First Quarter Results

DESWELL INDUSTRIES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (U.S. dollars in thousands, except per share data)

	Quarter ended
	June 30
	2000	1999
Net sales	$ 17,786	$ 12,081
Cost of sales	11,531	7,489
Gross profit	6,255	4,592
Selling, general and administrative expenses	3,435	2,667
Operating income	2,820	1,925
Interest expense	0	0
Other income, net	229	335
Income before income taxes	3,049	2,260
Income taxes	204	187
Income before minority interests	2,845	2,073
Minority interests	88	(40)
Net income	$2,757	$2,113

Basic:
Net income per share (note 3)	$ 0.52	$ 0.39
Weighted average number of shares outstanding (in thousands)	5,348	5,476

Diluted:
Net income per share (note 3)	$ 0.51	$ 0.39
Weighted average common and potential Common shares (in thousands)	5,407	5,476

DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(U.S. dollars in thousands)

	June 30,	March 31,
	2000	2000
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$27,783	$27,156
Restricted cash	2,145	2,129
Marketable securities	724	1,308
Accounts receivable, net	12,123	10,607
Inventories	12,213	10,932
Prepaid expenses and other current assets	1,932	2,295
Income taxes receivable	164	164
Total current assets	57,084	54,591
Property, plant and equipment - net	16,982	16,701
Goodwill	539	549
Total assets	$74,605	$71,841

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$6,028	$5,401
Customer deposits and accrued expenses	3,682	4,362
Income taxes payable	153	101
Total current liabilities	9,863	9,864
Deferred income tax	15	15
Minority interests	9,007	8,931

Shareholders' equity
Common stock
- authorized 20,000,000 shares; issued and outstanding 5,347,131 shares at June 30, 2000 and at March 31, 2000	53	55
Additional paid-in capital	24,069	24,100
Retained earnings	31,598	28,878
Total shareholders' equity	55,720	53,031
Total liabilities and shareholders' equity	$74,605	$71,841

DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
( U.S. dollars in thousands )

	Quarter ended June 30,
	2000	1999
Cash flows from operating activities:
Net income	$2,757	$2,113
Adjustments to reconcile net income to net cash provided by operating activities :
Depreciation and amortization	1,232	1,232
Loss on sale of property, plant and equipment	6	6
Minority interests	88	88
Changes in current assets and liabilities:
Accounts receivable	(1,532)	(1,082)
Marketable securities	582	(1,209)
Inventories	(1,295)	(818)
Prepaid expenses and other current assets	360	1,982
Income taxes receivable	0	0
Accounts payable	634	656
Customer deposits and accrued expenses	(674)	(664)
In income taxes payable	52	80
Net cash provided by operating activities	2,212	2,127

Cash flows from investing activities
Purchase of property, plant and equipment	(1,531)	(837)
Proceeds from disposal of property, plant and equipment	0	1
Acquisition, excluding cash acquired	0	(6)
Decrease in restricted cash	(19)	(542)
Net cash used in investing activities	(1,550)	(1,384)

Cash flows from financing activities
Exchange difference on translation	(35)	0
Dividends paid	0	(2,990)
Net cash used in financing activities	(35)	(2,990)

Net (decrease) / increase in cash and cash equivalents	627	(2,247)
Cash and cash equivalents, at beginning of period	27,156	27,556
Cash and cash equivalents, at end of period	27,783	25,309

Supplementary disclosures of cashflow information:
Cash paid during the period for:
Interest	0	98
Income taxes	152	107

Additional interest in a subsidiary:
Goodwill	0	81
Minority Interests	0	(75)
Cash paid, net of cash acquired	0	6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands except per share data)

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 June 30, 2000 and March 31, 2000, the results of operations for the quarters and years ended June 30, 2000 and June 30, 1999, and the cash flows for the years ended June 30, 2000 and June 30, 1999. The notes to the Consolidated Financial Statements, which are contained in the Form 20-F Annual Report filed on July 6, 2000 under the Securities Exchange Act of 1934 should be read in conjunction with these Consolidated Financial Statements.

