TRIO-TECH INTERNATIONAL - Quarter Report: 2007 December (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                  to                 

TRIO-TECH INTERNATIONAL

(Exact name of Registrant as specified in its Charter)

California		95-2086631
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
16139 Wyandotte
Van Nuys, California		91406
(Address of principle executive offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: 818-787-7000

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of common stock outstanding as of February 1, 2008 is 3,225,930

 

 

TRIO-TECH   INTERNATIONAL
INDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE

				Page
Part I.		Financial Information
Item 1.		Financial Statements
		(a) Condensed Consolidated Balance Sheets as of December 31, 2007 (Unaudited) and June 30, 2007			4
		(b) Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended December 31, 2007 (Unaudited) and December 31, 2006 (Unaudited)			5
		(c) Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2007 (Unaudited) and December 31, 2006 (Unaudited)			6
		(d) Notes to Consolidated Financial Statements (Unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			31
Item 4T.		Controls and Procedures			32
Part II.		Other Information
Item 1.		Legal Proceedings			33
Item 1A.		Risk Factors			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3.		Defaults upon Senior Securities			33
Item 4.		Submission of Matters to a Vote of Security Holders			33
Item 5.		Other Information			34
Item 6.		Exhibits			34
Signatures					35
Exhibits
Certifications
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

FORWARD-LOOKING STATEMENTS

          The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain 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, and assumptions regarding future activities and results of operations of the Company. In light of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among others, could cause actual results to differ materially from those reflected in any forward-looking statements made by or on behalf of the Company: market acceptance of Company products and services; changing business conditions or technologies and volatility in the semiconductor industry, which could affect demand for the Company’s products and services; the impact of competition; problems with technology; product development schedules; delivery schedules; changes in military or commercial testing specifications which could affect the market for the Company’s products and services; difficulties in profitably integrating acquired businesses, if any, into the Company; risks associated with conducting business internationally and especially in Southeast Asia, including currency fluctuations and devaluation, currency restrictions, local laws and restrictions and possible social, political and economic instability; and other economic, financial and regulatory factors beyond the Company’s control. World-wide oil prices increased caused companies to incur higher costs. 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. We anticipate that this chain effect will hit the Company’s business gradually in the future. See the discussions elsewhere in this Form 10-Q, including under the heading “Certain Risks That May Affect Our Future Results,” for more information. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology.

          We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

PART I. FINANCIAL INFORMATION

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES)

		December 31,				June 30,
		2007				2007
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	5,316			$	7,135
Short-term deposits			8,890				7,815
Trade accounts receivable, less allowance for doubtful accounts of $42 and $42			10,633				7,410
Other receivables			364				245
Inventories, less provision for obsolete inventory of $816 and $786			2,473				1,946
Prepaid expenses and other current assets			283				122
Asset held for sale			212				—
Total current assets			28,171				24,673
INVESTMENT IN CHINA (Note 10)			2,057				—
PROPERTY, PLANT AND EQUIPMENT, Net			7,667				7,458
OTHER INTANGIBLE ASSETS, Net			166				212
OTHER ASSETS			404				445
TOTAL ASSETS		$	38,465			$	32,788
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	3,386			$	2,265
Accrued expenses			3,533				4,354
Advances from buyer			21				—
Income taxes payable			836				948
Current portion of notes payable			1,428				536
Current portion of capital leases			112				125
Total current liabilities			9,316				8,228
NOTES PAYABLE, net of current portion			2,179				139
CAPITAL LEASES, net of current portion			118				155
DEFERRED TAX LIABILITIES			396				373
TOTAL LIABILITIES		$	12,009			$	8,895
MINORITY INTEREST			2,830				2,459
SHAREHOLDERS’ EQUITY:
Common stock; no par value, 15,000,000 shares authorized; 3,225,930 shares issued and outstanding as of December 31, 2007, and at June 30, 2007			10,361				10,361
Paid-in capital			818				460
Retained earnings			11,051				10,135
Accumulated other comprehensive income			1,396				478
Total shareholders’ equity			23,626				21,434
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	38,465			$	32,788

See accompanying notes to condensed consolidated financial statements.

