Overview

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, the information under the headings "Risk Factors" and "Management's discussion and analysis of financial condition and results of operations" in the our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

Trio-Tech International ("TTI") was incorporated in 1958 under the laws of the State of California. As used herein, the term "Trio-Tech" or "Company" or "we" or "us" or "Registrant" includes Trio-Tech International and its subsidiaries unless the context otherwise indicates. Our mailing address and executive offices are located at 16139 Wyandotte Street, Van Nuys, California 91406, and our telephone number is (818) 787-7000.

The Company is a provider of environmental and reliability test equipment and services to the semiconductor industry. Our customers rely on us to verify that their semiconductor components meet or exceed the rigorous reliability standards demanded for aerospace, communications and other electronics products.

TTI generates more than 90% of its revenue from its three core business segments in the test and measurement industry, i.e. manufacturing of test equipment, testing services and distribution of test equipment. In 2007, we added a real estate revenue segment and in 2009, a fabrication segment when we ventured into providing fabrication service for oil and gas equipment industry.

Manufacturing

TTI develops and manufactures an extensive range of test equipment used in the "front end" and the "back end" manufacturing processes of semiconductors. Our equipment includes leak detectors, autoclaves, centrifuges, burn-in systems and boards, HAST testers, temperature controlled chucks, wet benches and more.

Testing

TTI provides comprehensive electrical, environmental, and burn-in testing services to semiconductor manufacturers in our testing laboratories in Southeast Asia and the United States. Our customers include both manufacturers and end-users of semiconductor and electronic components who look to us when they do not want to establish their own facilities. The independent tests are performed to industry and customer specific standards.

Distribution

In addition to our own products and services, TTI also provides an extensive range of complementary environmental and reliability test equipment from reputable manufacturers through our distribution operations. Such equipment includes temperature cycling and shock test chambers, reflow ovens, mechanical shock testers, drop testers and more.

Real Estate

In 2007, TTI invested in real property in Chongqing, China, which generated investment returns as well as investment income from real estate development projects and rental income from properties.

Fabrication

To mitigate concentration risks arising from industry concentration and customer concentration in our core businesses, TTI invested in a new business that provides product and services to the oil and gas industry. This business operates from a yard facility in Indonesia and fabricates steel structures, pipe spools, skid equipment packages and modules, heat transfer and process equipment.

Third Quarter Fiscal 2012 Highlights

· Manufacturing segment revenue increased by $1,513, or 61.6%, to $3,969 for the third quarter of fiscal 2012, compared to $2,456 for the same period in fiscal 2011.

· Testing segment revenue increased by $149, or 5.0%, to $3,141 for the third quarter of fiscal 2012, compared to $2,992 for the same period in fiscal 2011.

· Distribution segment revenue increased by $105, or 54.1%, to $299 for the third quarter of fiscal 2012, compared to $194 for the same period in fiscal 2011.

· Real estate segment revenue decreased by $19, or 38.8%, to $30 for the third quarter of fiscal 2012, compared to $49 for the same period in fiscal 2011.

· Fabrication Services segment revenue decreased by $55, or 39.9%, to $83 for the third quarter of fiscal 2012, compared to $138 for the same period in fiscal 2011.

· The overall gross profit margins decreased by 11.9% to 12.3% for the third quarter of fiscal 2012, from 24.2% for the same period in fiscal 2011.

· Loss from operations increased by $324 to $933 for the third quarter of fiscal 2012, compared to $609 for the same period in fiscal 2011.

· General and administrative expenses as a percentage of revenue decreased by 12.8% to 21.5% for the third quarter of fiscal 2012, from 34.3% for the same period in fiscal 2011.

· Selling expenses as a percentage of revenue increased by 0.2% to 2.2% for the third quarter of fiscal 2012, from 2.0% for the same period in fiscal 2011.

· Net loss for the third quarter of 2012 was $518 as compared to $462 for the same period in fiscal 2011.

Results of Operations and Business Outlook

The following table sets forth our revenue components for the three and nine
months ended March 31, 2012 and 2011, respectively.


