The following should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings "Risk factors" and "Management's discussion and analysis of financial condition and results of operations" in the most recent Annual Report on Form 10-K.

Overview

Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. The Company also designs, manufactures and markets equipment and systems, and distributes semiconductor processing and testing equipment manufactured by others. The Company operates in three business segments: Testing Services, Manufacturing and Distribution.

We own and operate facilities that provide testing services for semiconductor devices and other electronic components to meet the requirements of military, aerospace, industrial and commercial applications. We currently operate four testing facilities, one in the United States, three in Southeast Asia. The Company uses its own proprietary equipment for certain burn-in, centrifugal and leak tests, and commercially available equipment for various other environmental tests. The Company conducts the majority of its testing operations in Southeast Asia and China with facilities in Singapore, Malaysia, Thailand and China. Our facilities require substantial investment to construct and are largely fixed-costs assets once in operation. Because we own most of the testing capacity, a significant portion of our operating costs is fixed. In general, these costs do not decline with reductions in customer demand or the utilization of our testing capacity, and can adversely affect profit margins as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over the increased output, which should improve profit margins.

In the third quarter of fiscal 2008, one of our major customers ceased their advanced burn-in testing service contract with us due to one of their product lines reaching the end of its life cycle earlier than expected. The net sales in the testing segment decreased by $2,445 to $3,098 for the three months ended September 30, 2008 as the result of the loss of revenue from this major customer. Management took immediate action to reduce expenses in an effort to match future cash flows and is in the process of developing new customer relationships in China and Malaysia and exploring new business opportunities to offset the lost testing revenue from this contract.

Our manufacturing segment manufactures Artic Temperature Controlled Wafer Chucks, which are used for test, characterization and failure analysis of semiconductor wafers, Wet Process Stations, which wash and dry wafers at a series of 100 to 300 additional processing steps after the etching or deposition of integrated circuits, and other microelectronic substrates in what is commonly called the "front-end," or creation, of semiconductor circuits. Additionally, we also manufacture centrifuges, leak detectors, HAST (Highly Accelerated Stress Test) systems and "burn-in" systems that are used primarily in the "back-end" of the semiconductor manufacturing process to test finished semiconductor devices and electronic components.

In the United States, our manufacturing segment focused on marketing used and refurbished equipment, which some of our customers are more willing to purchase since it is less expensive than new equipment.

Due to the competitive environment in the manufacturing segment, we anticipate that we will continue to implement our cost reduction plan by outsourcing a portion of our manufacturing process to outside suppliers, such as electrical and mechanical fabrication houses, and seek competitively priced materials.

Our distribution segment operates primarily in Southeast Asia. This segment markets and supports distribution of our own manufactured equipment in addition to distributing complementary products supplied by other manufacturers that are used by our customers and other semiconductor and electronics manufacturers. We expanded the distribution business to include a strategic business unit mainly to serve as a distributor of electronic components to customers. It is the strategy of management to focus on the sales of our own manufactured products. We believe this will help us to reduce our exposure to multiple risks arising from being a mere distributor of manufactured products from others.

In June 2007, Trio-Tech International Pte., Ltd. established a subsidiary in Chongqing, China. This subsidiary, Trio-Tech (Chongqing) Co., Ltd., has registered capital of RMB 20,000 (Chinese yuan), or approximately U.S. $2,600, and is wholly owned by Trio-Tech International Pte., Ltd. On August 27, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with JiaSheng Property Development Co., Ltd. (JiaSheng) to jointly develop a piece of property with 24.91 acres owned by JiaSheng located in Chongqing City, China, which is intended for sale after the completion of development. In fiscal 2008, the Company invested an aggregate of RMB 15,000, equivalent to approximately U.S. $2,210 based on the exchange rate on September 30, 2008 published by the Federal Reserve System on this project. In the fourth quarter of 2008, the investment of RMB 5,000, or approximately $737 was returned to the Company, which reduced the investment in this project to $1,473. The Company also recorded a profit of RMB 750, approximately $103 in investment income in the fourth quarter of 2008. In accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock, management believes that the cost method of accounting is appropriate.