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
UNAUDITED (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

		Six Months Ended								Three Months Ended
		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2007				2006				2007				2006
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenue
Products		$	13,708			$	14,772			$	7,201			$	8,794
Services			11,213				9,171				5,670				5,273
			24,921				23,943				12,871				14,067
Cost of Sales
Cost of products sold			11,468				12,461				5,939				7,648
Cost of services rendered			7,216				5,658				3,737				3,069
			18,684				18,119				9,676				10,717
Gross Margin			6,237				5,824				3,195				3,350
Operating Expenses
General and administrative			4,069				3,150				2,424				1,704
Selling			277				398				153				207
Research and development			38				34				19				17
Impairment loss			16				172				16				172
Total operating expenses			4,400				3,754				2,612				2,100
Income from Operations			1,837				2,070				583				1,250
Other Income (Expenses)
Interest expense			(164	)			(66	)			(79	)			(37	)
Other (expense) income			(191	)			110				(141	)			73
Total other (expense) income			(355	)			44				(220	)			36
Income Before Income Taxes			1,482				2,114				363				1,286
Income Tax Provision			314				478				142				453
Income Before Minority Interest			1,168				1,636				221				833
Minority interest			(252	)			(81	)			(56	)			(34	)
Net Income Attributed to Common Shares			916				1,555				165				799
EARNINGS PER SHARE:
Basic earnings per share		$	0.28			$	0.48			$	0.05			$	0.25
Diluted earnings per share		$	0.28			$	0.48			$	0.05			$	0.25
Weighted Average Shares Outstanding:
Basic			3,226				3,220				3,226				3,221
Diluted			3,259				3,232				3,228				3,233
Comprehensive Income:
Net income		$	916			$	1,555			$	165			$	799
Foreign currency translation adjustment			918				508				702				482
Comprehensive Income		$	1,834			$	2,063			$	867			$	1,281

See accompanying notes to condensed consolidated financial statements.

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED (IN THOUSANDS)

		Dec. 31,				Dec. 31,
		2007				2006
		(unaudited)				(unaudited)
Cash Flow from Operating Activities
Net income		$	916			$	1,555
Adjustments to reconcile net income to net cash flow (used in) provided by operating activities
Depreciation and amortization			1,528				1,124
Bad debts expense, net			—				119
Inventory provision			35				144
Accrued interest expense net accrued interest income			(53	)			(45	)
Impairment loss			16				172
Stock compensation			358				3
Gain on sale of property			—				(40	)
Deferred tax provision			23				21
Minority interest			265				81
Changes in operating assets and liabilities
Accounts receivables			(3,223	)			(3,424	)
Other receivables			(119	)			99
Other assets			41				(146	)
Inventories			(562	)			(2,334	)
Prepaid expenses and other liabilities			(161	)			(50	)
Accounts payable and accrued liabilities			321				2,810
Income tax payable			(112	)			221
Net cash (used in) provided by operating activities			(727	)			310
Cash Flow from Investing Activities
Proceeds from short-term deposits matured			21,443				7,063
Investments in short-term deposits			(22,416	)			(4,707	)
Additions to property, plant and equipment			(1,493	)			(2,020	)
Proceeds from sale of equipment			—				49
Investment in Chongqing, China			(2,057	)			—
Net cash (used in) provided by investing activities			(4,523	)			385
Cash Flow from Financing Activities
Net borrowings on lines of credit							1,831
Repayment of bank loans and capital leases			(854	)			(463	)
Proceeds from long-term bank loans and capital leases			3,687				6
Proceeds from exercising stock options			—				16
Proceeds from 10% shareholder on the short swing profit of the Company stock			—				118
Dividends paid to minority interest			—				(42	)
Net cash provided by financing activities			2,833				1,466
Effect of Changes in Exchange Rate			598				309
NET (DECREASE) INCREASE IN CASH			(1,819	)			2,470
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			7,135				2,551
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	5,316			$	5,021

		Dec. 31,				Dec. 31,
		2007				2006
Supplementary Information Of Cash Flows
Cash paid during the period for:
Interest		$	117			$	66
Income taxes		$	477			$	254
Non-Cash Transactions
Capital lease of property, plant and equipment		$	—			$	30
Declaration of cash dividends to be paid		$	—			$	323
Assets held for sale		$	(212	)		$	—
Carrying value of property reclassified from property, plant and equipment		$	212			$	—

See accompanying notes to condensed consolidated financial statements.

