
Income (loss) before income taxes and minority interest
North America (principally the U.S.)	$	2,214		$	2,540		$	(20,970	)
Asia		4,701			4,916			4,718
Europe		(1,005	)		(810	)		(1,991	)
Corporate		(12,225	)		(5,230	)		(9,745	)
Shanghai, PRC joint venture		(362	)		—			—
Income (loss) before income taxes and minority interest from continuing operations	$	(6,677	)	$	1,416		$	(27,988	)

The operating loss and loss before income tax and minority interest in 2003 included stock-based compensation expenses of $3,901, impairment loss of $78 related to the asset-held-for sale in the Company’s North American operations, transaction cost on purchase of residence from Chairman of $496 and research and development cost of $201.

The income before income tax and minority interest in 2002 included impairment loss of $160 relating to Europe, and $1,230 relating to the Company’s North American operations.

The loss before income taxes and minority interest in 2001 included restructuring costs of $6,356, provision of bad and doubtful debts for Ames Department Stores of $800, settlement of legal cases of $4,575 relating to the North American operations and loss on divestiture of $672 relating to the European operation.

	2003		2002		2001
Interest expenses
North America (principally the U.S.)	$	1,084	$	1,576	$	1,455
Asia		272		257		340
Europe		10		7		11
Corporate		148		126		2,592
Shanghai, PRC joint venture		—		—		—
Interest expenses from continuing operations	$	1,514	$	1,966	$	4,398

The fair value of the warrants interest of $1,372 was recorded as a component of corporate expense in 2001 in the table above.

- 57 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

20. SEGMENT INFORMATION - continued

	2003		2002		2001
Interest income
North America (principally the U.S.)	$	12	$	23	$	136
Asia		50		33		35
Europe		—		8		3
Corporate		257		264		503
Shanghai, PRC joint venture		—		—		—
Interest income from continuing operations	$	319	$	328	$	677
Assets, at end of year
North America (principally the U.S.)	$	57,820	$	63,683	$	79,397
Asia		40,083		35,155		35,281
Europe		141		1,053		1,648
Corporate		25,390		29,976		4,812
Shanghai, PRC joint venture		9,294		—		—
Assets, at the end of year of continuing operations	$	132,728	$	129,867	$	121,138
Expenditures for property, plant and equipment
North America (principally the U.S.)	$	4,464	$	2,112	$	8,025
Asia		1,981		3,831		775
Europe		175		30		59
Corporate		12,710		1,433		—
Shanghai, PRC joint venture		4,996		—		—
	$	24,326	$	7,406	$	8,859
Depreciation and amortization
North America (principally the U.S.)	$	5,519	$	4,484	$	5,731
Asia		2,133		2,792		2,933
Europe		76		141		320
Corporate		178		179		86
Shanghai, PRC joint venture		14		—		—
Depreciation and amortization from continuing operations	$	7,920	$	7,596	$	9,070
Property, plant and equipment, end of year
North America (principally the U.S.)	$	24,998	$	19,673	$	21,600
Asia		10,625		8,636		7,254
Europe		310		189		—
Corporate		11,868		768		566
Shanghai, PRC joint venture		4,982		—		—
Property, plant and equipment, end of year of continuing operations	$	52,783	$	29,266	$	29,420

- 58 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands except shares and per share amounts)

20. SEGMENT INFORMATION - continued

A customer of the Company accounted for approximately 18% of the net sales in 2003 (16% in 2002). Accounts receivable from this customer totaled approximated $2,314 of total receivables as of December 31, 2003 ($2,251 in 2002). No single customer accounted for 10% or more of the net sales in 2001.

21. BUSINESS ACQUISITION

In March 2001, one of the Company’s U.S. subsidiaries acquired the North American assets of Drypers Corporation pursuant to the order of the U.S. Bankruptcy Court based in Houston, Texas for approximately $39,625, including acquisition costs, less working capital adjustments of $3,747. The assets are located in Marion, Ohio; Vancouver, Washington and Houston, Texas and relate to the manufacture and sale of disposable baby diapers and training pants. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, “Business Combinations”, and the purchase price was allocated based on the relative fair values of the assets acquired.

