The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in the Annual Report. The Company prepares its financial statements in accordance with U.S. GAAP.

The Company's net sales for the year ended March 31, 1998 were $66,169,000, an increase of $21,629,000 or 48.6% as compared to year ended March 31, 1997. Sales to Mita Industries (H.K.) Limited ("Mita"), Inter-Tel Incorporated ("Inter-Tel"), Behringer Holdings (Pte) Ltd. ("Behringer") and Namtai Shenzhen, the Company's four largest customers during the year ended March 31, 1998, represented approximately 79.7% of net sales for the year.

The increase in net sales was mainly related to additional sales of injection-molded plastic, electronic and metallic products of $7,782,000, $11,008,000 and $2,839,000, respectively, or increases of 31.4%, 59.2% and 237.6%, respectively, as compared with the net sales of $24,764,000, $18,581,000 and $1,195,000, respectively in these categories of activity in the year ended March 31, 1997. Sales of plastic parts and components, electronic products and subassemblies and metallic products represented 49.2%, 44.7% and 6.1%, respectively, of the Company's total sales during the year ended March 31, 1998 as compared to 55.6%, 41.7% and 2.7%, respectively, of the Company's total sales during the year ended March 31, 1997. The increase in sales of plastic parts and components in absolute dollars during fiscal 1998 compared to fiscal 1997 resulted from the increase in sales to existing and new customers, with sales to Mita, Inter-Tel, Namtai Shenzhen and Vtech Communications Ltd. increasing by an aggregate of $7,387,000. Management attributes the increase in orders from these customers mainly to the customers' recognition of the efficiency in the manufacture and high quality of the Company's products. The substantial increase in sales of electronic products during fiscal 1998 compared to fiscal 1997 was mainly attributed to the increase in both OEM and subcontract sales to the Company's existing customers, with sales to Behringer and Inter-Tel in fiscal 1998 increasing by $11,470,000 from fiscal 1997. Revenues from the metallic operation were generated from a subsidiary acquired in October 1996 and accordingly fiscal 1998 sales increases in these operations resulted from including them for a full year rather than only about six months as was the case in fiscal 1997.

Net sales to customers by geographic area are determined by reference to shipping destinations as directed by the Company's customers. During the year ended March 31, 1998, sales to China, Hong Kong, the United States, Europe and Japan increased by $8,402,000, $2,358,000, $2,241,000, $8,098,000 and 530,000, respectively, over 1997 levels.

The overall gross profit for the year ended March 31, 1998 was $29,923,000, representing a gross profit margin of 45.2%. This compares with the overall gross profit and gross profit margin of $19,075,000 or 42.8% for the year ended March 31, 1997. The slight increase in gross margin of 2.4% was mainly attributable to higher margins generated from the plastic assembly work during fiscal 1998, from the plastic tooling modification requests from an existing customer and from the higher margins generated from the increase in electronic subcontracting orders. The gross margins on the sale of plastic parts and assembly increased slightly to 45.6% in the year ended March 31, 1998 as compared to 42.4% in the previous year. The gross margins on sales of electronic products and subassemblies increased to 50.9% in fiscal 1998 from 45.8% in fiscal 1997. The increases of 3.2% and 5.1% on the gross profit margins in plastic and electronic operations were primarily attributable to the Company's concentrated and continuing efforts to secure orders with higher margins and the higher margins generated from the increase in electronic subcontracting sales.

Selling, general and administrative expenses for the year ended March 31, 1998 were $14,067,000, amounting to 21.2% of total net sales, as compared to $7,943,000 or 17.8% of total net sales for the year ended March 31, 1997. The increase in selling, general and administrative expenses of $6,124,000 over fiscal 1997 was largely due to the growth in the Company's operations. The increase in selling, general and administrative expenses as a percentage of total sales during fiscal 1998 over fiscal 1997 levels primarily resulted from the increase in expenses for providing research and development, quality control and engineering support to the Company.

