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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

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 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 generated more than 97% 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 during the six months ended December 31, 2012. In 2007 we added a real estate revenue segment and in 2009 a fabrication segment when we ventured into providing fabrication services 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

Beginning in 2007, TTI has invested in real property in Chongqing, China, which has 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 business that provides products and services to the oil and gas industry. This business operated from a leased yard facility in Indonesia and fabricated steel structures, pipe spools, skid equipment packages and modules, heat transfer and process equipment. However, because the expected revenue and volume were not achieved, management terminated the lease for the yard during the second quarter of fiscal 2013 and intends to outsource fabrication projects to service providers who have facilities to undertake such projects. Management intends to continue this segment of business and expects to achieve benefits to this segment through operating with lower fixed costs.

Second Quarter Fiscal 2013 Highlights

· Manufacturing segment revenue decreased by $137, or 4.3%, to $3,079 for the second quarter of fiscal 2013, compared to $3,216 for the same period in fiscal 2012.

· Testing segment revenue increased by $954, or 33.9%, to $3,769 for the second quarter of fiscal 2013, compared to $2,815 for the same period in fiscal 2012.

· Distribution segment revenue increased by $255, or 300.0%, to $340 for the second quarter of fiscal 2013, compared to $85 for the same period in fiscal 2012.

· Real estate segment revenue decreased by $15, or 31.3%, to $33 for the second quarter of fiscal 2013, compared to $48 for the same period in fiscal 2012.

· Fabrication services segment revenue decreased by $325, or 71.4%, to $130 for the second quarter of fiscal 2013, compared to $455 for the same period in fiscal 2012.

· The overall gross profit margins increased by 6.9% to 18.3% for the second quarter of fiscal 2013, from 11.4% for the same period in fiscal 2012.

· Loss from operations decreased by $1,021 to $585 for the second quarter of fiscal 2013, compared to $1,606 for the same period in fiscal 2012.

· General and administrative expenses as a percentage of revenue decreased by 9.2% to 23.5% for the second quarter of fiscal 2013, from 32.7% for the same period in fiscal 2012.

· Selling expenses as a percentage of revenue increased by 0.1% to 1.8% for the second quarter of fiscal 2013, from 1.9% for the same period in fiscal 2012.

· Net loss attributable to Trio-Tech International for the second quarter of 2013 was $506 as compared to $1,203 for the same period in fiscal 2012.

Results of Operations and Business Outlook

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

                       Three Months Ended         Six Months Ended
 Revenue Components       December 31,              December 31,
                      2012           2011         2012        2011
Revenue:
Manufacturing           41.9 %        48.6 %       48.9 %      39.0 %
Testing Services        51.3          42.5         44.9        39.6
Fabrication Services     1.8           6.9          1.8        18.2
Distribution             4.6           1.3          4.0         2.6
Real Estate              0.4           0.7          0.4         0.6
Total                  100.0 %       100.0 %      100.0 %     100.0 %

Revenue for the three months and six months ended December 31, 2012 was $7,351 and $17,098, respectively, an increase of $732 and $1,680, respectively, when compared to the revenue for the same periods of the prior fiscal year. As a percentage, revenue increased by 11.1% and 10.9% for the three and six months ended December 31, 2012, respectively, when compared to total revenue for the same periods of the prior year.

For the three month ended December 31, 2012, the increase in revenue was primarily due to an increase in revenue in the testing segment in our Malaysia, Thailand and China operations and an increase in revenue from the distribution segment in our Singapore operations, but partially offset by a decrease in revenue in the manufacturing and testing segment in our Singapore operations, the fabrication services segment in our Indonesia operation and real estate segment in our China operation. For the six months ended December 31, 2012, the increase in revenue was primarily due to an increase in revenue in the manufacturing segment in our Singapore operation, the testing segment in Malaysia, Thailand and China operations and the distribution segment in Singapore operation. The increase was partially offset by the decrease in revenue in the testing segment in our Singapore operation, real estate segment in China and fabrication services in our Indonesia operation.

