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 and four throughout 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 may 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 $7,504 to $7,682 for the nine months ended March 31, 2009 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 were seriously reduced. During the nine months ended March 31, 2009, there was minimal business activity in our Shanghai testing operation, and there were 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 services 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. During the third quarter of fiscal 2009, we also recorded an impairment loss of $95 for some testing equipment in our Malaysia operation, which was beyond repairable conditions.

In the second quarter of fiscal year 2009, we recorded lease termination expenses of $164 related to the future minimum rent of two idle plants in the Singapore operation. The non-cancelable lease term for these two plants expires in March 2011 and April 2011, because neither of these plants 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 Company accrued the entire future minimum rent up to the end of the lease period in the second quarter of fiscal 2009. This provision for future rental expense increased our cost of goods sold by $164 in the second quarter of fiscal year 2009.

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 $2,195 based on the exchange rate on March 31, 2009 published by the Federal Reserve System on this project. In the fourth quarter of 2008, the investment of RMB 5,000, or approximately $732 was returned to the Company, which reduced the investment in this project to $1,463. 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 $813 based on the exchange rate as of March 31, 2009 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 nine months ended March 31, 2009, this property generated a rental income of $54.

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 $1,030 based on the exchange rate as of March 31, 2009 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 March 31, 2009, the Company paid cash in the amount of $529, and offset amounts of $290 as the return of investment principal, $192 as investment income and $19 as the penalties charged for this new commercial and residential property totaling $1,030.

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 nine months ended March 31, 2009 was included in other income in the Consolidated Statements of Operations and Comprehensive Income. There was no investment income during the nine months ended March 31, 2008.

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. From 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 nine months ended March 31, 2009.

Third Quarter Fiscal 2009 Highlights

· Total revenue decreased 57.7% to $3,578 for the third quarter of fiscal 2009, compared with revenue of $8,455 for the third quarter of fiscal 2008.

· Testing segment revenue decreased by $2,117, or 53.3%, to $1,856 compared with $3,973 for the third quarter of fiscal 2008.

· Manufacturing segment revenue decreased by $2,694, or 61.7%, to $1,673 compared with $4,367 for the third quarter of fiscal 2008.

· Distribution segment revenue decreased by $66, or 57.4%, to $49 compared with $115 for the third quarter of fiscal 2008.

· Loss from operations decreased by $758, to $556 compared with $1,314 for the third quarter of fiscal 2008.

· Gross margins improved by 4.0% to 20.7% from 16.7% for the third quarter of fiscal 2008.

· Selling expenses decreased by $116, or 61.4%, to $73 compared with $189 for the third quarter of fiscal 2008.

· General and administrative expenses decreased by $972, or 46.8%, to $1,103 compared with $2,075 for the third quarter of fiscal 2008.

· Net loss decreased by $1,249, or 88.5%, to $162, compared to $1,411 for the third quarter of fiscal 2008.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended March 31, 2009. 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 unaudited consolidated financial statements and notes thereto accompanying this Quarterly Report.

Subsequent Events

In April 2009, Trio-Tech International Pte., Ltd. set up a new entity, SHI International Pte Ltd. ("SHI"), in which Trio-Tech International Pte., Ltd. holds 55% of the ownership interest. On April 07, 2009, SHI entered into a Share Purchase Agreement, pursuant to which SHI has agreed to acquire from Erni Susanto Susi, Dwi Kartikarini and PT SAS Internasional shares of PT SAS Heavy Industry ("SASHI") for an aggregate cash purchase price of $10 , and a goodwill obligation of $100 The shares of SASHI to be acquired by SHI pursuant to the Share Purchase Agreement represent approximately 95% of the outstanding shares of SASHI. The consummation of such purchase and sale is subject to the satisfaction of certain conditions. SASHI engages in business in the oil and gas industry.

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 $1,030. This purchase was made on terms no less favorable to the Company than it could obtain in arms length transactions. (See Note 16 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 nine and three months ended March 31, 2009 and 2008, respectively.

Revenue Components
                     Nine Months Ended
                         March 31,             Three Months Ended March 31,
                    2009          2008            2009                2008
Net Sales:
Manufacturing         48.6 %       53.5 %            46.7 %              51.6 %
Testing               50.0         45.5              51.9                47.0
Distribution           1.4          1.0               1.4                 1.4
Total               100.00 %     100.00 %          100.00 %            100.00 %

Net sales for the nine and three months ended March 31, 2009 were $15,370 and $3,578, respectively, a decrease of $18,006 and $4,877, respectively, when compared to the same periods of the prior year. As a percentage, total net sales decreased by 53.9% for the nine months and decreased by 57.7% for the three months ended March 31, 2009, 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 the United Sates) decreased by $17,639 to $11,641 and by $4,151 to $3,252 for the nine months and three months ended March 31, 2009, 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 a result of the instability of the financial markets and their influence on the global economy . Net sales into and within the United States were $3,729 and $326 for the nine and three months ended March 31, 2009, respectively, a decrease of $367 and $726, respectively, when compared to the same periods of the prior year.