On January 4, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd. to purchase an office space of 827.2 square meters on the 35th floor of a 40 story high office building located in Chongqing, China. The total cash purchase price was RMB 5,554 (Chinese yuan), equivalent to approximately $818 based on the exchange rate as of September 30, 2008 published by the Federal Reserve System. The Company rented this property out to a third party on July 13, 2008. The term of the rent agreement is five years with a monthly rental income of RMB 39, or approximately $5 for the first three years, with an increase of 8% in the fourth year and another 8% in the fifth year. It the first quarter of fiscal 2009, this property generated a rental income of $15.

The investment income generated by Trio-Tech (Chongqing) Co., Ltd. in the first quarter of fiscal year 2009 was classified as investment income, which was included in other income in the Consolidated Statements of Operations and Comprehensive Income for the three months ended September 30, 2008. There was no investment income in the same period of fiscal 2008.

First Quarter Fiscal 2009 Highlights

? Total revenue decreased 48.3% to $6,230 for the first quarter of fiscal 2009, compared with revenue of $12,050 for the first quarter of fiscal 2008.

? Manufacturing segment revenue decreased by $3,350, or 52.4%, to $3,046, compared to $6,396 for the first quarter of fiscal 2008.

? Testing segment revenue decreased by $2,445, or 44.1%, to $3,098, compared to $5,543 for the first quarter of fiscal 2008.

? Distribution segment revenue decreased by $25, or 22.5% to $86, compared to $111 for the first quarter of fiscal 2008.

? Loss from operations increased by $1,941, or 154.8%, to $687 compared with an income of $1,254 for the first quarter of fiscal 2008.

? Gross profit margins decreased by 4.3% to 20.9% from 25.2% for the first quarter of fiscal 2008.

? Selling expenses as a percentage of revenue increased by 1.0% from 1.0% of revenue for the first quarter of fiscal 2008 to 2.0% of revenue for the first quarter of fiscal 2009.

? General and administrative expenses as a percentage of revenue increased by 18.6% from 13.7% of revenue for the first quarter of fiscal 2008 to 32.3% or revenue for the first quarter of fiscal 2009.

? Net loss increased by $1,470, or 195.7% to $719, compared to a net income of $751 for the first quarter of fiscal 2008.

? Net cash flow provided by operating activities increased by $415, or 108.6% to $33, compared to a cash outflow of $382 for the first quarter of fiscal 2008.

Subsequent Events

On October 23, 2008, Trio-Tech Chongqing Co., Ltd. entered into a Memorandum Agreement with JiaSheng Property Development Co., Ltd. ("JiaSheng") to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters, at JiaSheng Jingyun Huafu Project located at No. 17 Puyun Avenue in Chongqing, China.

The total cash purchase price to be paid by the Company under the Memorandum Agreement is RMB 7,043 (Chinese yuan) or approximately $1,030 (U.S. dollars) based on the exchange rate as of October 23, 2008 published by the Federal Reserve Statistical Release. Under the terms of the Memorandum Agreement, the Company made a down payment of 10% in cash in the amount of RMB 704 or U.S. $103 based on the exchange rate as of October 23, 2008 published by the Federal Reserve Statistical Release in October 2008 and the balance of 90% was paid on November 4, 2008, using internally generated funds of the Company.

Additionally, on October 23, 2008, the Company entered into a lease agreement with JiaSheng for the six units purchased from JiaSheng pursuant to the Memorandum Agreement. The lease provides for a two year term with an annual rental income of RMB 1,392 (Chinese yuan) or approximately $204 (U.S. dollars). The lease commenced November 1, 2008.

Results of Operations and Business Outlook

The following table sets forth our revenue components for the three months ended
September 30, 2008 and 2007, respectively.

                                Three Months Ended September 30,
                                 2008                      2007
               Net Sales:
               Manufacturing          48.9 %                    53.1 %
               Testing                49.7                      46.0
               Distribution            1.4                       0.9
               Total                 100.0 %                   100.0 %

Net sales for the three months ended September 30, 2008 were $6,230, a decrease of $5,820, or 48.3%, compared to $12,050 for the same quarter last fiscal year.