As a result of the increase in net sales, operating income was $15,856,000 for the year ended March 31, 1998, an increase of $4,724,000 or 42.4%, as compared with the prior year. There was no material fluctuation in the overall operating margins between the two years. The operation margin for the year ended March 31, 1998 was 24.0%, as compared to 25.0% in the previous year.

Minority interests represent the 49% and 66.9% minority interest in the electronics and metallic subsidiaries, respectively. The increase in minority interest to $3,289,000 for the year ended March 31, 1998 from $2,165,000 for the year ended March 31, 1997 reflects the fact that the electronic business generated greater profits in fiscal 1998 than in fiscal 1997. As the operations of metallic subsidiary are in the preliminary stage, its operating results and minority interest effects have not been material to the Company since these operations were acquired in October 1996.

As a result of the above factors, net income was $12,971,000 for the year ended March 31, 1998, an increase of $4,226,000 or 48.3%, as compared to the year ended March 31, 1997 and net income as a percentage of net sales remained at 19.6% for both years.

The Company's net sales for the year ended March 31, 1997 were $44,540,000 an increase of $13,960,000 or 45.7%, as compared to the year ended March 31, 1996. Sales to Mita, Inter-Tel, Behringer and Namtai Shenzhen, the Company's four largest customers in the year ended March 31, 1997, represented approximately 80.4% of net sales for the year.

• Sales of plastic parts and components for the year ended March 31, 1997 amounted to $24,764,000, an increase of $6,089,000 or 32.6%, as compared to the year ended March 31, 1996 and represented 55.6% of the Company's total sales. This increase was primarily due to increases in sales to existing and new customers as a result of increasing volume of orders receiving from their ultimate customers, with sales to Mita, Inter-Tel and Namtai Shenzhen increasing by $5,720,000, offset by reduced sales to two other customers by $713.000. Management attributes the increase in orders from these major customers mainly to the customers' recognition of the high efficiency in the manufacture and high quality of the Company's products. The Company is generally not able to increase prices to its customers of plastic products and increases in sales are generally volume-related.
• Sales of electronic products and subassemblies for the year ended March 31, 1997 amounted to $18,581,000, an increase of $6,676,000, or 56.1% as compared to the year ended March 31, 1996, and represented 41.7% of the Company's total sales. The increase in sales of such products was primarily due to increased sales to Behringer and Inter-Tel, offset by reduced sales to smaller customers. Management attributes the significant increase in sales in the year ended March 31, 1997 to increases in sales orders for new OEM products.
• Sales of metallic products from the date of acquisition of Kwanta in October 1996 through March 31, 1997 amounted to $1,195,000 and represented 2.7% of the Company's total sales.

Net sales to customers by geographic area are determined by reference to shipping destinations as directed by the Company's customers. During the year ended March 31, 1997, sales to China, Hong Kong, the United States and Europe increased by $1,456,000, $4,723,000, $5,119,000 and $2,662,000, respectively, over 1996 levels.

• The overall gross profit for the year ended March 31, 1997 was $19,075,000, representing a gross profit margin of 42.8%. This compares with the overall gross profit and gross profit margin of $12,548,000 or 41.0% for the year ended March 31, 1996, and indicates a slight increase in overall gross profit margin of 1.8%.

• The gross margin on the sale of plastic parts and components increased slightly to 42.4%, in the year ended March 31, 1997 as compared to 41.7% in the previous year. The contribution to the overall gross profit margin by plastic parts and components was $10,505,000 in the year ended March 31, 1997, an increase of $2,724,000 from the previous year. There were no material fluctuations in the profit margins as resin prices were relatively stable during the two years.
• Gross margins on sales of electronic orders and subassemblies increased to 45.8% compared to 40.0% in the previous year. The contribution to the overall gross profit margin by electronic parts and subassemblies was $8,505,000 during the year ended March 31, 1997, compared to $4,767,000 in the previous year. The gross profit margin on sales of electronic orders and subassemblies increased in fiscal 1997as the Company continued concentrating its efforts on securing orders with higher margins. Moreover, because of the Company's efforts to expand its sources of supply, improvements in gross profit margins also results from a decrease in cost of some raw material purchases beginning in the last quarter of the year ended March 31, 1997.