Revenue Components
                       Three Months Ended         Nine Months Ended
                            March 31,                 March 31,
                      2012          2011          2012         2011
Revenue:
Manufacturing          3,969         2,456        9,983       16,717
Testing Services       3,141         2,992        9,247        9,659
Distribution             299           194          702          627
Real Estate               30            49          125        1,008
Fabrication Services      83           138        2,883          396

Total                  7,522         5,829       22,940       28,407



Revenue Components
                       Three Months Ended         Nine Months Ended
                            March 31,                 March 31,
                     2012          2011          2012          2011
Revenue:
Manufacturing         52.8 %          42.2 %      43.5 %         58.9 %
Testing Services      41.7            51.3        40.3           34.0
Distribution           4.0            3.3          3.1           2.2
Real Estate            0.4            0.8          0.5           3.5
Fabrication Services   1.1             2.4        12.6            1.4

Total                100.0 %         100.0 %     100.0 %        100.0 %

Revenue for the three months and nine months ended March 31, 2012 was $7,522 and $22,940, respectively, an increase of $1,693 and a decrease of $5,467, respectively, when compared to the revenue for the same periods of the prior fiscal year. As a percentage, revenue increased by 29.0% and decreased by 19.2% for the three and nine months ended March 31, 2012, respectively, when compared to total revenue for the same periods of the prior year.

Revenue into and within China, the Southeast Asia regions and other countries (except revenue into and within the United States) increased by $1,433, or 25.7%, to $7,004 and decreased by $5,573, or 20.5%, to $21,678 for the three months and nine months ended March 31, 2012, respectively, as compared with $5,571 and $27,251 for the same periods of last fiscal year.

The increase in revenue for the three months ended March 31, 2012 was primarily due to an increase in revenue in the manufacturing segment in our Singapore operation, in the testing segment in our China operation and in the distribution segment in our Singapore and fabrication segment in the Indonesia operation, but partially offset by a decrease in revenue in the testing segment in our Malaysia operation and the real estate segment in our China operation.

The increase for the nine months was primarily due to an increase in the testing segment in our China operation, in the distribution segment in our Singapore and fabrication segment in the Indonesia operation, but partially offset by a decrease in revenue in the manufacturing segment in our Singapore operation, testing segment in our Singapore, Malaysia and Thailand operation and the real estate segment in our China operation.

Revenue into and within the United States was $518 and $1,262 for the three months and nine months ended March 31, 2012, respectively, an increase of $260, or 100.8% and $106, or 9.2% respectively, from $258 and $1,156 for the same periods of the prior year. The increase in revenue into and with United States for the three months and nine months ended March 31, 2012 was mainly due to an increase in market demand for our products in the U.S. market as compared to the same period in fiscal 2011.

Revenue for the three and nine months ended March 31, 2012 can be discussed within the five segments as follows:

Manufacturing Segment

Revenue in the manufacturing segment as a percentage of total revenue was 52.8% and 43.5% for the three and nine months ended March 31, 2012, respectively, an increase of 10.6% and a decrease of 15.4% of total revenue, respectively, when compared to the same periods of the last fiscal year. The absolute amount of revenue increased by $1,513 to $3,969 and decreased by $6,734 to $9,983 for the three and nine months ended March 31, 2012, respectively, when compared to the same periods of the last fiscal year.

The increase in revenue generated by the manufacturing segment for the three months ended March 31, 2012 was primarily due to an increase in sale orders from one of our major customer in the third quarter of fiscal 2012. The revenue in the manufacturing segment from this major customer accounted for 49.5% of our total revenue in the manufacturing segment for the three months ended March 31, 2012 as compared to 20.6% for the same period in the last fiscal year. The increase in revenue during this period from this customer was primarily due to an increase in their capital spending compared to the same period of last fiscal year.