The fair value of assets acquired and consideration paid were as follows:

Fair value of tangible assets acquired	$	30,670
Fair value of Drypers trademarks, patents and customer relationships		5,208
	$	35,878

The operating results of the Drypers assets acquired have been included in the Company’s consolidated statements of operations from March 14, 2001, the acquisition date. The unaudited pro forma results of continuing operations of the Company for the years ended December 31, 2001 and 2000, assuming the acquisition occurred at the beginning of each period are as follows:

	2001
Net sales	$	278,811
Loss from continuing operations	$	29,117
Net loss	$	27,151
Loss per share from continuing operations	$	4.33
Net loss per share	$	4.04

The acquisition was financed by existing cash balances of the Company, proceeds from term loans and a revolving credit line (see Notes 11 and 12).

- 59 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands except shares and per share amounts)

22. QUARTERLY DATA (UNAUDITED)

	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
2003
Net sales	$	57,646		$	51,057			53,445			56,262
Gross profit		13,886			11,940			12,738			15,536
Net loss (1)		(1,238	)		(2,991	)		(1,918	)		(2,533	)
Loss per share:
Basic		(0.18	)		(0.44	)		(0.30	)		(0.35	)
Diluted (2)		(0.18	)		(0.44	)		(0.30	)		(0.35	)
2002
Net sales	$	55,538		$	55,835		$	57,718		$	58,706
Gross profit		13,128			14,637			14,586			15,024
Income (loss) from continuing operations (3)		(826	)		(108	)		106			473
Income from discontinued operations (4)		820			936			781			15,063
Net income (loss) (3 and 4)		(6	)		828			887			15,536
Income (loss) per share:
Income (loss) from continuing operations		(0.12	)		(0.01	)		0.02			0.06
Income from discontinued operations		0.12			0.13			0.11			2.16
Net income (loss) per share		(0.00	)		0.12			0.13			2.22

⁽¹⁾ Net loss includes charges of $213, $1,495, $1,396 and $797 related to stock based compensation expense from the first quarter to fourth quarter of 2003.

⁽²⁾ The restricted shares and stock options outstanding at December 31, 2003 have not been included in the computation of diluted earnings per share because to do so would be anti-dilutive for the year ended December 31, 2003.

⁽³⁾ Includes impairment loss of $160 on the Company’s U.K. operation in the third quarter, and $654 and $576 on the assets held-for-sale and the Drypers trademarks in the fourth quarter of 2002.

⁽⁴⁾ Includes net gain on disposal of discontinued operations of $14,833 (net of tax of $692) in the fourth quarter of 2002.

- 60 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

23. SETTLEMENT OF LEGAL CASES

In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by the plaintiffs John M. Tharpe, Robert E. Herrin and R&L Engineering, Inc., a Georgia corporation, (collectively the “Plaintiffs”) in the United States District Court for the Middle District of Georgia. The complaint alleged that the Company, its United States subsidiary and certain European sup. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers, that the Company and its U.S. subsidiary breached a confidentiality agreement with the Plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the Plaintiffs, and theft by the Defendants of the Plaintiffs’ trade secrets concerning the waistband applicator. On March 20, 2002 the United States District Court for the Middle District of Georgia entered a $4,000 judgment in favor of the Plaintiffs. On March 29, 2002 an amended final order and judgment was entered by the United States District Court for the Middle District of Georgia awarding the Plaintiffs $10,400 in actual and increased damages for patent infringement and prejudgment interest on the patent claim. Subsequent to the entering of this final order and judgment, the Company began to negotiate a settlement with the Plaintiffs. On April 9, 2002, the Company entered into a Settlement Agreement with the Plaintiffs. The terms of this Settlement Agreement required the Company to make a lump sum payment of $4,200 to the Plaintiffs no later than April 18, 2002 to settle all asserted claims in the original lawsuit. The $4,200 lump sum payment along with the Plaintiffs filed a “Stipulated Final Order of Dismissal” dismissing with prejudice both the judgment dated March 20, 2002 and the amended final order and judgment dated March 29, 2002. Effective with the filing of the “Stipulated Final Order of Dismissal”, the lawsuit has been settled and the judgments of March 20 and March 29 have been vacated. The Company recorded the $4,200 settlement as a loss on settlement of legal cases in the Company’s consolidated statements of operations for the year ended December 31, 2001.