Selling, general and administrative expenses for the year ended March 31, 1997 were $7,943,000, amounting to 17.8% of total net sales, as compared to $5,361,000 or 17.5% of total net sales for the year ended March 31, 1996. The increase in selling, general and administrative expenses of $2,582,000 over the prior year was largely due to the growth in the Company's operations.

As a result of the increase in net sales, operating income was $11,132,000 for the year ended March 31, 1997, an increase of $3,945,000 or 54.9% as compared with the prior year. There was no material fluctuation in the overall operating margins between the two years. The operation margin for the year ended March 31, 1997 was 25.0%, as compared to 23.5% in the previous year.

Minority interests represented a 49% interest in Integrated, the Company's subsidiary holding the interest in the Company's electronics operations, and a 66.9% minority interest in Kwanta, the subsidiary engaged in the manufacture of metallic molds and accessories. In Kwanta's case, the minority interest is calculated by subtracting from 100%, the product of the Company's 51% interest in Integrated and the 64.9% interest in Kwanta that Integrated acquired in October 1996. The increase in minority interest to $2,165,000 for the year ended March 31, 1997 from $1,286,000 in the prior year reflects the increase in profits generated by the electronic business during the year ended March 31, 1997 as compared to the year ended March 31, 1996. As the Company's metal parts operations are in preliminary stage, the operating results and the minority interest from these operations were immaterial to the Company in the year ended March 31, 1997.

As a result of the above factors, net income was $8,745,000 for the year ended March 31, 1997, an increase of $2,834,000 or 47.9%, as compared to the year ended March 31, 1996. Net income as a percentage of net sales increased slightly to 19.6% from 19.3%.

Prior to the Company's IPO in March 1995, the Company relied primarily upon internally generated funds and short-term bank borrowings (including trade finance facilities) to finance its operations and expansion, although capital expenditures were partly financed by long-term debt, including capital leases. In July and August 1995, the Company completed the IPO, issuing an aggregate of 1,150,000 Common Shares and 1,150,000 Warrants, receiving net proceeds of $7,893,000. Each two Warrants were exercisable for $9.056 to purchase one Common Share ($4.528 per Warrant). As part of the IPO the Company also issued 92,000 Representatives' Options and 8,000 Advisor's Warrants, each such Option and Warrant exercisable to purchase one Common Share and one Warrant. During the year ended March 31, 1997, the Company issued an additional 77,775 Common Shares upon exercise of 155,550 Warrants, 45,462 Common Shares upon exercise of 45,846 of the Representative's Options and the Warrants underlying them; 12,000 Common Shares upon the full exercise of the Advisor's Warrants and the Warrants underlying them; and 116,100 Common Shares upon exercise of stock options granted under the Company's 1995 Stock Option Plan. From such issuance the Company realized net proceeds of $2,402,000. At March 31, 1997, there were 4,801,337 Common Shares and 994,450 Warrants outstanding.

In January 1998, the Company announced plans to redeem its outstanding Warrants and gave notice of such redemption to holders. As a consequence, holders of 896,649 Warrants exercised them to purchase an aggregate of 448,324 Common Shares, resulting in receipt by the Company of net proceeds totaling $4,060,027. The remaining 11,275 Warrants that were not exercised by February 17, 1998 were redeemed on February 18, 1998. In total during the year ended March 31, 1998, the Company issued an additional 491,587 Common Shares upon exercise of 983,175 Warrants, 92,307 Common Shares upon exercise of 46,768 of the Representative's Options and the Warrants underlying them and 93,900 Common Shares upon exercise of stock options granted under the Company's 1995 Stock Option Plan. These issuances resulted in the receipt by the Company of an additional $6,221,000 of net proceeds. At March 31, 1998, there were 5,479,131 Common Shares outstanding.

