The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report and with our Annual Report on Form 10-K for the fiscal year ended May 31, 2012 and the condensed consolidated financial statements and notes thereto.

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this report, including those made by the management of Aehr Test Systems, other than statements of historical fact, are forward-looking statements. These statements typically may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "planned," "estimated," and "potential," among others and include, but are not limited to, statements concerning our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated results or other expectations reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and other factors beyond our control, and in particular, the risks discussed in "Part II, Item 1A. Risk Factors" and those discussed in other documents we file with the SEC. All forward-looking statements included in this document are based on our current expectations, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

OVERVIEW

The Company was founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since its inception, the Company has sold more than 2,500 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. The Company's principal products currently are the Advanced Burn-in and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in system, the MAX burn-in system, WaferPak contactors, the DiePak carrier and test fixtures.

The Company's net sales consist primarily of sales of systems, test fixtures, die carriers, upgrades and spare parts and revenues from service contracts and cancellation charges. The Company's selling arrangements may include contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, long-term service contracts, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the critical accounting policies, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

During the first quarter of fiscal 2013, the Company entered into an agreement with a customer to develop a next generation system. The project identifies multiple milestones and values assigned to each. The consideration earned upon achieving the milestone is required to meet the following conditions prior to recognition: the value is commensurate with the vendor's performance to meet the milestone, it relates solely to past performance, and it is reasonable relative to all of the deliverables and payment terms within the arrangement.

Other than recognition of revenue under the milestone method related to the development contract, we believe there have been no material changes to our critical accounting policies and estimates during the three months ended August 31, 2012 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

RESULTS OF OPERATIONS

The following table sets forth items in the Company's unaudited condensed
consolidated statements of operations as a percentage of net sales for the
periods indicated.

                                                           Three Months Ended
                                                                August 31
                                                           2012           2011

     Net sales                                               100.0 %       100.0 %
     Cost of sales                                            49.2          56.4
     Gross profit                                             50.8          43.6

     Operating expenses:
     Selling, general and administrative                      37.0          38.8
     Research and development                                 19.2          26.2

     Total operating expenses                                 56.2          65.0

     Loss from operations                                     (5.4 )       (21.4 )

     Interest expense                                         (0.3 )           -
     Gain on sale of long-term investment                        -          24.0
     Other expense, net                                       (0.4 )        (0.3 )

     (Loss) income before income tax (expense) benefit        (6.1 )         2.3

     Income tax (expense) benefit                                -           0.7
     Net (loss) income                                        (6.1 )%        3.0 %

THREE MONTHS ENDED AUGUST 31, 2012 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2011

NET SALES. Net sales increased to $4.8 million for the three months ended August 31, 2012 from $4.1 million for the three months ended August 31, 2011, an increase of 17.0%. The increase in net sales for the three months ended August 31, 2012 was primarily due to an increase in net sales of the Company's Test During Burn-in (TDBI) products, partially offset by a decrease of the Company's wafer-level products. Net sales of the TDBI products for the three months ended August 31, 2012 were $2.8 million, and increased approximately $1.2 million from the three months ended August 31, 2011. Net sales of the Company's wafer-level products for the three months ended August 31, 2012 were $2.0 million, and decreased approximately $0.5 million from the three months ended August 31, 2011.

GROSS PROFIT. Gross profit consists of net sales less cost of sales. Cost of sales consists primarily of the cost of materials, assembly and test costs, and overhead from operations. Gross profit increased to $2.5 million for the three months ended August 31, 2012 from $1.8 million for the three months ended August 31, 2011, an increase of $0.7 million. Gross profit margin, the percentage of gross profit to net sales, increased to 50.8% for the three months ended August 31, 2012 from 43.6% for the three months ended August 31, 2011. The gross profit margin improved primarily due to the high margin net sales of an engineering development project for the three months ended August 31, 2012.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs of employees, commission expenses to independent sales representatives, product promotion and other professional services. SG&A expenses increased to $1.8 million for the three months ended August 31, 2012 from $1.6 million for the three months ended August 31, 2011, an increase of 11.7%. The increase in SG&A expenses was primarily due to an increase of $0.1 million in pre-sales support expenses.