A claim was made by Ms. Rhonda Tracy, the owner of U.S. Patent No. 5,797,824 for disposable diapers with a padded waistband and leg holes, asserting that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. The Company, however, had filed a lawsuit against Ms. Tracy in the U.S. District Court for the Northern District of Georgia for a declaration that her patent is invalid and/or not infringed. The Company settled this claim with Rhonda Tracy on March 15, 2002 for $375. The Company has recorded the $375 as a loss on settlement of legal cases in the Company’s Consolidated Statements of Operations for the year ended December 31, 2001.

The Company is currently not defending itself in any significant litigation matters. Although it cannot be certain, in management’s opinion, none of the legal proceedings in which the Company is currently involved, individually or in the aggregate, is expected to have a material adverse effect on the Company’s business, financial condition or results of operations.

- 61 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(dollars in thousands)

24. SUBSEQUENT EVENT

In June 2004, the Company announced the reopening of the Duluth, Georgia facility as a distribution center to reinforce our logistic capabilities by having a Southeastern U.S. location. At the same time the Company announced the closure of the Oconto Falls, Wisconsin adult incontinence facility. This decision is a key part of our strategic plans for 2004 to de-emphasize the Institutional Market sector of our U.S. adult incontinence business.

The Company will continue to focus on and build its successful business in the Retail Market sector. The manufacturing of the adult incontinence products will be consolidated into the Marion, Ohio plant. As a result of the plant closure, the Company estimates that approximately 70 employees will be affected with an estimated $300,000 severance cost. In addition, the Company will revise its estimated useful lifes and net realizable values of property, plant and equipment which will accelerate depreciation by approximately $1 million subsequent to June 2004 through the expected closure in August 2004.

- 62 -

SHAREHOLDER INFORMATION

Annual Meeting

The next annual meeting of shareholders will be held in Jakarta, Indonesia on November 17, 2004 at 10:00 a.m. local time. Notice of the meeting and proxy statement will be mailed to shareholders before the meeting.

Market Information

The Company’s shares are traded on the NASDAQ National Market System under the Symbol DSGIF.

Stock Transfer Agent

Mellon Investor Services LLC

P.O. Box 3315

South Hackensack

New Jersey 07606

U.S.A.

Phone	:        1-800-356 2017
	(1) 201-329-8660 (Foreign)
	1-800-231-5469 (TDD for Hearing-Impaired)
Website	:        www.melloninvestor.com

Independent Registered Public Accounting Firm

Deloitte & Touche LLP

Suite 1500

191 Peachtree St., NE

Atlanta, GA 30303-1924

USA

Principal Executive Office

DSG International Limited

17th Floor, Watson Centre

16-22 Kung Yip Street

Kwai Chung

Hong Kong

Phone :        (852) 2484-4820

Form 20-F

The Company’s 2003 report to the Securities and Exchange Commission on Form 20-F provides additional details about the Company’s business as well as other financial information not included in this annual report. A copy of this report is available to shareholders upon written request to the Company’s Principal Executive Office.