The decrease in revenue generated by the manufacturing segment for the nine months ended March 31, 2012 was primarily due to an decrease in sale orders from one of our major customer due to their reduced capital spending during the first and second quarter of fiscal 2012. The revenue in the manufacturing segment from this major customer accounted for 49.4% of our total revenue in the manufacturing segment for the nine months ended March 31, 2012 as compared to 46.5% for the same period in the last fiscal year. The decrease in revenue from this customer was primarily due to an decrease in their capital spending in the first two quarters of fiscal 2012 as compared to the same period of last fiscal year.

The future revenue in our manufacturing segment will be significantly affected by the purchase and capital expenditure plans of this major customer if the customer base cannot be increased.

Testing Services Segment

Revenue in the testing segment as a percentage of total revenue was 41.7% and 40.3% for the three and nine months ended March 31, 2012, respectively, a decrease of 9.6% and an increase of 6.3% of total revenue respectively, when compared to the same periods of the last fiscal year. The absolute amount of revenue increased by $149 to $3,141 and decreased by $412 to $9,247 for the three and nine months ended March 31, 2012, respectively, when compared to the same periods of the last fiscal year.

The increase in revenue generated by the testing segment for the three months ended March 31, 2012 was primarily due to an increase in testing volume in our China operations, but partially offset by a decrease in testing volume in our Malaysia operation. The increase in testing volume in our China operations was mainly due to an increase in sale orders by one of our major customers in our Tianjin operation and an increase in customer base in our Suzhou operation. In spite of the increase in revenue in the third quarter of fiscal 2012, the revenue decrease for the nine months ended March 31, 2012 was primarily due to the decrease in testing volume during the first two quarters of fiscal 2012 in our Malaysia and Thailand operations, which was mainly caused by our major customers reducing their orders due to the global market slowdown. Additionally, our Thailand operation was affected by a slowdown caused by severe flooding in Thailand during second quarter in fiscal 2012. Demand for testing services varies from country to country depending on changes taking place in the market and our customers' forecasts. As it is difficult to accurately forecast fluctuations in the market, management believes it is necessary to maintain testing facilities in close proximity to our customers in order to make it convenient for them to send us their newly manufactured parts for testing and to enable us to maintain a share of the market.

Distribution Segment

Revenue in the distribution segment accounted for 4.0% and 3.1% of total revenue for the three and nine months ended March 31, 2012, respectively, an increase of 0.7% and 0.9%, respectively, when compared to the same periods of the last fiscal year. The absolute amount of revenue increased by $105 to $299 and by $75 to $702 for the three and nine months ended March 31, 2012, respectively, when compared to the same periods of the last fiscal year. The increase in revenue for the three and nine months ended March 31, 2102 was mainly due to an increase in the orders from our existing customers due to increase in market demand for our products.

Real Estate Segment

The real estate segment accounted for 0.4% and 0.5% of total net revenue for the three and nine months ended March 31, 2012, respectively, a decrease of 0.4% and 3.0% compared to the same periods of the last fiscal year. The absolute amount of net revenue in the real estate segment decreased by $19 to $30 and by $883 to $125 for the three and nine months ended March 31, 2012, respectively, compared to the same periods of fiscal 2011. The decrease was primarily due to a decrease in our investment income and rental income in the real estate segment for the three and nine months ended March 31, 2012 as described below.

The two main revenue components for the real estate segment were investment income and rental income.

No investment income accounted as revenue for the three month ended March 31, 2012 and 2011 due to income amounting to $62 an $183 for three and nine months ended March 31, 2012 as compared to $97 for three and nine months ended March 31, 2011 from certain of our property development investments being reclassified to loan receivables from the third quarter of fiscal 2011 in accordance with ASC Topic 310-10-25 Receivables. Such income is included in "Other Income". We did not receive any investment income for the nine months ended March 31, 2012 while we received an investment income of RMB 5,226 for investment in property development, or approximately $ 782 for the nine months ended March 31, 2011. This investment income was mainly contributable to the investment in project B-48 phase 1, which reached maturity by the end of the second quarter of fiscal 2011.

