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 five testing facilities, one in the United States, four in China and 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 with facilities in Singapore, Malaysia and Thailand. 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 $5,387 to $5,826 for the six months ended December 31, 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.

Recently, there has been widespread concern over the instability of the financial markets and their influence on the global economy. We believe that, as a result of the credit market crisis and other macro-economic challenges currently affecting the global economy, the orders from our customers in our testing operations in China was seriously reduced. During the six months ended December 31, 2008, there was minimal business activity in our Shanghai testing operations, and there was also no secured orders or backlogs for subsequent periods. Therefore, we expect no future cash flows from the assets in the Shanghai operation. The Company recorded an impairment loss of $296 on these assets based on its examination of future undiscounted cash flows in the second quarter of fiscal 2009. In addition, business in the Suzhou operation also began to slow down in the fourth quarter of fiscal 2008 and has suffered losses in the last three quarters. The operation is currently only providing line support, maintenance and training service for one customer. Based on our estimated future undiscounted cash flows, an impairment loss of $224 was recorded for some of the testing equipment during the second quarter of fiscal 2009.

In the second quarter of fiscal year 2009, we also recorded lease termination expenses of $164 related to the future minimum rent of two idle plants in the Singapore operation. The noncancelable lease term for these two plants expires in March 2011 and April 2011. As both of these plants do not have any economic benefit to the Company, management does not currently have further plans for these units, and the ability for the Company to sublease these units does not seem likely, according to SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the entire future minimum rent up to the end of the lease period was accrued in the second quarter of fiscal 2009. This provision for future rental expense increased our cost of goods sold by $164.

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 $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 $2,199 based on the exchange rate on December 31, 2008 published by the Federal Reserve System on this project. In the fourth quarter of 2008, the investment of RMB 5,000, or approximately $733 was returned to the Company, which reduced the investment in this project to $1,466. The Company also recorded a profit of RMB 750, approximately $110 in investment income in the fourth quarter of 2008. In October 2008, the Company received a second return on investment principal of RMB 1,988, or $291 and investment income of RMB 1,312, or $192 from JiaSheng. In accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock, management recorded the transaction using the cost method of accounting.

On January 4, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd. to purchase 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 $814 based on the exchange rate as of December 31, 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 rental agreement is five years with a monthly rental income of RMB 39, or approximately $6 for the first three years, with an increase of 8% in the fourth year and another 8% in the fifth year. During the six months ended December 31, 2008, this property generated a rental income of $36.

On October 23, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with JiaSheng to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters located in Chongqing, China. The total purchase price was RMB 7,042, equivalent to approximately $1,031 based on the exchange rate as of December 31, 2008 published by the Federal Reserve System. In October 2008, the Company made a cash down payment of 10% in the amount of RMB 704, or $103. In November 2008, the Company paid an additional RMB 2,908 in cash, or $426, from internally generated funds of the Company. The remaining balance was offset by the investment return the Company earned related to the No. B48 property. The Company and JiaSheng agreed to offset the investment return from the No. B48 property in the BeiPei district of Chongqing City against the purchase price of this commercial and residential property. In addition, the Company charged JiaSheng RMB130, or $19, as penalties for the delay in the payment of investment principal and investment income. The penalty was also used to also offset the purchase price of the commercial and residential property. As of December 31, 2008, the Company paid cash in the amount of $529, and offset amounts of $291 as the return of investment principal, $192 as investment income and $19 as the penalties charged for this new commercial and residential property totaling $1,031.

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, or approximately $204. The lease started on November 1, 2008.

The investment income generated by Trio-Tech (Chongqing) Co., Ltd. during the six months ended December 31, 2008 was included in other income in the Consolidated Statements of Operations and Comprehensive Income. There was no investment income during the six months ended December 31, 2007.

In the context of a challenging economic environment, in order to achieve our goal of attaining a lower breakeven point, we undertook several cost reduction measures. Since the first quarter of fiscal 2009 ending September 30, 2008, we reduced our headcount by approximately 48 employees. Also, on February 27, 2008, our Chief Executive Office, Chief Financial Officer and directors voluntarily decreased their base salary to 50% of the base salary agreed to in July 2007. In the second quarter of 2009 ending December 31, 2008, we implemented four-day work weeks for all the employees in the Singapore operation, which reduced our employee compensation by approximately 20%. These cost cutting actions reduced our general and administrative expenses in the first six months ended December 31, 2008.

Second Quarter Fiscal 2009 Highlights

· Total revenue decreased 56.8% to $5,562 for the second quarter of fiscal 2009, compared with revenue of $12,871 for the second quarter of fiscal 2008.

· Testing segment revenue decreased by $2,942, or 51.9%, to $2,728 compared with $5,670 for the second quarter of fiscal 2008.