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS, EXCEPT PER
SHARE AND NUMBER OF SHARES)

1.		ORGANIZATION AND BASIS OF PRESENTATION
		Trio-Tech International (“the Company” or “TTI” hereafter) was incorporated in fiscal 1958 under the laws of the State of California. TTI provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. In addition, TTI operates testing facilities in the United States. The Company also designs, develops, manufactures and markets a broad range of equipment and systems used in the manufacturing and testing of semiconductor devices and electronic components. TTI conducts business in three business segments: Testing Services, Manufacturing and Distribution. TTI has subsidiaries in the U.S., Singapore, Malaysia, Thailand, and China as follows:

		Ownership		Location
Express Test Corporation(dormant)		100%		Van Nuys, California
Trio-Tech Reliability Services (dormant)		100%		Van Nuys, California
KTS Incorporated, dba Universal Systems (dormant)		100%		Van Nuys, California
European Electronic Test Centre
(Operation ceased on November 1, 2005)		100%		Dublin, Ireland
Trio-Tech International Pte. Ltd.		100%		Singapore
Universal (Far East) Pte. Ltd.		100%		Singapore
Trio-Tech Thailand		100%		Bangkok, Thailand
Trio-Tech Bangkok		100%		Bangkok, Thailand
Trio-Tech Malaysia		55%		Penang and Selangor, Malaysia
Trio-Tech Kuala Lumpur — 100% owned by		55%		Selangor, Malaysia
Trio-Tech Malaysia
Prestal Enterprise Sdn. Bhd.		76%		Selangor, Malaysia
Trio-Tech (SIP) Co. Ltd.		100%		Suzhou, China
Trio-Tech (Shanghai) Co. Ltd.		100%		Shanghai, China
Trio-Tech (Chongqing) Co. Ltd.		100%		Chongqing, China

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant inter-company accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements are presented in U.S. dollars. The accompanying financial statements do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the six months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report for the fiscal year ended June 30, 2007.

Certain prior year balances on the Statement of Operations and Comprehensive Income have been reclassified to conform to the current presentation. The reclassification had no impact on net income for the six months ended December 31, 2006.

Change in Estimate: During the third quarter of fiscal 2007 ended March 30, 2007, management determined that the useful life of fixed assets for smart burn-in projects was shorter than originally expected. Revised useful life of these assets resulted in an additional depreciation expense of $233, or $0.07 per diluted share in the six months ended December 31, 2007. These assets will be fully depreciated as of June 30, 2008.

In the first quarter of fiscal year 2008, our Singapore operation reversed approximately $255 in employee bonuses payable that were accrued during the fiscal year ended June 30, 2007. The provision for bonuses was based on the Company’s policy and guidelines related to bonuses, the financial results of the Singapore operation, group objectives and individual employee performance set up at the beginning of fiscal year 2007 and employee headcount on June 30, 2007. According to the Company’s guidelines, the Singapore operation accrued $1,110 in bonuses payable, and 420 employees were covered under the bonus provision.

Prior to the time for payment of bonuses accrued, the Company determined (a) that in the first quarter of fiscal year 2008, 51 (12.4%) employees on the bonus list for fiscal year 2007 had left the Company and thus were not entitled to such bonuses, and
(b) based on the employee performance review conducted at the end of September 2007, management noted that among more than 350 employees who were still on the bonus list, a number of employees did not qualify for the bonus of the full three months of base salary. As a result of combining the aforementioned factors, bonuses totaling $255 were over-accrued. Accordingly, the over-provision of $255 was reversed in the first quarter of fiscal 2008 as a result of the change in estimate. This change in estimate increased the net income for the six months ended December 31, 2007 by $255, or $0.08 per diluted share.