Revenue into and within China, the Southeast Asia regions and other countries (except revenue into and within the United States) increased by $764, or 12.2%, to $7,047 and by $1,534, or 10.5%, to $16,208 for the three months and six months ended December 31, 2012, respectively, as compared with $6,283 and $14,674 for the same periods of last fiscal year.

Revenue into and within the United States was $277 and $863 for the three months and six months ended December 31, 2012, respectively, a decrease of $59 and an increase of $119, respectively, from $336 and $744 for the same periods of the prior year. The decrease in the three months result was mainly due to a decrease in orders from our customers in the U.S. market in the second quarter of fiscal 2013 as compared to the same period in fiscal 2012. However for the six months result there was an increase in revenue due to higher demand during the first quarter of fiscal 2013 as compared to the same period in the last fiscal year.

Revenue for the three and six months ended December 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 41.9% and 48.9% for the three and six months ended December 31, 2012, respectively, a decrease of 6.7% and an increase of 9.9% of total revenue, respectively, when compared to the same periods of the last fiscal year. The absolute amount of revenue decreased by $137 to $3,079 and increased by $2,357 to $8,371 for the three and six months ended December 31, 2012, respectively, compared to the same periods of the last fiscal year.

Revenue in the manufacturing segment for the three month period ended December 31, 2012 decreased primarily due to a decrease in capital spending by one of our major customers for the testing and production of their semiconductors compared to the same period of last fiscal year. The revenue in the manufacturing segment from this major customer accounted for 51.5% and 53.6% of our total revenue in the manufacturing segment for the three months ended December 31, 2012 and 2011, respectively. Such decrease in revenue was partially offset by the revenue generated from a new customer in our Singapore operations.

Revenue in the manufacturing segment for the six month period ended December 31, 2012 increased both in the Singapore operation and the U.S. operation, due to increased demand from our customers during the first quarter of fiscal 2013 as compared to the same period of the last fiscal year. The revenue in the manufacturing segment from this major customer accounted for 64.5% and 58.1% of our total revenue in the manufacturing segment for the six months ended December 31, 2012 and 2011 respectively.

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 51.3% and 44.9% for the three and six months ended December 31, 2012, respectively, an increase of 8.8% and 5.3%, respectively, of total revenue when compared to the same periods of the last fiscal year. The absolute amount of revenue increased by $954 to $3,769 and by $1,572 to $7,678 for the three and six months ended December 31, 2012, respectively, compared to the same periods of the last fiscal year.

Revenue in the testing segment for the three and six month period ended December 31, 2012 increased primarily due to an increase in testing volume in our Malaysia, Thailand and China operations, but partially offset by a decrease in testing volume in our Singapore operations. The decrease in testing volume in our Singapore operations was mainly caused by our major customers reducing their orders due to the decrease in demand for our customers' products. The increase in our testing volume in the Malaysia operation was due to the increase in demand for our customers' products during the period. The Thailand operations had higher volume in this year as compared to the second quarter of fiscal 2012, which was affected by a slowdown caused by severe flooding in that fiscal year.

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 4.6% and 4.0% of total revenue for the three and six months ended December 31, 2012, respectively, an increase of 3.3% and 1.4%, respectively, when compared to the same periods of the prior year. The absolute amount of revenue increased by $255 to $340 and by $281 to $684 for the three and six months ended December 31, 2012, respectively, compared to the same periods of the last fiscal year.

Revenue in the distribution segment for the three and six month period ended December 31, 2012 increased primarily due to an increase in orders from our existing customers due to the increase in demand for their products.

Demand for the distribution segment varies depending on the demand for our customers' products and the changes taking place in the market and our customers' forecasts. Hence it is difficult to accurately forecast fluctuations in the market.

Real Estate Segment

The real estate segment accounted for 0.4% of total net revenue for the three and six months ended December 31, 2012, respectively, a decrease of 0.3% and 0.2% respectively, as compared to the same periods of the prior year. The absolute amount of revenue in the real estate segment decreased by $15 to $33 and by $32 to $63 for the three and six months ended December 31, 2012, respectively, compared to the same periods of the last fiscal year. The decrease was primarily due to a decrease in rental income in the real estate segment for the three and six months ended December 31, 2012 as described below.

