Dear Shareholder,

The fiscal 1999 was a very challenging year. We encountered many obstacles primarily due to the Asian market downturn. This affected the CompanyÕs performance, particularly in the last two quarters. The fiscal year ended March 31, 1999 was the first time recording a revenue decrease in the past ten years.

Our net sales for the year ended March 31, 1999 were $53.4 million, a decrease of 19% compared to sales of $66.2 million for the year ended March 31, 1998. Operating income decreased 31% to $10.9 million, compared to $15.9 million in the previous year, and net income decreased 27% to $9.5 million, compared to $13.0 million in the previous year. Basic earnings per share and diluted earnings per share decreased to $1.73 and $1.72 respectively (based on 5,478,000 and 5,524,000 weighted average shares outstanding, respectively), compared to $2.59 and $2.40 respectively (based on 5,006,000 and 5,394,000 weighted average shares outstanding, respectively), for the year ended March 31, 1998.

Given the difficult business environment, I am pleased to report an overall operating profit margin of 20.4% for the year. In addition to reporting strong profitability, we continue to have no short-term or long-term debt. As of March 31, 1999, the company reported an increase of cash and cash equivalents to $27.6 million compared to $21.9 million on March 31, 1998. Working capital was $41.1 million as of March 31, 1999, versus $36.0 million as of March 31, 1998.

Due to our healthy balance sheet, the board of directors declared a year-end cash dividend of $0.55 per share compared to $0.50 per share in 1998. Regular cash dividends for 1999 totaled $0.88, a 10% increase over the $0.80 per share distributed in regular cash dividends during 1998.

The decrease in revenues was mainly due to a reduction in orders from existing customers. Mita Hong Kong reduced orders by approximately 50% for much of the year due to a reduced demand as a result of the restructuring of its parent company, Mita Japan. We have had a very strong relationship with Mita Hong Kong for the past 10 years and continue to work very closely with the Company to help support its manufacturing needs.

While revenues were down, we continued to invest selectively in our business to service customerÕs needs and prepare for future growth. In April 1999, we leased additional manufacturing space in Shekou, Shenzhen for our plastic molding products division in order to centralize our operations and lower operating costs. In July 1999, we purchased approximately $700,000 worth of new tooling machines to service new orders. This is in addition to a $700,000 machinery purchase in February. These machines can achieve remarkably higher efficiency in mold making and are nearly four times faster than normal machines under certain applications. Furthermore, with the changes in technology and our dedication as an industrial leader, we will continue to increase efficiencies by upgrading our machinery to meet the ever increasing customer requirements for high precision and high-speed production.

In the coming year, we will work hard to not only to stabilize our business, but also drive unit growth. We hope to continue to build strong relationships with existing customers, such as Nam Tai Electronics, Inter-Tel, VTech and Behringer, as well as develop new relationships to broaden our customer base.

I want to take this opportunity to thank our customers and shareholders for their support and re-emphasize our commitment to reward that support by always striving to achieve the best financial performance possible. The difficult economic environment in Asia added a new challenge that we must continue to diligently manage our way through. While we can not control these macro trends in our industry, we continue to do everything possible to improve our financial performance for our shareholders.

Finally, I 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 is because of them we will continue to prosper for years to come.