In addition, during the six months ended December 31, 2007, the Singapore operation reversed commission expenses of $82. A portion of the commission payable by the Company is based on the estimated profit margin of sales when sales are recorded. Management reviews the commission liability periodically with the appropriate personnel. When the actual profit margin is lower than the one expected, the accrued commission liability should be reduced and the commission expenses should be reversed accordingly. Based on management review in the six months ended December 31, 2007, it was determined that the actual profit margin for some sales was less than expected due to an increase in unexpected service expenses following the sales. Accordingly, the Company reversed $82 in commissions. This change in estimate increased the net income for the six months ended December 31, 2007 by $82, or $0.03 per diluted shares.

2.		SUBSEQUENT EVENT
		On January 4, 2008, Trio-Tech (Chongqing) Co. Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd. to purchase an 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 RMB5,554 (Chinese yuan), equivalent to approximately US$762 based on the exchange rate on December 31, 2007 published by the Federal Reserve System. Under the terms of the agreement, the Company paid the purchase price in full on January 4, 2008.

3.		NEW ACCOUNTING PRONOUNCEMENTS
		In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations in a number of areas including the treatment of contingent considerations, pre-acquisition contingencies, transaction costs, in-process research and development, and restructuring costs. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company believes the adoption of SFAS 141R will have an impact on the accounting for future acquisitions.
		In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51, or SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company has not completed our evaluation of the potential impact, if any, of the adoption of SFAS No. 160 on its consolidated financial position, results of operations and cash flows.
		In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” or SFAS No. 159. SFAS No. 159 permits, but does not require, entities to choose to measure eligible items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided that a company also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements.” Management is in the process of assessing if this statement will have a material impact on the Company’s financial statements once adopted.
		In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” or SFAS No. 157. SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. There is partial delay in applying FAS 157 to non-financial assets and liabilities measured on a non-recurring basis. The Company is currently evaluating the impact adoption may have on its financial condition or results of operations.
		In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 requires that tax benefits generated by dividends paid during the vesting period on certain equity-classified share-based compensation awards be classified as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-

based payment awards. EITF 06-11 will be effective on July 1, 2008 and is to be applied on a prospective basis. The Company does not expect that the adoption of this EITF will have a material impact on its consolidated results of operations or financial position.

4.		INVENTORIES
		Inventories consisted of the following:

		Dec. 31,
		2007				June 30,
		(Unaudited)				2007
Raw materials		$	1,529			$	1,295
Work in progress			1,501				1,210
Finished goods			259				222
Less: provision for obsolete inventory			(816	)			(781	)
		$	2,473			$	1,946

5.		STOCK OPTIONS
		As of December 31, 2007, the Company had 13,050 shares of stock options outstanding under the 1998 Employee Option Plan, which was terminated on December 2, 2005 by the Company’s Board of Directors.
		On September 24, 2007, the Company’s Board of Directors unanimously adopted the 2007 Employee Stock Option Plan and the 2007 Directors Equity Incentive Plan, which were approved by the shareholders on December 3, 2007. The 2007 Employee Stock Option Plan provides for awards of up to 300,000 shares of the Company’s Common Stock to employees, consultants and advisors. The 2007 Directors Equity Incentive Plan provides for awards of up to 200,000 shares of the Company’s Common Stock to the members of the Board of Directors in the forms of non-qualified options and restricted stock. These two plans are administered by the Board, which also establishes the terms of the awards.
		Effective July 1, 2005, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (SFAS No 123R), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to the Company’s employees and directors including stock options and employee stock purchases. Stock-based compensation expense for stock options and employee stock purchases granted subsequent to July 1, 2005 was based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. During the process of estimating the fair value of the stock options granted and recognizing share-based compensation, the following assumptions were adopted.

      Assumptions

The fair value for these awards was estimated using the Black-Scholes option pricing model with the following weighted average assumptions, assuming no expected dividends:

		Six Months Ended				Year Ended
		December 31, 2007				June 30, 2007
Expected volatility			110.91	%			73.22-98.51	%
Risk free interest rate			3.1	%			4.5	%
Expected life (years)			2.00				2.00

The expected volatilities are based on the historical volatility of the Company’s stock. The observation is made on a weekly basis. The observation period covered is consistent with the expected life of options. The expected life of stock options is based on the historical experience of similar stock options granted and observed. The risk-free rate is consistent with the expected terms of the stock options and is based on the United States Treasury yield curve in effect at the time of grant.