2. Inventories

	June 30,	March 31,
	2000	2000
Inventories by major categories :
Raw materials	$ 7,116	$ 6,924
Work in progress	2,160	1,553
Finished goods	2,937	2,466
	$ 12,213	$ 10,932

3. Earnings Per Share

The basic net income per share and diluted net income per share are computed in accordance with the Statement of Financial Accounting Standards No.128 "Earnings Per Share".

The basic net income per share is computed by dividing income available to common holders by the weighted average number of common shares outstanding during the period. Diluted net income per share gives effect to all dilutive potential common shares outstanding during the period. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In computing the dilutive effect of potential common shares, the average stock price for the period is used in determining the number of treasury shares assumed to be purchased with the proceeds from exercise of options.

The net income for the quarters and years ended June 30, 2000 and 1999 were from the Company's continuing operations.

Results of Operations

General

The Company's revenues are derived from the manufacture and sale of (i) injection-molded plastic parts and components, (ii) electronic products and subassemblies and (iii) metallic parts and components. The Company carries out all of its manufacturing operations in southern China, where it is able to take advantage of the lower overhead costs and inexpensive labor rates as compared to Hong Kong.

Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999

The Company's net sales for the quarter ended June 30, 2000 were $17,786,000, an increase of $5,705,000 or 47.2% as compared to corresponding period in 1999. The increase in sales was mainly related to increased sales of injection-molded plastic, electronic and metallic products of $2,840,000, $2,595,000 and $270,000 repsectively. This represented increased of 36.8%, 80.0% and 24.2% respectively, as compared with the net sales in the corresponding periof in the prior year.

The increase in net sales in respective divisions was mainly due to increase in orders from its existing customers as well as new customers.

The gross profit for the quarter ended June 30, 2000 was $6,255,000, representing a gross profit margin of 35.2%. This compares with the overall gross profit and gross profit margin of $4,592,000 or 38.0% for the quarter ended June 30, 1999.

Selling, general and administrative expenses for the quarter ended June 30, 2000 were $3,435,000, amounting to 19.3% of total net sales, as compared to $2,667,000 or 22.1% of total net sales for the quarter ended June 30, 1999.

Minority interests represent the 49% minority interest in both the electronics and metallic subsidiaries. The increase in minority interest to $88,000 for the quarter ended June 30, 2000 from the deficiency of $40,000 for the corresponding quarter in the prior year reflects the increased profits generated by the electronic and metallic business.

As a result of the above factors, net income was $2,757,000 for the quarter ended June 30, 2000, an increase of $644,000 or 30.5%, as compared to the quarter ended June 30, 1999 and net income as a percentage of net sales decreased to 15.5% from 17.5.

Liquidity and Capital Resources

Traditionally, the Company has relied primarily upon internally generated funds and short-term borrowings (including trade finance facilities) to finance its operations and expansion, although capital expenditure has been partly financed by long-term debt, including capital leases.

As of June 30, 2000, the Company had a working capital surplus of $47,221,000. This compares with a working capital surplus of $44,727,000 at June 30, 1999. The increase in working capital was mainly attributed to net cash generated from its operating activities.

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 with cash generated from operations. The Company has no outstanding short-term borrowings and no long-term debt as of June 30, 2000.

As of June 30, 2000, the Company had in place general banking facilities with three financial institutions aggregating approximately $15,439,000. 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. As of June 30, 2000, the Company had ( i ) unused credit facilities of $15,439,000 ( ii ) cash and cash equivalents of $27,783,000 and ( iii ) restricted cash of $2,145,000. The restricted cash of $1,981,000 and leasehold land and buildings of $1,400,000 have been pledged as collateral for those credit facilities. The Company also had $164,000 pledged as deposit for customs duty in Dongguan, China.

The Company expects that working capital requirements and capital additions will continue to be funded through cash on hand and internally generated funds.

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