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 with values assigned to each. The consideration earned upon achieving the milestone is required to meet the following conditions prior to recognition: (i) the value is commensurate with the vendor's performance to meet the milestone, (ii) it relates solely to past performance, (iii) 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 described above, we believe there have been no material changes to our critical accounting policies and estimates during the six months ended November 30, 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           Six Months Ended
                                            November 30,                November 30,
                                         2012           2011          2012         2011

Net sales                                  100.0 %       100.0 %       100.0 %      100.0 %
Cost of sales                               55.2          70.8          52.3         63.3
Gross profit                                44.8          29.2          47.7         36.7

Operating expenses:
Selling, general and administrative         41.0          39.6          39.0         39.2
Research and development                    19.0          26.9          19.1         26.5

Total operating expenses                    60.0          66.5          58.1         65.7

Loss from operations                       (15.2 )       (37.3 )       (10.4 )      (29.0 )

Interest expense                            (0.2 )          --          (0.3 )         --
Gain on sale of long-term investment          --            --            --         12.4
Other (expense) income, net                 (0.3 )         1.5          (0.3 )        0.6

Loss before income tax
(expense) benefit                          (15.7 )       (35.8 )       (11.0 )      (16.0 )

Income tax (expense) benefit                (0.3 )         0.2          (0.2 )        0.4
Net loss                                   (16.0 )%      (35.6 )%      (11.2 )%     (15.6 )%

THREE MONTHS ENDED NOVEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
2011

NET SALES. Net sales increased to $5.1 million for the three months ended November 30, 2012 from $3.9 million for the three months ended November 30, 2011, an increase of 30.9%. The increase in net sales for the three months ended November 30, 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 November 30, 2012 were $4.4 million, and increased approximately $2.6 million from the three months ended November 30, 2011. Net sales of the Company's wafer-level products for the three months ended November 30, 2012 were $0.6 million, and decreased approximately $1.2 million from the three months ended November 30, 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 $2.3 million for the three months ended November 30, 2012 from $1.1 million for the three months ended November 30, 2011, an increase of 100.6%. Gross profit margin increased to 44.8% for the three months ended November 30, 2012 from 29.2% for the three months ended November 30, 2011. The increase in gross profit margin was primarily the result of a change in mix of product sales, and manufacturing efficiencies due to an increase in net sales noted above.

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 $2.1 million for the three months ended November 30, 2012 from $1.5 million for the three months ended November 30, 2011, an increase of 35.3%. The increase in SG&A expenses was primarily due to an increase of $0.2 million in pre-sales support expenses, and $0.2 million sales commission to outside sales representatives.

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 professional consulting expenses. R&D expenses remained unchanged at $1.0 million for the three months ended November 30, 2012 compared with the three months ended November 30, 2011.

INTEREST EXPENSE. Interest expense increased to $13,000 for the three months ended November 30, 2012 from nil for the three months ended November 30, 2011 primarily as a result of borrowings on the line of credit.

OTHER (EXPENSE) INCOME, NET. Other expense, net was $15,000 for the three months ended November 30, 2012, compared with other income, net of $58,000 for the three months ended November 30, 2011. The change between other expense and other income was due primarily to gains and losses realized in connection with foreign exchange rate fluctuations during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $16,000 for the three months ended November 30, 2012, compared with an income tax benefit of $8,000 for the three months ended November 30, 2011. An income tax benefit was recognized in the second quarter of fiscal 2012 resulting from an adjustment of a tax liability previously reported.

SIX MONTHS ENDED NOVEMBER 30, 2012 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
2011

NET SALES. Net sales increased to $9.9 million for the six months ended November 30, 2012 from $8.0 million for the six months ended November 30, 2011, an increase of 23.7%. The increase in net sales for the six months ended November 30, 2012 resulted primarily from 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 six months ended November 30, 2012 were $7.2 million, and increased approximately $3.8 million from the six months ended November 30, 2011. Net sales of the Company's wafer-level products for the six months ended November 30, 2012 were $2.5 million, and decreased approximately $1.7 million from the six months ended November 30, 2011.