Net sales into and within China and the Southeast Asia regions and other countries (except sales into and within the United States) decreased by $6,692, or 63.2% to $3,898 for the three months ended September 30, 2008, compared with $10,590 for the same period of last fiscal year. The decrease was primarily due to a drop in sales in the testing segment in our Singapore and China operations. Net sales into and within the United States were $2,332, an increase of $872, or 59.7% compared to the same quarter last fiscal year 2008, due to an increase in market demand for our refurbished equipment.

The decrease in net sales can be discussed within three segments as follows:

Manufacturing Segment

Net sales in the manufacturing segment as a percentage of total net sales decreased by 4.2% to 48.9% of total net sales for the three months ended September 30, 2008, compared to 53.1% of total net sales in the first quarter of fiscal 2008. The absolute amount of net sales decreased by $3,350 for the three months ended September 30, 2008, from $6,396 to $3,046, compared to the same period of fiscal 2008. The decrease in revenue generated by the manufacturing segment was due to the fact that fewer orders were placed by one of our major customers, which was the result of slower movement of that customer's product line and equipment capacity. We believe that the loss of orders from our major customer will continue to have a negative impact on our revenue in the future if we are unable to compensate for the loss of this source of revenue.

Testing Segment

As a percentage of the total revenue, the revenue generated by the testing segment in the first quarter of fiscal 2009 accounted for 49.7% of total sales, an increase of 3.7%, compared to 46.0% in the same period of fiscal 2008. In terms of dollar amount, the revenue of the testing segment for the first quarter of fiscal 2009 was $3,098, reflecting a decrease of $2,445, or 44.1%, compared to $5,543 for the first quarter of fiscal 2008. This decrease in revenue was due to the loss of our main customer due to one of its product lines reaching the end of its life cycle earlier than expected, rendering our testing services in the Singapore, Thailand and China operations for that product no longer necessary.

Distribution Segment

The distribution segment accounted for 1.4% of total net sales in the first quarter of fiscal 2009, an increase of 0.5% compared to 0.9% in the first quarter of fiscal 2008. The absolute amount of net sales decreased by $25 for the three months ended September 30, 2008, from $111 in the first quarter of fiscal 2008 to $86 in the first quarter of fiscal 2009. The drop in revenue was due to lower demand in the current market for back-end products such as Vibration equipment and chambers and, we believe, a saturation of equipment and electronic components in the current market.

Uncertainties and Remedies

There are several influencing factors which create uncertainties when forecasting performance, such as the ever-changing nature of technology, specific requirements from the customer, decline in demand for certain types of burn-in devices or equipment, and other similar factors. Based on a number of economic indicators, it appears that growth in global economic activity has slowed substantially. At the present time, the rate at which the global economy will slow has become increasingly uncertain. A continued slowing of global economic growth, and, in particular, in the United States, will likely to have a negative impact on our growth and results of operations. One of these factors is the highly competitive nature of the semiconductor industry. Another is that some customers are unable to provide a forecast of the products required in the upcoming weeks; hence it is difficult to plan for the resources needed to meet these customers' requirements due to short lead time and last minute order confirmation. This will normally result in a lower margin for these products, as it is more expensive to purchase materials in a short time frame. However, the Company has taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors. For example, in order to meet customers' demands upon short notice, the Company maintains higher inventories, but continues to work closely with its customers to avoid stock piling. We continue to cut costs by upgrading some of our existing facilities to cater to the changing requirements of customers and by maintaining a lean headcount, while still keeping quality high so as to sell new products at a competitive price. We have also been improving customer service from staff by keeping our staff up to date on the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. Finally, the Company is exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology while at the same time searching for improved testing methods of higher technology chips.