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

No investment income was recorded as "revenue" for the three and six months ended December 31, 2012 and 2011. Income for certain of our property development investments (after deduction of the relevant local taxes) was RMB 358 and RMB 748, or approximately $57 and $119, for the three and six months ended December 31, 2012 as compared to income of RMB 390 and RMB 780, or approximately $62 and $124, for the three and six months ended December 31, 2011. This investment was reclassified to loan receivables commencing in the third quarter of fiscal 2011, in accordance with ASC Topic 310-10-25 Receivables, in the third quarter of fiscal 2011. Hence such income is also reclassified as "Other Income."

Rental income for the three and six months ended December 31, 2012 was RMB 205 and RMB 395 or approximately $33 and $63, respectively, as compared to RMB 305 and RMB 609 or approximately $47 and $95, respectively for the same period of the last fiscal year. The decrease was primarily due to the expiry of a lease agreement during January 2012. Although the Company has been looking for a suitable tenant for such property, the property is still vacant as at the date of this report. Management reviewed this asset for impairment and, based on the market value of the property as compared to the carrying value, concluded that there was no need to impair the property.

"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 10.00% interest. Prior to the first quarter of fiscal 2012, the investment 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 the operating and financial activities of the joint venture. Therefore, effective September 29, 2011, we began accounting for this investment using the cost method. The carrying value of this investment at December 31, 2012 was $781, which approximates our pro rata share of the underlying value of the joint venture. Based on ASC Topic 323 - Investment - Other, Cost Method Investments, after evaluating for impairment, the carrying value of the investment has been considered to be the cost of investment. The Company disposed of its option to purchase 15% of the investment from this joint venture during September 2011 for RMB 500, or approximately $79.

Fabrication Services Segment

As a percentage of total revenue, the revenue generated by the fabrication services segment accounted for 1.8% of total revenue for the three and six months ended December 31, 2012, respectively, as compared to 6.9% and 18.2% of total revenue for the same periods of last fiscal year. The absolute amount of revenue was $130 and $302 for the three and six months ended December 31, 2012, respectively, representing a decrease of $325 and $2,498 as compared to $455 and $2,800 for the same period of last fiscal year. The decrease in revenue generated by the segment during the three and six months period ended December 31, 2012 was due to fewer fabrication projects in the period, combined with a reduction in orders due to the decision to terminate the lease of the yard at the end of second quarter of fiscal 2013. Management intends to continue this segment of business and expects to achieve benefits to this segment through operating with lower fixed costs.

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 Second Quarter Ended December 31, 2012 ("Q2 2013") and December 31, 2011 ("Q2 2012")

The following table sets forth certain consolidated statements of income data as a percentage of revenue for the second quarters of fiscal 2013 and 2012, respectively:

                               Three Months Ended
                                  December 31,
                               2012           2011
Revenue                          100.0  %      100.0 %
Cost of sales                     81.7          88.6
Gross Margin                      18.3  %       11.4 %
Operating expenses :
General and administrative        23.5  %       32.7 %
Selling                            1.8           1.9
Research and development           1.0           1.1
Impairment loss                    0.0           0.0
Gain on disposal of PP&E           0.0           0.0
Total operating expenses          26.3  %       35.7 %

Overall Gross Margin

Overall gross margin as a percentage of revenue increased by 6.9% to 18.3% for the three months ended December 31, 2012, from 11.4% for the same period of the last fiscal year, primarily due to an increase in the gross profit margin in the manufacturing, testing and distribution segments. The increase was partially offset by a decrease in gross profit margin in the real estate and fabrication services segments.