The decrease in net sales in the nine and three months ended March 31, 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 48.6% and 46.7% for the nine and three months ended March 31, 2009, respectively, representing a decrease of 4.9%, respectively, when compared to the same periods of the prior year. The absolute amount of net sales were $7,473 and $1,673 for the nine and three months ended March 31, 2009 respectively, a decrease of $10,375 and $2,694, respectively, when compared to the same periods of the prior year. We believe that the current worldwide economic crisis and its influence on the international market have a negative effect on our business. The demand for our equipments decreased, which in turn reduced our revenue.

Testing Segment

Net sales in the testing segment as a percentage of total net sales were 50.0% and 51.9% for the nine and three months ended March 31, 2009, respectively, representing an increase of 4.5% and 4.9%, 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 $7,504 to $7,682 and by $2,117 to $1,856 for the nine and three months ended March 31, 2009, respectively, compared to the same periods of fiscal 2008. We believe that the economic crisis is having a significant impact on the semiconductor industry and that China is experiencing a slowdown in its electronics manufacturing industries. We believe the foregoing resulted in reduced demand in our 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 nine and three months ended March 31, 2009, respectively, an increase of 0.4% and zero compared to the same periods in fiscal 2008. The absolute amount of net sales decreased by $127 to $215 and by $66 to $49 for the nine and three months ended March 31, 2009, 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. We continue to cut costs 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. This chain effect has hit the Company's business, and we anticipate that will continue to affect the Company's business in the future. We are 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 Third Quarters Ended March 31, 2009 and 2008

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

                                                           Three Months Ended
                                                                March 31,
                                                           2009           2008
     Net Sales                                                 100 %       100.0 %
     Cost of sales                                            79.3 %        83.3 %
     Gross Margin                                             20.7 %        16.7 %

     Operating Expenses
     General and administrative                               30.8 %        24.6 %
     Selling                                                   2.0 %         2.2 %
     Research and development                                  0.3 %         0.1 %
     Impairment loss                                           2.7 %         5.2 %
     Loss on disposal of property, plant and equipment         0.4 %         0.1 %
     Total operating expenses                                 36.2 %        32.2 %

     Loss from Operations                                    (15.5 )%      (15.5 )%

Overall Gross Margin

Overall gross margin as a percentage of revenue increased by 4.0% for the three months ended March 31, 2009, from 16.7% in the third quarter of fiscal 2008 to 20.7%, due primarily to the increase in the gross margin in the manufacturing segment. In terms of dollar value, the overall gross margin decreased by $668 for the three months ended March 31, 2009, from $1,409 to $741, compared to the same quarter of fiscal 2008 resulting from a decrease in revenue.

Gross margin as a percentage of revenue in the manufacturing segment increased by 19.5% for the three months ended March 31, 2009, from 4.4% in the third quarter of fiscal 2008 to 23.8% in the third quarter of fiscal 2009. The significant increase in gross margin was due to a decrease in sales of lower margin burn-in systems and pass-through products in the third quarter of fiscal 2009 compared with the same period of fiscal 2008. In addition, there was a decrease in the price of raw material in the third quarter of 2009 as some of our suppliers lowered their price as the result of heavy competition in the supplies market. In absolute amounts, gross margin in the manufacturing segment increased by $208 to $399 for the three months ended March 31, 2009, from $191 for the three months ended March 31, 2008.

Gross margin as a percentage of revenue in the testing segment decreased by 11.6% for the three months ended March 31, 2009, from 29.6% to 18.0%, compared to the same quarter of fiscal 2008. In terms of dollar amount, gross margin in the testing segment in the third quarter of fiscal 2009 was $335, a decrease of $840 compared to $1,175 in the same period of fiscal 2008. The decrease in the gross margin was due primarily to a drop in the average selling price of services in the Singapore testing operations. Our customers changed their demands and specifications for burn-in hours, which resulted in a lower average unit selling price for burn-in services. Another factor contributing to the decline in gross margin was the fact that significant portions of our operating costs are fixed in the testing segment; thus as product demands decrease and factory utilization decreases, the fixed costs are spread over the decreased output, resulting in a drop in profit margin.

Gross margin as a percentage of revenue in the distribution segment was 14.3% for the third quarter of fiscal 2009, a decrease by 23.1% from 37.4% in the third quarter of fiscal 2008. The decrease in gross profit as a percentage of sales was due to a decrease in average sales prices in the third quarter of fiscal 2009 compared to the same period of fiscal 2008. In absolute amounts, gross margin was $7, a decrease of $36 from $43 in the same period of fiscal 2008. The gross margin in 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 third quarters of fiscal 2009 and 2008 were as
follows:
                                                           Three Months Ended
                                                                March 31,
     (In Thousands, unaudited)                              2009          2008
     General and administrative                          $    1,103      $ 2,075
     Selling                                                     73          189
     Research and development                                    10            7
     Impairment loss                                             95          441
     Loss on disposal of property, plant and equipment           16           11
        Total                                            $    1,297      $ 2,723

General and administrative expenses decreased by $972, or 46.8%, compared to the same period of fiscal 2008, from $2,075 to $1,103 for the three months ended March 31, 2009. The decrease was attributable to a decrease in payroll expenses and a decrease in officer and executive compensation in the third quarter of fiscal 2009. Since the third quarter of fiscal 2008 ending March 31, 2008, we undertook several cost reduction actions. We reduced our headcount by . . .