Comparison of the First Quarters Ended September 30, 2008 ("Q1 2009") and September 30, 2007 ("Q1 2008")

The following table sets forth certain consolidated statements of income data as a percentage of net sales for the first quarters of fiscal 2009 and 2008, respectively:

                                           Three Months Ended September 30,
                                             2008                     2007
     Net Sales                                     100.0 %                 100.0 %
     Cost of sales                                  79.1 %                  74.8 %
     Gross Margin                                   20.9 %                  25.2 %

     Operating Expenses
     General and administrative                     32.3 %                  13.7 %
     Selling                                         2.0 %                   1.0 %
     Research and development                        0.2 %                   0.1 %
     Gain on disposal of PP&E                      (2.6) %                     -
     Total operating expenses                       31.9 %                  14.8 %

     Income / (Loss) from Operations              (11.0) %                  10.4 %

Overall Gross Margin

Overall gross margin as a percentage of revenue decreased by 4.3% to 20.9%, for the three months ended September 30, 2008 from 25.2% in the first quarter of last year primarily due to the decrease in the gross margin in the testing segment.

Gross profit margin as a percentage of revenue in the manufacturing segment decreased from 14.9% in the first quarter of fiscal 2008 to 14.4% in the first quarter of fiscal 2009. The decrease in gross margin was due to an increase in sales of lower margin burn-in systems pass-through products vis-à-vis higher margin systems in the first quarter of fiscal 2009 compared with the mix of systems in the same period of fiscal 2008. In addition, there was a decrease in the average sales price of burn-in boards and burn-in systems as a result of strong competition in the market place. However, the Company currently intends to continue manufacturing low-margin burn-in systems and boards in order to maintain market share of these products with its current customers. In absolute amounts, gross profits deceased by $512 to $438 for the three months ended September 30, 2008, from $950 for the three months ended September 30, 2007.

Gross profit margin as a percentage of revenue in the testing segment decreased by 10.2% for the three months ended September 30, 2008, from 37.2% to 27.0%, compared to the same quarter last fiscal year. In terms of dollar amount, gross margin in the testing segment in the first quarter of fiscal 2009 was $837, a decrease of $1,226, or 59.4%, compared to $2,063 in the same period of fiscal 2008. The decrease in the gross margin was primarily due to a decrease in testing volume coupled with a decrease in sales prices in the first quarter of fiscal year 2009. Additionally, because significant portions of our operating costs are fixed in the testing segment, as service demands and factory utilization decrease, the fixed costs are spread over the decreased output, which deteriorates profit margin. In addition, our customers changed their demands and specifications for burn-in hours, which resulted in a lower average unit selling price for burn-in services.

Gross profit margin as a percentage of revenue in the distribution segment improved by 5.3% for the first quarter of fiscal 2009, from 26.1% in the first quarter of fiscal 2008 to 31.4%, compared to the same quarter last fiscal year. The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices in the first quarter of fiscal 2009 compared to the same quarter of fiscal 2008. In terms of dollar amount, gross margin in the distribution segment in the first quarter of fiscal 2009 was $27, a decrease of $2, or 6.9%, compared to $29 in the same period of fiscal 2008. . The gross margin of the distribution segment is not only affected by the market price of our products, but also our product mix, which changes frequently as a result of changes in market demand.

Operating Expenses

Operating expenses for the first quarters of 2009 and 2008 were as follows:
                                         Three Months Ended September 30,
        (In Thousands, unaudited)          2008                     2007
        General and administrative   $          2,015         $          1,645
        Selling                      $            123         $            124
        Research and development     $             10         $             19
        Gain on disposal of PP&E     $           (159 )       $              -
           Total                     $          1,989         $          1,788

General and administrative expenses increased by $370, or 22.5%, from $1,645 to $2,015 for the three months ended September 30, 2008, compared to the same period of last fiscal year. The increase was primarily attributable to an increase of noncash stock option expenses of $238 in the first quarter of fiscal 2009 and a reversal of bonus provision of $154 in the first quarter of fiscal year 2008 as discussed in our annual report for the year-ended June 30, 2008. We did not have any bonus reversal in the first quarter of fiscal 2009. The increase was offset by a decrease in the officer and executive compensation in the first quarter of fiscal 2009. On February 27, 2008, in view of anticipated reductions in service revenue for fiscal 2008, our Chief Executive Officer, Chief Financial Officer and directors voluntarily decreased their base salary to 50% of the base salary agreed to in July 2007. As a result, our compensation for the officers and executives decreased by $99 in the first quarter of fiscal 2009.

