Dear Shareholder,

I am pleased to report that 1998 was a year that saw Deswell continue its tremendous growth and enhance its profitability. Net sales for the year ended March 31, 1998 were $66.2 million, an increase of 49% compared to sales of $44.5 million for the year ended March 31, 1997. Operating income increased 42% to $15.9 million, compared to $11.1 million in the previous year, and net income increased 48% to $13.0 million, compared to $8.7 million last year. Basic earnings per share and diluted earnings per share increased to $2.59 and $2.40 respectively, compared to $1.90 and $1.85 respectively for the year ended March 31, 1997. Deswell's balance sheet remains strong, with $36.0 million in working capital as of March 31, 1998, compared to $21.4 million as of March 31, 1997. We continue to have no short-term or long-term debt.

Other financial events include the February 1998 redemption of outstanding Common Share Purchase Warrants which were issued as part of, and in conjunction with, our initial public offering in July 1995. This redemption resulted in a cash infusion to the Company of approximately $4.1 million.

Because of our healthy balance sheet, the Board of Directors authorized a year-end cash dividend of $0.50 per share, and a special cash dividend of $0.25 per share. Regular cash dividends for 1998 totaled $0.80, a 23.1% increase over the $0.65 per share distributed in regular cash dividends during 1997.

Deswell's outstanding performance over the past year is a direct result of our focus on meeting the changing needs of our customers and the continual improvement and expansion of our manufacturing infrastructure. Achievements during the year included the completion of a significant expansion of our facilities in May 1997 and ongoing upgrades of our production equipment and capacity. Increased demand has required our business units to adapt to a constant state of expansion and upgrade. All of our business units were able to meet those challenges and continue to prosper during 1998.

Jetcrown Industrial Ltd. continued to strengthen its position as a leader in the injection molding industry. Kwanasia Electronics Co. Ltd. grew very rapidly this year to account for over 40% of our sales. We are also very pleased with the integration of Kwanta Precision Metals Products Co. Ltd. into our business operations. Customers are excited about the new product offerings Kwanta has brought to Deswell. By leveraging our excellent existing client base built by Jetcrown Industrial Ltd. and Kwanasia Electronics Co. Ltd., we have initiated an effective cross selling strategy. As a result, revenue at Kwanta increased more than 230% compared to 1997.

Some highlights of the individual units include:

JETCROWN INDUSTRIAL LTD.

Our plastic injection molding operation, Jetcrown, increased its sales 31.4% adding $7,782,000 to its sales over the 1997 year end numbers. Comprising 49.2% of 1998 total sales, Jetcrown is Deswell's largest operating unit.

Jetcrown is dedicated to providing the most advanced design options as well as flawless production to its OEM customers. To achieve these goals Jetcrown has employed advanced software design in mold design and drawing, automated the injection molding process and has continously invested in machinery. Due to the upgrade of machinery, Jetcrown is now capable of producing assembly lines for several components of fax machines and copiers.

By offering an advanced product portfolio and providing exceptional customer service, Jetcrown continues to build strong relationships with its major customers.

KWANASIA ELECTRONICS CO. LTD.

Our electronics operation, Kwanasia, increased its sales 59.2%, or $11,008,000, over the 1997 year end numbers. Kwanasia comprised 44.7% of total sales in fiscal 1998. Kwanasia's increased high margin electronic subcontracting orders last year helped advanced Deswell's gross profit margin to 45.2%, from 42.8% in fiscal 1997.

In March 1998, Kwanasia announced its intention to expand assembly capacity by over 120%, adding 200,000 square feet of manufacturing space. This additional space will allow us to accommodate the fast growth of Deswell's electronics assembly business. The new production space is still under construction at the time of this writing and we expect it to be fully operational by September 1998.

KWANTA PRECISION METAL PRODUCTS CO. LTD.

We are pleased to report that after its first full year as a division of Deswell, Kwanta, our precision metal operation, increased its sales 237.6%, or $2,839,000 over its 1997 year end sales figure. While it accounts for only 6.1% of our total sales volume, the high quality metal parts manufacturing that Kwanta provides is important to our customers and provides us with significant advantage over our competition.

I want to take this opportunity to thank our customers and shareholders for their support and to re-emphasize our commitment to reward that support by always striving to achieve the best financial performance possible. The difficult economic environment in Asia has added a new challenge that we must diligently manage our way through. While we can not control economic trends, we can do everything possible to solidify and build upon customer relationships which are key to long-term shareholder value.

Finally, I also want to thank the management and staff of Deswell for their continued dedication to the Company; it is because of them that Deswell has performed so well over the past years, and it will be because of them that we continue to prosper.