For the year ended March 31, 1998, net cash generated from operations totaled $14,933,000, including net income of $12,971,000 and depreciation and amortization of $3,356,000. Accounts receivable and inventories increased by $3,757,000 and $854,000, respectively, over levels at March 31, 1997, primarily as a result in increases in sales and the general increase in business activities. Accounts payable decreased by $913,000 over March 31, 1997. For the year ended March 31, 1997, net cash generated from operations totaled $11,149,000, including net income of $8,745,000 and depreciation and amortization of $2,365,000. Accounts receivable and inventories increased by $2,180,000 and $2,629,000, respectively, over levels at March 31, 1996, primarily as a result in increases in sales and the general increase in business activities. Accounts payable increased by $2,212,000 over March 31, 1996 levels as a result of the increase in inventories.

Net cash used in investing activities amounted to $7,428,000 and $6,983,000 for the years ended March 31, 1998 and 1997, respectively. Capital expenditures during these periods totaled $7,420,000 and $6,283,000, respectively, and were financed by the net proceeds from the Company's IPO and internally generated funds. The capital expenditure primarily related to the acquisition of plant and machinery for the Company's production facilities in China and office equipment for the Company's administrative operations in China. During the year ended March 31, 1997, the Company, through Integrated, a 51%-owned subsidiary, acquired a 64.9% interest in Kwanta for $64,000. Additional cash of $16,000 and $663,000 in the years ended March 31, 1998 and 1997, respectively, was pledged as security for increased short-term borrowing facilities.

Net cash generated from financing activities was $2,394,000 for the year ended March 31, 1998, as compared to net cash used in financing activities of $1,083,000 for the year ended March 31, 1997. Integrated paid a dividend totaling $774,000 to its shareholders during the year ended March 31, 1998. The Company received $395,000 as its share of the dividend and Messrs. S. K. Lee and M. C. Tam, minority shareholders of Integrated, received $379,000, as their share of the dividend. The major sources of financing have been the net proceeds from the issuances of Common Shares upon exercise of outstanding options and warrants.

The Company generates sufficient funds from its operating activities to finance its operations and there is little need for external financing. The Company had no outstanding short-term borrowings or long-term debt at March 31, 1998 or 1997.The Company repaid the short-term portion of its long-term debt outstanding at March 31, 1996 in the amount of $395,000 during the year ended March 31, 1997.

Dividends paid under Hong Kong law are tax free to the recipient. While the Company had paid dividends to its shareholders prior to its IPO, it discontinued payment of dividends after the IPO until its new dividend policy was announced in July 1996. At that time, Company announced that it planned to pay cash dividends semi-annually in the form of an interim and final dividend based on the Company's growth during the preceding year. The Company announced that dividends would be 25% to 35% of the net earnings of the preceding year limited, however, by the net cash flow available for future development. The interim dividend would be based upon the Company's first six months operating results and would be paid between November and December and the final dividend would be based upon the Company's second six months of operations and would be declared and paid between July and August. Under this dividend policy, the Company declared and paid dividends aggregating $2,755,000 during the year ended March 31, 1997, $1,608,000 of which consisted of a final dividend paid in August 1996 based on results for the second six months of the year ended March 31, 1996 and the balance of which consisted of an interim dividend paid in December 1996 based on results for the first six months of the year ended March 31, 1997. In May 1997, the Company declared, and in June 1997, the Company paid, the final cash dividend of $1,950,000 based on results for the second six months of the year ended March 31, 1997 and in November 1997 the Company declared, and on December 16, 1997, the Company paid the interim cash dividend of $1,498,000 based on results for the first six months of the year ended March 31, 1998. In May 1998, the Company declared, and in June 1998, the Company paid, the final and special cash dividend of $4,109,000 based on results for the second six months of the year ended March 31, 1998. The Company currently plans to continue its dividend policy as announced, but such plans and policy for future dividends consist of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Whether future dividends will be declared will be depend upon the Company's future growth and earnings, of which there can be no assurance, and the Company's cash flow needs for future development, which growth, earning or cash flow needs may be adversely affected by one or more of the factors discussed in Item 1. Business - Risk Factors. Accordingly, there can be no assurance that future cash dividends on the Company's Common Shares will be declared, what the amounts of such dividends will be or whether such dividends, once declared for a specific period will continue for any future period or at all.