· Manufacturing segment revenue decreased by $4,331, or 61.1%, to $2,754 compared with $7,085 for the second quarter of fiscal 2008.

· Distribution segment revenue decreased by $36, or 31.0%, to $80 compared with $116 for the second quarter of fiscal 2008.

· Loss from operations increased by $1,239, to $621 compared with an income from operations of $618 for the second quarter of fiscal 2008.

· Gross margins decreased by 1.0% to 23.8% from 24.8% for the second quarter of fiscal 2008.

· Selling expenses decreased by $70, or 45.8%, to $83 compared with $153 for the second quarter of fiscal 2008.

· General and administrative expenses decreased by $1,065, or 44.6%, to $1,324 compared with $2,389 for the second quarter of fiscal 2008.

· Impairment loss increased by $504 to $520, compared with $16 for the second quarter of fiscal 2008.

· Net loss increased by $591, or 358.2%, to $426, compared to a net income of $165 for the second quarter of fiscal 2008.

· Net cash flow provided by operating activities increased by $1,199, or 164.9%, to $472, compared to a cash outflow of $727 in the six months ended December 31, 2008.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended December 31, 2008. These highlights are not intended to be a full discussion of our operating results for this quarter. These highlights should be read in conjunction with the following discussion and with our un-audited consolidated financial statements and notes thereto accompanying this Quarterly Report.

Subsequent Events

On January 8, 2009, Trio-Tech (Malaysia) Sdn. Bhd. entered into a Sales and Purchase Agreement with TS Matrix Properties Sdn. Bhd. ("TSM") whereby the Company agreed to purchase from TSM real property totaling 7,312 square meters in Selangor Darul Ehsan, Malaysia. This property is currently leased by the Company for its testing operations.

The total cash purchase price to be paid by the Company under the Sales and Purchase Agreement is RM 12,450 (Malaysian ringgit), or approximately $3,608 based on the exchange rate as December 31, 2008 published by the Federal Reserve System. Pursuant to the Sales and Purchase Agreement, the Company paid TSM a 10% refundable cash down payment of RM 1,245, or approximately $361 through internally generated funds. The consummation of the transaction contemplated by the Sale and Purchase Agreement is subject to the satisfaction of certain conditions. The balance of the purchase price is expected to be paid upon completion of certain conditions through internally generated funds and a bank loan of RM 9,625, or approximately $2,790. The Company is still in the process of securing a bank loan from a local bank in Malaysia.

Related Party Transaction

During the second quarter of fiscal 2009, the Company purchased four units of commercial property and two units of residential property in Chongqing China from JiaSheng. JiaSheng and the Company are parties to the Agreement entered into on August 27, 2007 and the Supplement Agreement entered into on November 15, 2007 relating to an investment in the NO.B48 lot in the BeiPei district of Chongqing, China. The purchase price was approximately $1,031. This purchase was made on terms no less favorable to the Company than it could obtain in arms length transactions. (See Note 9 to the unaudited financial statements included in this Form 10-Q)

Results of Operations and Business Outlook

The following table sets forth our revenue components for the six and three months ended December 31, 2008 and 2007, respectively.

Revenue Components
                     Six Months Ended
                       December 31,             Three Months Ended December 31,
                    2008         2007             2008                    2007
Net Sales:
Manufacturing        49.2 %       54.1 %              49.5  %                 55.0 %
Testing              49.4 %       45.0 %              49.1  %                 44.1 %
Distribution          1.4 %        0.9 %               1.4  %                  0.9 %
Total               100.0 %      100.0 %             100.0  %                100.0 %

Net sales for the six months and three months ended December 31, 2008 were $11,792 and $5,562, respectively, a decrease of $13,129 and $7,309, respectively, when compared to net sales for the same periods of the prior year. As a percentage, net sales decreased by 52.7% for the six months and decreased by 56.8% for the three months ended December 31, 2008, respectively, when compared to total net sales for the same periods of the prior year.

Net sales into and within China and the Southeast Asia regions and other countries (except sales into and within United States) decreased by $13,488 to $8,389 and by $6,796 to $4,491 for the six months and three months ended December 31, 2008, respectively, compared to the same period of the prior year. This decrease was primarily due to a drop in sales in our Singapore and China operations as the result of the loss of a significant contract with one of our major customers and instability of the financial markets and their influence on the global economy. Net sales into and within the United States were $3,403 and $1,071 for the six months and three months ended December 31, 2008, respectively, an increase of $359 and a decrease of $513, respectively, when compared to the same periods of the prior year.

