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Deswell Industries, Inc. (Nasdaq: DSWL) today announced its financial results for the fiscal second quarter ended September 30, 2008.

Net sales for the second quarter ended September 30, 2008 were $32 million, a decrease of 16.1% compared to sales of $38 million for the same quarter ended September 30, 2007, mainly as a consequence of the continuing decline in business from the Company’s electronic and metallic segment due to declining demand in the professional audio and instrument equipment market. The Company reported an operating loss in the second quarter of $1.7 million, compared to operating income of $1.7 million for the same quarter of 2007. Net results for the second quarter ended September 30, 2008 was a loss of $1.7 million compared to net income of $1.8 million for the quarter ended September 30, 2007. Basic net income per share and diluted net income per share decreased to ($0.11) and ($0.11) respectively, (based on 15,791,000 and 15,791,000 weighted average shares outstanding, respectively) compared to $0.11 and $0.11 respectively, (based on 15,428,000 and 15,496,000 weighted average shares outstanding, respectively) for the quarter ended September 30, 2007.

Total gross margin was 10.9 % in the second quarter ended September 30, 2008 compared to 17.4% in the same quarter last year. Gross profit in the plastic segment decreased to 10.8% of net sales for the second quarter compared to 25.4% of net sales for the same quarter of last year. The decreased gross margin in the plastic segment was mainly a combined effect of a change in customer mix, an increase in material cost partly due to increased usage and renminbi appreciation, and increase in factory overhead cost compared to the same quarter last year. Gross profit in the electronic and metallic segment increased to 11.1% of net sales for the second quarter ended September 30, 2008, compared to 11.6% of net sales for the year-ago quarter. The improved gross margin in the electronic and metallic segment was mainly attributed to the combined effect of a change in product mix as well as continued controls in raw materials cost.

Net sales for the six months ended September 30, 2008 were $67.3 million, a decrease of 12.5%, compared to sales of $76.9 million for the corresponding period in 2007. Operating income decreased $5.3 million to a loss of $353,000, compared to $5.0 million of operating income for the first six months of fiscal 2007. Net income decreased $5.2 million to a loss of $382,000, compared to $4.9 million for the six months ended September 30, 2007. Basic and diluted net income per share for the six months decreased to $0.02 and $0.02, respectively (based on 15,791,000 and 15,803,000 weighted average share outstanding, respectively), compared to $0.32 and $0.32, respectively (based on 15,244,000 and 15,287,000 weighted average shares outstanding, respectively), for the six months ended September 30, 2007.

The Company's financial position remained strong at the end of the second quarter of fiscal year 2008, with $17.5 million cash and cash equivalents at September 30, 2008, compared to $22.7 million on March 31, 2008. Working capital totaled $50.5 million as of September 30, 2008, versus $54.8 million as of March 31, 2008. Furthermore, the Company has no long-term or short-term borrowings at September 30, 2008.

Mr. Franki Tse, chief executive officer, commented, “During the quarter, our plastics division grew by 17% due to increased orders from the entertainment and gaming segment. Unfortunately, this growth was more than offset by a decrease in sales demand at our electronics division due to our higher manufacturing costs and RMB appreciation. In our electronics division, we are very focused on diversifying our customer base and improving business with current customers and have expanded our sales and marketing efforts to drive sales to the division.”

Mr. Tse continued, “We are actively reducing our costs, expenses and headcounts through restructuring to maximize profits in the business. That being said, we expect the recent world financial crisis and softened demand in the electronics industry will have a continued impact on our fiscal 2009 business. Fortunately, our balance sheet remains exceptional, with a healthy cash position and no long term debt. Given our loss for the quarter, we have suspended the dividend to conserve cash and best position us to drive future performance.”

About Deswell

Deswell manufactures injection-molded plastic parts and components, electronic products and subassemblies, and metallic products for original equipment manufacturers (“OEMs”) and contract manufacturers at its factories in the People’s Republic of China. The Company produces a wide variety of plastic parts and components used in the manufacture of consumer and industrial products; printed circuit board assemblies using surface mount (“SMT”) and finished products such as telephones, telephone answering machines, sophisticated studio-quality audio equipment and computer peripherals. The Company’s customers include Digidesign Inc., Vtech Telecommunications Ltd., Epson Precision (H.K.) Ltd., Inter-Tel Incorporated, Line 6 Manufacturing, N&J Company and Peavey Electronics Corporation.

To learn more about Deswell Industries, Inc., please visit the Company’s web site at www.deswell.com.

Forward-Looking Statements

Statements in this press release that are "forward-looking statements" are based on current expectations and assumptions that are subject to risks and uncertainties. For example, our statements regarding our expected growth in sales from the electronic and metallic division in the coming year and our efforts to reduce overhead costs in our plastic division are forward-looking statements. Actual results could differ materially because of the following factors, among others, which may cause revenues and income to fall short of anticipated levels or our overhead expenses to increase: our dependence on a few major customers; vigorous competition forcing product price reductions or discounts; the timing and amount of significant orders from our relatively few significant customers; continuing increases in resin prices that cannot be passed on to customers; unexpected production delays; obsolete inventory or product returns; losses resulting from fraudulent activity of our customers or employees; labor shortages that increase labor and costs; changes in the mix of product products we manufacture and sell; adverse currency fluctuations in the renminbi and Hong Kong dollar when translated to US dollars; potential new accounting pronouncements; and the effects of travel restrictions and quarantines associated with major health problems, such as the Severe Acute Respiratory Syndrome, on general economic activity.

For further information regarding risks and uncertainties associated with the Company’s business, please refer to the “Risk Factors” section of Company’s Annual Report on Form 20-F, copies of which may be obtained from the Website maintained by the Securities and Exchange Commission at http://www.sec.gov.

All information in this release is made as of the date of this press release. Deswell undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in Deswell’s expectations.