As a consequence of the fixed exchange rate between the Hong Kong dollar and the U.S. dollar, interest rates on Hong Kong dollar borrowings are similar to U.S. interest rates. The Hong Kong Prime Rate increased during the year ended March 31, 1998, rising from 8.75% at the beginning of the year to 10% at March 31, 1998. This did not have any material affect on the average interest rates on the Company's short-term borrowings over the year.

At March 31, 1998, the Company had cash and cash equivalents of $21,902,000 and committed bank lines of credit of $12,016,000, none of which had been used. The Company also had restricted cash of $2,927,000 and leasehold land and buildings of $1,468,000, which were pledged as collateral for those credit facilities. The Company expects that working capital requirements and capital additions will continue to be funded through cash on hand and internally generated funds. The Company's working capital requirements are expected to increase in line with the growth in the Company's business. The Company had capital commitments for plant and machinery of $780,000 as of March 31, 1998. The Company expects that internally generated funds will be sufficient to satisfy its cash needs for at least the next 12 months.

The Company believes that inflation has not had a material effect on its business. Although the Company has found it difficult to increase the prices of its products in order to keep pace with inflation, particularly in its plastics operations, the Company believes that the location of its manufacturing operations in Southern China has resulted in a lower cost base which still provides it with a competitive advantage. Accordingly, the Company is reliant upon increasing its transaction volume in order to compensate for the effects of inflation.

The Company sells most of its products and pays for most components in either Hong Kong dollars or U.S. dollars. Exchange rate fluctuations have not had a significant impact on the Company's operating results. Labor cost and overhead expenses of the Company's Hong Kong operations and China factories are paid in Hong Kong dollars and renminbi, respectively. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at approximately HK$7.80 to US$1.00 and accordingly has not represented a currency exchange risk to the U.S. dollars. The Chinese government has announced its intention to maintain this fixed exchange rate, but despite such assurances there has been uncertainty reported in this regard. There can be no assurance that the Chinese government will continue to maintain the present currency exchange mechanism and the Company could face increased currency risks if the current exchange rate mechanism is changed. If the currency exchange mechanism between the Hong Kong dollar and the U.S. dollar is changed, the Company's results of operations and financial condition could be materially adversely affected. Labor and overhead expenses of the Company's China operations amounted to approximately 24%, 23% and 21% of the Company's total expenses during the years ended March 31, 1996, 1997 and 1998, respectively. In 1994, China adopted a floating currency system whereby the official exchange rate is equal to the market rate. Since the market and official yuan rates were unified, the value of the yuan against the dollar has been relatively stable, with an average rate of 8.28 yuan per $1.00 during 1997, 8.28 yuan per $1.00 during 1996 and 8.32 yuan per $1.00 during 1995. The Company believes, because its Chinese operations presently are confined to manufacturing products for export or for customers in China that are controlled by foreign investors and which pay the Company in Hong Kong dollars, that the current economic climate in China should not have a direct adverse impact on the Company's business.

Many existing computer programs, including some programs used by the Company, use only two digits to identify a year in the date field. These programs were designed without considering the impact of the upcoming change in the century. If not corrected, these computer applications and systems could fail or create erroneous results by, at, or after the year 2000. Based on the Company's investigation to date, management does not anticipate that the Company will incur material operating expenses or be required to incur material costs to the year 2000 compliant.