The decrease in net sales in the six months ended December 31, 2008 and in the second quarter of fiscal 2009 can be discussed within three segments as follows:

Manufacturing Segment

Net sales in the manufacturing segment as a percentage of total net sales were 49.2% and 49.5% for the six months and three months ended December 31, 2008, respectively, a decrease of 4.9% and 5.5% of total net sales, respectively, when compared to the same periods of the prior year. The absolute amount of net sales were $5,800 and $2,754 for the six months and three months ended December 31, 2008, respectively, a decrease of $7,681 and $4,331, respectively, when compared to the same periods of the prior year. 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 slowing in 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

Net sales in the testing segment as a percentage of total net sales were 49.4% and 49.1% for the six months and three months ended December 31, 2008, respectively, an increase of 4.4% and 5.0%, respectively, of total net sales when compared to the same periods of the prior year. The absolute amount of net sales in the testing segment decreased by $5,387 to $5,826 and by $2,942 to $2,728 for the six months and three months ended December 31, 2008, respectively, compared to the same periods of fiscal 2008. This decrease in revenue was due to the loss of a significant contract with one of our major customers 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. Furthermore, we saw a slowdown in the electronics manufacturing industries in China, which in turn reduced our customers' demand in the testing services in China and Southeast Asia.

Distribution Segment

Net sales in the distribution segment accounted for 1.4% of total net sales for the six months and three months ended December 31, 2008, respectively, an increase of 0.5% compared to the same periods in fiscal 2008. The absolute amount of net sales decreased by $61 to $166 and by $36 to $80 for the six months and three months ended December 31, 2008, respectively, compared to the same periods in fiscal 2008. 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. Product volume for the distribution segment depends on sales activities such as placing orders, queries on products and backlog. Equipment and electronic component sales are very competitive, as the products are prevalent in the 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, declines in demand for certain types of burn-in devices or equipment, and other similar factors. 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. 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 will likely have a negative impact on our growth and results of operations. 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, we maintain higher inventories, but continue to work closely with our 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 our customer service by keeping our staff updated with regard to the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. We believe customers have tightened and will continue to tighten their spending resulting in a decline in the demand for electronic products and semiconductor equipment in the current financial meltdown. We anticipate that this chain effect will hit the Company's business gradually in the future. 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 Second Quarters Ended December 31, 2008 and 2007

The following table sets forth certain consolidated statements of income data as
a percentage of net sales for the second quarters of fiscal 2009 and 2008,
respectively:
                                           Three Months Ended December 31,
                                             2008                     2007
       Net Sales                                    100 %                   100 %
       Cost of sales                               76.2 %                  75.2 %
       Gross Margin                                23.8 %                  24.8 %

       Operating Expenses
       General and administrative                  23.8 %                  18.6 %
       Selling                                      1.5 %                   1.2 %
       Research and development                     0.2 %                   0.1 %
       Impairment loss                              9.3 %                   0.1 %
       Gain on disposal of PP&E                     0.1 %                    --
       Total operating expenses                    34.9 %                  20.0 %

       Income (loss) from Operations              (11.1 %)                  4.8 %

Overall Gross Margin

Overall gross margin as a percentage of revenue decreased by 1.0% for the three months ended December 31, 2008, from 24.8% in the second quarter of fiscal 2008 to 23.8%, due primarily to a decrease in gross margin in the testing segment, which was offset by the improvement in gross margin in the manufacturing segment and distribution segments. In terms of dollar value, the overall gross margin decreased by $1,874 for the three months ended December 31, 2008, from $3,195 to $1,321, compared to the same quarter of fiscal 2008 resulting from the loss of a significant contract with one of our major customers, as noted above.

Gross margin as a percentage of revenue in the manufacturing segment increased by 3.6% for the three months ended December 31, 2008, from 17.4% in the second quarter of fiscal 2008 to 21.0% in the second quarter of fiscal 2009. The increase in gross margin was due to a decrease in sales of lower margin burn-in systems and pass-through products in the second quarter of fiscal 2009 compared with the same period of fiscal 2008. In absolute amounts, gross profits decreased by $654 to $579 for the three months ended December 31, 2008, from $1,233 for the three months ended December 31, 2007.

Gross margin as a percentage of revenue in the testing segment decreased by 7.8% for the three months ended December 31, 2008, from 34.1% to 26.3%, compared to the same quarter of fiscal 2008. In terms of dollar amount, gross margin in the testing segment in the second quarter of fiscal 2009 was $717, a decrease of $1,216, or 62.9%, compared to $1,933 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 second 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 margin as a percentage of revenue in the distribution segment improved by 6.3% to 31.3% for the three months ended December 31, 2008, from 25.0% for the three months ended December 31, 2007. The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices in the second 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 second quarter of fiscal 2009 was $25, a decrease of $4, or 13.7%, 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.

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