- 63 -

DSG COMPANIES

Asia

Disposable Soft Goods Limited

17/F Watson Centre

16-22 Kung Yip Street

Kwai Chung, N T

Hong Kong

Telephone	:        (852) 2427 6951
Facsimile	:        (852) 2480 4491

Disposable Soft Goods (S) Pte Limited

No. 1, Joo Koon Crescent

4th Floor, Yeow Heng Industrial Building

Singapore 629087

Telephone	:        (65) 6861 9155
Facsimile	:        (65) 6861 9313

Disposable Soft Goods (Zhongshan) Limited

Jin Chang Road

Jin Sha Industrial Zone

Shalang, Zhongshan, Guangdong

People’s Republic of China

Postal Code	:        528411
Telephone	:        (86) 760-855 9866
Facsimile	:        (86) 760-855 8794

DSG International (Thailand) Limited

835 Moo 4 Prakasa

Muang

Samutprakarn 10280

Thailand

Telephone	:        (66) 2-709 4153
Facsimile	:        (66) 2-709 3884

PT DSG Surya Mas Indonesia

Jl. Pancatama Raya Kav. 18

Desa Leuwilimus, Cikande

Serang, Jawa Barat

Indonesia

Telephone	:        (62) 254-400 934
Facsimile	:        (62) 254-400 939

DSG (Malaysia) Sdn Bhd

Lot 542, Jalan Subang 2

Sg Penaga Industrial Park

47500 Subang Jaya, Selangor Darul Ehsan

Malaysia

Telephone	:        (60) 3-8023 1833
Facsimile	:        (60) 3-8024 9033

North America

Associated Hygienic Products LLC

4455 River Green Parkway

Duluth, GA 30096

U.S.A.

Telephone	:        (1) 770-497 9800
Facsimile	:        (1) 770-623 8887

Associated Hygienic Products Inc.

205 E. Highland Drive

Oconto Falls, WI 54154

U.S.A.

Telephone	:        (1) 920-846 8444
Facsimile	:        (1) 920-846 3026

AHP Holdings, L.P.

2805 Peachtree Industrial Blvd.

Suite 211

Duluth, GA 30097

U.S.A.

Telephone	:        (1) 678-957 9989
Facsimile	:        (1) 678-957 9985

Europe

Disposable Soft Goods (UK) Plc

Boythorpe Works

Derbyshire

Chesterfield, S40 2PH

U.K.

Telephone	:        (44) 1246-221 228
Facsimile	:        (44) 1246-274 773

- 64 -

DSG International Limited

Principal Executive Office

17/F Watson Centre

16-22 Kung Yip Street

Kwai Chung, N T

Hong Kong

Telephone	:        (852) 2484 4820
Facsimile	:        (852) 2480 4491

- 65 -

EX-23

EXHIBIT 23

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement No. 333-84898 of our Report dated June 25, 2004 relating to the consolidated financial statements of DSG International Limited and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003 appearing on Form S-8 of our report dated June 25, 2004, incorporated by reference in this Annual Report on Form 20-F of DSG International Limited for the year ended December 31, 2003.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP

Atlanta, Georgia

June 25, 2004

EX-99.1

EXHIBIT 99.1

CERTIFICATION AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter Chang, Chief Financial Officer of DSG International Limited, certify that:

1. I have reviewed this annual report on Form 20-F of DSG International Limited;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 25, 2004

/s/ PETER CHANG

Peter Chang

EX-99.2

EXHIBIT 99.2

CERTIFICATION AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brandon Wang, Chairman and Chief Executive Officer, of DSG International Limited, certify that:

1. I have reviewed this annual report on Form 20-F of DSG International Limited;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 25, 2004

/s/ BRANDON WANG

Brandon Wang

EX-99.3

EXHIBIT 99.3

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of DSG International Limited (the “Company”) on Form 20-F for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter Chang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: to the best of my knowledge the Annual Report of the Company on Form 20-F for the period ended December 31, 2003 fully complied with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

/s/ PETER CHANG

Peter Chang

EX-99.4

EXHIBIT 99.4

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of DSG International Limited (the “Company”) on Form 20-F for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brandon Wang, Chairman and Chief Executive Officer, of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: to the best of my knowledge the Annual Report of the Company on Form 20-F for the period ended December 31, 2003 fully complied with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

/s/ BRANDON WANG

Brandon Wang