Rental income for the three and nine months ended March 31, 2012 was RMB 185 and RMB 794 or approximately $ 30 and $ 125, respectively, based on the average exchange rate for the period of three and nine months ended March 31, 2012, respectively, published by the Monetary Authority of Singapore, a decrease of $ 19 and $ 103 compared to RMB 352 and RMB 1,525 or approximately $ 54 and $ 228, respectively, for the same periods in fiscal 2011. The decrease was primarily due to one of the rental contracts reached maturity in January, 2012, resulting in less rental income for the third quarter of fiscal 2012. A negotiation for the new rental contract is in process as at the date of this report.

"Investment in unconsolidated joint venture" as shown in the balance sheet consists of the cost of an investment in a joint venture, in which we have a 10.42% interest. Prior to the first quarter of fiscal 2012, the 10.42% ownership in this China affiliate was recorded on the equity basis. In the first quarter of fiscal 2012, we concluded that we could no longer exert significant influence on the operating and financial activities of the joint venture. Therefore, we began accounting for this investment using cost method effective September 29, 2011. The carrying value of this investment at March 31, 2012 was $772, which approximates our pro rate share of the underlying value of the joint venture. Based on ASC Topic 323 - Investment - Other, Cost Method Investments, the existing cost, after evaluating for impairment, the carrying value of the investment has been considered to be the cost of investment.

Fabrication Services Segment

As a percentage of total revenue, the revenue generated by the fabrication services segment accounted for 1.1% and 12.6% of total revenue for the three and nine months ended March 31, 2012, respectively, as compared to 2.4% and 1.4% of total revenue for the same periods of last fiscal year. The absolute amount of revenue was $ 83 and $ 2,883 for the three and nine months ended March 31, 2012, respectively, a decrease of $ 55 and an increase of $ 2,487, respectively as compared to $ 138 and $ 396 for the same period of last fiscal year. The decrease in revenue for the three months ended March 31, 2012 generated by the segment was due to only one project being carried out in the third quarter of fiscal 2012. In spite of the decrease in revenue in the third quarter of fiscal 2012, the revenue increase in the nine months ended March 31, 2012 was due to the completion of two fabrication projects during the first quarter of fiscal 2012. Although we have been in the fabrication business for only two years, we believe we are starting to penetrate the market with these new projects.

Revenue in the fabrication segment decreased by $ 372, or 81.8%, for the third quarter of fiscal 2012, as compared to $ 455 for the second quarter of fiscal 2012. Revenue in this segment is recognized based on the percentage of completion. The decrease in revenue was primarily due to certain projects have been completed in the second quarter of fiscal 2012. The Company is currently handling another project which is expected to be completed by the end of the fourth quarter of fiscal 2012 and is working on securing further projects.

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, and decline in demand for certain types of burn-in devices or equipment, decline in demand for testing services and fabrication services, and other similar factors. One factor that influences uncertainty 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 manufacturing customers' demands upon short notice, the Company maintains higher inventories, but continues to work closely with its customers to avoid stock piling. 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.

There are several influencing factors which create uncertainties when forecasting performance of our real estate segment, such as obtaining the rights by the joint venture to develop the real estate projects in China, inflation in China, currency fluctuations and devaluation, changes in Chinese laws, regulations, or their interpretation.

Comparison of the Third Quarter Ended March 31, 2012 ("Q3 2012") and March 31, 2011 ("Q3 2011")

The following table sets forth certain consolidated statements of income data as a percentage of revenue for the third quarters of fiscal 2012 and 2011, respectively:

                                Three Months Ended March 31,
                                 2012                  2011
Revenue                              100.0  %              100.0 %
Cost of sales                         87.7                  75.8
Gross Margin                          12.3  %               24.2 %
Operating expenses :
General and administrative            21.5  %               34.3 %
Selling                                2.2                   2.0
Research and development               1.0                   1.0
Impairment loss                        0.0                   0.0
Gain on disposal of PP&E               0.0                  (2.6 )
Total operating expenses              24.7  %               34.7 %

Overall Gross Margin

Overall gross margin as a percentage of revenue decreased by 11.9% to 12.3% for the three months ended March 31, 2012, from 24.2% in the same period of the last fiscal year primarily due to a decrease in the gross profit margin in the testing, distribution and fabrication services segments. That decrease was partially offset by an increase in gross profit margin in the manufacturing and real estate segments.