RESEARCH AND DEVELOPMENT. Research and development, or R&D, expenses consist primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies, and outside services. R&D expenses decreased to $0.9 million for the three months ended August 31, 2012 from $1.1 million for the three months ended August 31, 2011, a decrease of 14.0%. This decrease was primarily attributable to a reduction in project expenses of $42,000, outside services of $33,000 and employment related expenses of $28,000.

INTEREST EXPENSE. Interest expense was $12,000 for the three months ended August 31, 2012 compared with nil for the three months ended August 31, 2011.

GAIN ON SALE OF LONG-TERM INVESTMENT. During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd, resulting in a gain of $990,000.

OTHER EXPENSE, NET. Other expense, net were $19,000 and $12,000 for the three months ended August 31, 2012 and 2011, respectively.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $2,000 for the three months ended August 31, 2012, compared with an income tax benefit of $27,000 for the three months ended August 31, 2011. Income tax benefit was recognized in the income tax provision in the first quarter of fiscal 2012 resulting from an adjustment of a tax liability previously reported.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $0.3 million for the three months ended August 31, 2012 and $1.6 million for the three months ended August 31, 2011. For the three months ended August 31, 2012, net cash used in operating activities was primarily driven by a net loss of $0.3 million as adjusted to exclude the effect of non-cash charge of stock-based compensation expense of $0.2 million, as well as the increase in inventories of $0.6 million, partially offset by an increase in accounts payable of $0.5 million. The increases in inventories and accounts payable were due primarily to inventory purchases to support future shipments. For the three months ended August 31, 2011, net cash used in operating activities was primarily driven by an increase of $1.1 million in accounts receivable and a $1.0 million gain on the sale of the Company's long-term investment, partially offset by an increase in accounts payable of $0.4 million. The increase in accounts receivable was due to the timing of revenue generated in the first quarter of fiscal 2012. The increase in accounts payable was due primarily to inventory purchases to support future shipments.

Net cash used in investing activities was $16,000 for the three months ended August 31, 2012 compared to net cash provided by investing activities of $1.4 million for the three months ended August 31, 2011. The cash provided by investing activities for the three months ended August 31, 2011 was due primarily to the $1.4 million in proceeds received from the sale of the Company's long-term investment in ESA Electronics PTE Ltd.

Financing activities provided cash of $111,000 for the three months ended August 31, 2012 and nil for the three months ended August 31, 2011. Net cash provided by financing activities during the three months ended August 31, 2012 was primarily due the proceeds from issuance of common stock for the Employee Stock Ownership Plan and from the exercise of stock options.

The effect of exchange rates provided cash of $5,000 and $124,000 for the three months ended August 31, 2012 and 2011, respectively. The change in cash provided was due to the fluctuation in the value of the dollar compared to foreign currencies.

As of August 31, 2012, the Company had working capital of $6.1 million. Working capital consists of cash and cash equivalents, accounts receivable, inventory and other current assets, less current liabilities.

The Company leases its manufacturing and office space under operating leases. The Company entered into a non-cancelable operating lease agreement for its United States manufacturing and office facilities, which commenced in April 2008 and expires in June 2015. Under the lease agreement, the Company is responsible for payments of utilities, taxes and insurance.

From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company's business. If consummated, any such transactions may use a portion of the Company's working capital or require the issuance of equity. The Company has no present understandings, commitments or agreements with respect to any material acquisitions.

The Company anticipates that the existing cash balance together with cash flows from operations, as well as funds available through the working capital credit facility will be adequate to meet its working capital and capital equipment requirements through fiscal 2013. Refer to Note 10, "LINE OF CREDIT", for further discussion of the credit facility agreement. After fiscal 2013, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to the Company.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet financing arrangements and has not established any variable interest entities.

OVERVIEW OF CONTRACTUAL OBLIGATIONS

On August 25, 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified U.S. based and foreign customer receivables, and export-related inventory. On May 29, 2012 the credit agreement was amended to increase the borrowing limit to $2.0 million. Refer to Note 10, "LINE OF CREDIT", for further discussion of the agreement. On September 11, 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million. Refer to Note 12, "SUBSEQUENT EVENT" for further discussion of the agreement.

There have been no additional material changes in the composition, magnitude or other key characteristics of the Company's contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2012.