GROSS PROFIT. Gross profit increased to $4.7 million for the six months ended November 30, 2012 from $2.9 million for the six months ended November 30, 2011, an increase of 61.1%. Gross profit margin increased to 47.7% for the six months ended November 30, 2012 from 36.7% for the six months ended November 30, 2011. The increase in gross profit margin was primarily the result of a change in mix of product sales, the impact in the first quarter of fiscal 2013 of development revenues for work previously performed, and manufacturing efficiencies due to an increase in net sales.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $3.9 million for the six months ended November 30, 2012 from $3.1 million for the six months ended November 30, 2011, an increase of 23.3%. The increase in SG&A expenses was primarily due to an increase of $0.3 million in pre-sales support expenses, and $0.2 million sales commission to outside sales representatives.

RESEARCH AND DEVELOPMENT. R&D expenses decreased to $1.9 million for the six months ended November 30, 2012 from $2.1 million for the six months ended November 30, 2011, a decrease of 10.8%. This decrease was primarily attributable to a reduction in development projects.

INTEREST EXPENSE. Interest expense increased to $25,000 for the six months ended November 30, 2012 from nil for the six months ended November 30, 2011 primarily as a result of borrowings on the line of credit.

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) INCOME, NET. Other expense, net was $34,000 for the six months ended November 30, 2012, compared with other income, net of $46,000 for the six months ended November 30, 2011. The change between other expense and other income was due primarily to gains and losses realized in connection with foreign exchange rate fluctuations during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $18,000 for the six months ended November 30, 2012, compared with income tax benefit of $35,000 for the six months ended November 30, 2011. An income tax benefit was recognized in the six months ended November 30, 2011 resulting from an adjustment of a tax liability previously reported.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $1.2 million for the six months ended November 30, 2012 and $2.4 million for the six months ended November 30, 2011. For the six months ended November 30, 2012, net cash used in operating activities was primarily the result of the net loss of $1.1 million as adjusted to exclude the effect of non-cash charges including stock-based compensation expense of $0.2 million and depreciation and amortization of $0.2 million, as well as increases in accounts receivable of $0.3 million and inventories of $0.3 million. The increase in accounts receivable was primarily due to an increase in revenues for the six months ended November 30, 2012 compared to the same period in the prior fiscal year. The increase in inventories was to support future shipments for customer orders. For the six months ended November 30, 2011, net cash used in operating activities was primarily driven by a net loss of $1.2 million, a $990,000 gain on the sale of the Company's long-term investment, increases in accounts receivable of $0.7 million and inventories of $0.6 million, partially offset by an increase in accounts payable of $0.5 million. The increase in accounts receivable was primarily due to an increase in revenues for the six months ended November 30, 2011 compared to the same period in the prior fiscal year. The increase in inventories was to support future shipments for customer orders. The increase in accounts payable was due primarily to inventory purchases to support future shipments.

Net cash used in investing activities was $21,000 for the six months ended November 30, 2012 compared to $1.4 million net cash provided for the six months ended November 30, 2011. The cash provided by investing activities for the six months ended November 30, 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 $457,000 for the six months ended November 30, 2012 and $114,000 for the six months ended November 30, 2011. Net cash provided by financing activities during the six months ended November 30, 2012 was due primarily to net borrowings under the line of credit of $277,000 and $180,000 due to proceeds from issuance of common stock for the ESPP, the Employee Stock Ownership Plan and from the exercise of stock options. Net cash provided by financing activities during the six months ended November 30, 2011 was due primarily to proceeds from issuance of common stock for the ESPP, the Employee Stock Ownership Plan and from the exercise of stock options.

The effect of exchange rates used cash of $88,000 for the six months ended November 30, 2012 and provided cash of $54,000 for the six months ended November 30, 2011. The change in cash provided or used was due to the fluctuation in the value of the dollar compared to foreign currencies.

As of November 30, 2012, the Company had working capital of $5.6 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. On September 11, 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million. The maturity date of the loan is August 23, 2013. Refer to Note 10, "LINE OF CREDIT", 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.