Gross profit margin as a percentage of revenue in the manufacturing segment increased by 1.6% to 15.9% for the three months ended March 31, 2012, from 14.3% in the same period of the last fiscal year. The increase of gross profit margin was primarily due to the fixed cost being spread over the increased output. The increase in revenues in Singapore operation was primarily due to increase in orders from one major customer as discussed above. In absolute dollar amounts, gross profits in the manufacturing segment increased by $278 to $630 for the three months ended March 31, 2012 from $352 for the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the testing segment decreased by 17.6% to 17.3% for the three months ended March 31, 2012, from 34.9% in the same period of the last fiscal year. Our Singapore operation increased its manpower cost to meets its increased revenue and the electricity expenses increased due to increase of rate in the tariff to meet its increased revenue. The Malaysia operation, despite its decrease in volume by approximately 30%, it incurred higher cost to meet the major customer's quality standard requirement, which reduced our gross margin in the Malaysia operation. Our Tianjin operation was setup with certain expected testing volume and incurred its fixed costs, however the inflow of testing volume was slower than expected and reducing gross margin in our Tianjin operation. All of the foregoing contributed to a lower margin in this segment. In absolute dollar amounts, gross profit in the testing segment decreased by $ 500 to $544 for the three months ended March 31, 2012 from $ 1,044 for the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the distribution segment decreased by 7.8% to 21.1% for the three months ended March 31, 2012, from 28.9% for the same period of the last fiscal year. The decrease was due to the change in product mix, as we sold more products with a lower profit margin in the distribution segment as compared to the same period of last fiscal year. In terms of absolute dollar amounts, gross profit in the distribution segment for the three months ended March 31, 2012 was $ 63, an increase of $ 7, compared to $ 56 in the same period of the last fiscal year. The increase in the gross profit was primarily due to the increase in revenue but partially offset against the lower gross margin. The gross profit margin of the distribution segment was 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.

Gross profit margin as a percentage of revenue in the real estate segment was 23.3% for the three months ended March 31, 2012, an increase of 2.9% as compared to 20.4% for the same period in the last fiscal year. In absolute dollar amounts, gross profit in the real estate segment for the three months ended March 31, 2012 was $ 7, a decrease of $ 3 from $ 10 in the same period of the last fiscal year. The decrease in the gross profit margin as a percentage of revenue in the real estate segment was mainly due to a decrease in rental revenue in the third quarter of fiscal 2012 as one of the rental contracts reached maturity in January 2012, while the cost remains fixed and hence there is no decrease in cost while the revenue decreases, resulting in a lower gross margin.

Gross profit margin as a percentage of revenue in the fabrication services segment deteriorated to a negative 385.5% for the three months ended March 31, 2012, compared to negative margin of 38.4% for the same period of the last fiscal year. In absolute dollar amounts, gross profit in the fabrication services segment for the three months ended March 31, 2012 was negative $ 320, as compared to a negative $ 53 in the same period of the last fiscal year. The subsidiary started its operating activities late calendar year 2009. The nature of the industry is such that it takes a few years initially to optimize the full capacity. The revenue generated from the initial few orders could not cover the entire fixed cost of the operation, resulting in a negative gross margin due to underutilization of the plant capacity. The cost of sales in this segment mainly consisted of rental expenses, depreciation expenses and cost of direct labor.

Operating Expenses

Operating expenses for the third quarters of fiscal 2012 and 2011 were as
follows:

                               Three Months Ended March 31,
(Unaudited)                      2012                2011
General and administrative   $       1,620       $       1,997
Selling                                164                 115
Research and development                73                  59
(Gain) on disposal of PP&E              --                (153 )
 Total                       $       1,857       $       2,018

General and administrative expenses decreased by $ 377, or 18.9%, from $ 1,997 to $ 1,620 for the three months ended March 31, 2012 compared to the same . . .