1. Management's Statement

In the opinion of Management, the accompanying unaudited financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position of Deswell Industries, Inc. (the Company) at December 31, 1999 and March 31, 1999, the results of operations for the quarters and nine months ended December 31, 1999 and December 31, 1998, and the cash flows for the nine months ended December 31, 1999 and December 31, 1998. The notes to the Consolidated Financial Statements that are contained in the Form 20-F Annual Report filed on July 6, 1999 under the Securities Exchange Act of 1934 should be read in conjunction with these Consolidated Financial Statements.

2. Inventories

Nine Months Ended December 31, 1999 Compared to Nine Months Ended December 31, 1998

The Company's net sales for the nine months ended December 31, 1999 were $46,000,000, an increase of $2,146,000 or 4.9% as compared to corresponding period in 1998. The increase in sales was mainly related to an increase in sales of injection-molded plastic products of $6,613,000 offset by a decrease in sales of electronic and metallic products of $4,467,000. This represented increase of 27.6% and decrease of 22.4% respectively, as compared with the net sales in the corresponding period in the prior year.

The increase in net sales from the plastic operation was attributed to the increase in orders from its existing strong customer based together with the new orders from new customers. The decrease in sales of electronic and metallic products was mainly attributed to the decrease in demand from its customers, especially the PCB assembly customers, coupled with the reduction in selling prices in both OEM and sub-contracted sales as compared to corresponding period in prior year.

The gross profit for the nine months ended December 31, 1999 was $17,574,000, representing a gross profit margin of 38.2%. This compares with the overall gross profit and gross profit margin of $17,922,000 or 40.9% for the nine months ended December 31, 1998.

Selling, general and administrative expenses for the nine months ended December 31, 1999 were $8,998,000, amounting to 19.6% of total net sales, as compared to $8,052,000 or 18.4% of total net sales for the nine months ended December 31, 1998. The increase in selling, general and administrative expenses of $946,000 over the corresponding period was mainly attributed to the increase in depreciation expenses on the capital expenditure incurred after the move in to the new electronic and metallic factories last year.

As a result, operating income was $8,576,000 for the nine months ended December 31, 1999, a decrease of $1,294,000 or 13.1% as compared with the corresponding period in the prior year.

During the nine months ended December 31, 1999, the Company acquired an additioonal 17.9% equity interest in the metal subsidiary. As a result, minority interests represent the 49% minority interest in both the electronics and metallic subsidiaries. The decrease in minority interest to $411,000 for the nine months ended December 31, 1999 from $1,608,000 for the nine months ended December 31, 1998 reflects the fact that the electronic and metallic business generated less profits in the current period as compared to corresponding period in 1998.

As a result of the above factors, net income was $8,393,000 for the nine months ended December 31, 1999, a decrease of $247,000 or 2.9%, as compared to the nine months ended December 31, 1998 and net income as a percentage of net sales slightly decreased to 18.2% from 19.7%.

Liquidity and Capital Resources

During the past five years, the Company has relied primarily upon internally generated funds and short-term borrowings (including trade finance facilities) to finance its operations and expansion.

At December 31, 1999, the Company had a working capital surplus of $41,493,000. This compares with a working capital surplus of $41,066,000 at March 31, 1999. The increase in working capital was mainly attributed to net cash generated from its operating activities offset by the cash dividend distributed of $4,777,000 in June and December 1999 and the repurchase of common shares of $1,256,000 during the period.

The Company has generated sufficient funds from its operating activities to finance its operations and there is little need for external financing other than short-term borrowings which are used to finance accounts receivable and are generally paid from cash generated from operations. The Company has no outstanding short-term borrowings and long-term debt at December 31, 1999.

At December 31, 1999, the Company had in place general banking facilities with two financial institutions aggregating approximately $14,212,000. Such facilities, which are subject to annual review, include overdrafts, letters of credit, import facilities, trust receipt financing, inward bills financing as well as fixed loans. At December 31, 1999, the Company had ( i ) unused credit facilities of $14,212,000 ( ii ) cash and cash equivalents of $26,716,000 and ( iii ) restricted cash of $1,932,000, which has been pledged as collateral for those credit facilities.

The Company expects that working capital requirements and capital additions will be funded through a combination of internally generated funds and existing facilities.

Return to Press Release