Gross profit margin as a percentage of revenue in the manufacturing segment increased by 0.9% to 18.2% for the three months ended December 31, 2012, from 17.3% in the same period of the last fiscal year. The increase of gross profit margin was primarily due to a decrease in labor and material cost which was partially offset by the decrease in revenue in our Singapore operation. The decrease in labor cost was due to reduction in employee headcount in the Singapore operations. The decrease in material cost was due to the reduction in the procurement to manage the decrease in revenue. The decrease in revenue in our Singapore operation was primarily due to the decrease in orders from one major customer as discussed above. In absolute dollar amounts, gross profits in the manufacturing segment increased by $1 to $560 for the three months ended December 31, 2012 from $559 for the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the testing segment increased by 15.8% to 24.6% for the three months ended December 31, 2012, from 8.8% in the same period of the last fiscal year. The increase was primarily due to an increase in testing volume in our Malaysia, Tianjin - China and Thailand operations which was partially offset by the decrease in the testing volume in our Singapore and Suzhou - China operations. Significant portions of our cost of goods sold are fixed in the testing segment. Thus, as the demand of services and factory utilization increase, the fixed costs are spread over the increased output, which increases the gross profit margin. In the prior fiscal year, our Thailand operation was affected by a slowdown due to floods during the second quarter in fiscal 2012, and thus the fixed costs resulted in a lower gross profit margin for that operation during such period. However, for the three-month period ended December 31, 2012, the Thailand operation improved its performance and its gross margin. The inflow of testing volume in our Malaysia and Tianjin - China operations has enabled those operations to improve gross margin. In absolute dollar amounts, gross profit in the testing segment increased by $678, to $927 for the three months ended December 31, 2012 from $249 for the same period of the last fiscal year.

The gross profit 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. Gross profit margin as a percentage of revenue in the distribution segment increased by 16.4% to 17.6% for the three months ended December 31, 2012, from 1.2% in the same period of the last fiscal year. The increase in gross margin was due to the change in product mix, as this segment increased sales of products that had higher profit margin items sufficient to offset the drop in gross margin due to the change in product mix 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 December 31, 2012 was $60, an increase of $59, compared to $1 in the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the real estate segment was 3.0% for the three months ended December 31, 2012, a decrease of 42.8% as compared to 45.8% in the same period in the last fiscal year. In absolute dollar amounts, gross profit in the real estate segment for the three months ended December 31, 2012 was $1, a decrease of $21, from $22 in the same period of the last fiscal year. The decrease in the gross profit margin as a percentage of revenue was due to a decrease in rental revenue, as one of the rental contracts reached maturity in January 2012. In addition, the depreciation expenses increased in the second quarter of fiscal 2013 as compared to the same period of the last fiscal year due to an increase in the property invested in the real estate segment. An amount of $673 was transferred from down payment, which was capitalized during April 2012, into investment property in China.

Gross profit margin as a percentage of revenue in the fabrication services segment was negative 154.6% for the three months ended December 31, 2012, deteriorating by 138.6% as compared to negative margin of 16.0% 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 December 31, 2012 was negative $201, a decrease of $128, from negative $73 in the same period of the last fiscal year. The nature of the industry is such that it takes a few years initially to optimize the full capacity. The revenue generated from the orders was not adequate to 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 yard rental expenses, depreciation expenses and cost of direct labor.

Operating Expenses

Operating expenses for the second quarters of fiscal 2013 and 2012 were as
follows:

                               Three Months Ended
                                  December 31,
(Unaudited)                     2012          2011
General and administrative   $    1,731      $ 2,166
Selling                             129          123
Research and development             72           73
Total                        $    1,932      $ 2,362

General and administrative expenses decreased by $435 or 20.1%, from $2,166 to $1,731 for the three months ended December 31, 2012 compared to the same period of last fiscal year. The decrease in general and administrative expenses was mainly attributable to the decrease in the expenses in the U.S., Singapore, Malaysia and Thailand operations which was partially offset by the increase in expenses in China operation. In the United States operations, stock option expenses in the corporate for the second quarter of fiscal 2013 were $8 as compared to $152 for the same period of last fiscal year, and there was a decrease in staff payroll related expenses, travel expenses which was partially offset by an increase in officers' compensation. In the Singapore operations, . . .