Selling expenses decreased slightly by $1, or 0.8%, from the three months ended September 30, 2008, from $124 to $123 compared to the same quarter of fiscal 2008.

In first quarter of fiscal 2009, research and development expenses were $10 compared to $19 for the first quarter of fiscal 2008. The decrease was primarily due to a decrease in full time employee headcount in the U.S. operation.

Gain on disposal of property, plant and equipment was $159 for the first quarter of fiscal year 2009, which mainly resulted from the disposal of certain idle fixed assets at a gain in the Singapore operation. We had no such gain for the same period of fiscal year 2008.

(Loss) Income from Operations

Loss from operations increased by $1,941, or 154.8%, from an income from operations of $1,254 for the three months ended September 30, 2007 to a loss of $687 for the three months ended September 30, 2008, mainly due to the decrease in revenue and an increase in operating expenses, as previously discussed.

Interest Expense

Interest expense for the first quarters of 2009 and 2008 was as follows:

Three Months Ended September 30, (In Thousands, unaudited) 2008 2007 Interest expense $ (58 ) $ (85 )

Interest expense decreased by $27 for the three months ended September 30, 2008 from $85 to $58, primarily due to a decrease in the loan payable and capital lease obligation. We are trying to keep our debt at minimum in order to save financing costs. Our credit rating provides us with ready and adequate access to funds in global markets. As of September 30, 2008, the Company has an unused line of credit of $15,657.

Other (Expenses) Income

Other (expenses) income for the first quarters of 2009 and 2008 were as follows:

Three Months Ended September 30, (In Thousands, unaudited) 2008 2007 Other (expenses) income $ 215 $ (50 )

Other income increased by $265 to $215 for the three months ended September 30, 2008 from an expense of $50 in the same quarter of last fiscal year, primarily due to an increase in rental income and currency transaction gain. Currency transaction gain increased by $275 for the three months ended September 30, 2008, from a transaction loss of $118 to a transaction gain of $157, compared to the same quarter of fiscal 2008. This was attributable to the strengthening of U.S. dollar against foreign currency with regard to transactions denominated in U.S. dollars. Rental income, which consisted mainly of space in the Malaysia operation and investment property in Chongqing operation rented to outside vendors, increased by $27 to $64 for the three months ended September 30, 2008 compared to $37 in the same period of fiscal 2008.

Income Tax

Income tax provision for the three months ended September 30, 2008 was $98, a decrease of $74 compared to the income tax provision of $172 for the same quarter last fiscal year. The decrease in income tax provision was mainly due to a lower tax provision for the decreased income generated from the Singapore operations in the first quarter of fiscal 2009.

We assessed our income tax liability of $382 as of September 30, 2008 in accordance with FIN48, which is related to the allocation of corporate management expenses to our Singapore operation in terms of Singapore tax law. We did not see any potential benefits arising from this tax position. Accordingly, no impact of this tax position was recognized in the statement of operations for this quarter of fiscal 2009. We did not include any potential income tax position in federal and state income tax returns currently filed.

Minority Interest

As of September 30, 2008, we held a 55% interest in Trio-Tech Malaysia. In the first quarter of fiscal 2009, minority interest in the net income of subsidiaries was $91, a decrease of $105, or 53.6%, compared to a minority interest in the net income of $196 for the same quarter of fiscal 2008. The decrease in the minority interest was due to the decrease in the net income generated from the Malaysia testing operation due to a decrease in revenue as the result of lesser market demands from our customers.

Net Income/Loss

Net loss was $719 in the first quarter of fiscal 2009, an increase of $1,470 from a net income of $751 for the three months ended September 30, 2008. The loss was mainly due to a decrease in revenue and an increase in operating expenses, which was offset by an increase in other income and a decrease in interest expenses and income tax provision, as previously discussed.

Earnings/Loss per Share

Basic and diluted loss per share for the three months ended September 30, 2008 increased by $0.45 to $0.22, from earnings of $0.23 per basic and diluted per share in the same quarter of the prior fiscal year.

Segment Information

The revenue, gross margin and income from each segment for the first quarter of fiscal 2009 and the first quarter of fiscal 2008, respectively, are presented below. As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.

Manufacturing Segment

. . .