      2007 Employee Stock Option Plan

The Company’s 2007 Employee Stock Option Plan (the “2007 Employee Plan”), which is shareholder-approved, permits the grant of stock options to its employees of up to 300,000 shares of Common Stock. Under the 2007 Employee Plan, all options must be granted with an exercise price of not less than “fair market value” as of the grant date and the options

granted should be exercisable within maximum ten years after the date of grant, or such lesser period of time as is set forth in the stock option agreements. They shall be exercisable (a) immediately as of the effective date of the stock option agreement granting the Option, or (b) in accordance with a schedule related to the date of the grant of the Option, the date of first employment, or such other date as may be set by the Compensation Committee. Generally, options granted under the 2007 Employee Plan are exercisable within five years after the date of grant, and vest over the period as follows: 25% vesting on the grant date and the remaining balance vesting in equal installments on the next three succeeding anniversaries of the grant date. The share-based compensation will be recognized in terms of the grade method over the vesting period. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the 2007 Employee Plan).

During the second quarter of fiscal 2008, pursuant to the 2007 Employee Plan, 50,000 shares of stock options were granted to certain officers and employees with an exercise price equal to the fair market value of the Company’s Common Stock (as defined under the 2007 Employee Plan in conformity with Regulation 409A of the Internal Revenue Code of 1986, as amended) at the date of grant. These options vest over the period as follows: 25% vesting on the grant date, and the balance vesting in equal installments on the next three succeeding anniversaries of the grant date. The fair market value of 50,000 shares of the Company’s Common Stock issuable upon exercise of stock options granted was approximately $277 based on the fair value of $5.55 per share determined by using the Black Scholes option pricing model. There were no options exercised during the six months ended December 31, 2007.

The Company recognized stock-based compensation expense of approximately $80 in the three months ended December 31, 2007 under the 2007 Employee Plan. Unamortized stock-based compensation of $197 based on fair value on the grant date related to options granted under the 2007 Employee Plan is expected to be recognized over a period of three years.

As of December 31, 2007, there were 12,500 shares of vested employees’ stock options. The weighted-average exercise price was $9.57, and the weighted average remaining contractual term was 4.93 years. The total intrinsic value of vested employees’ stock options during the six months ended December 31, 2007 was zero. A summary of option activities under the 2007 Employee Plan during the six months of fiscal 2008 ended December 31, 2007 is presented as follows:

										Weighted-Average
						Weighted-Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Options				Price				Term (Years)				Value
Outstanding at July 1, 2007			—
Granted			50,000				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at December 31, 2007			50,000			$	9.57				4.93				—
Exercisable at December 31, 2007			12,500			$	9.57				4.93				—

A summary of the status of the Company’s non-vested employees’ stock options during the six month period ended December 31, 2007 is presented below:

						Weighted-Average Grant-Date
		Options				Fair Value
Non-vested at July 1, 2007			—				—
Granted			50,000			$	5.55
Vested			(12,500	)		$	5.55
Forfeited			—				—
Non-vested at December 31, 2007			37,500			$	5.55

2007 Directors Equity Incentive Plan

The 2007 Directors Equity Incentive Plan (the “2007 Directors Plan”), which is shareholder-approved, permits the grant of 200,000 shares of Common Stock to its duly elected non-employee directors in forms of non-qualified options and restricted stock. The exercise price of the non-qualified options is 100% of the fair market value of the underlying shares on the grant date. The options have five-year contractual terms and are generally exercisable immediately as of the grant date.

During the second quarter of 2007, pursuant to the 2007 Directors Plan, 50,000 shares of stock options were granted to our directors with an exercise price equal to the fair market value of our Common Stock (as defined under the 2007 Directors Plan in conformity with Regulation 409A or the Internal Revenue Code of 1986, as amended) at the date of grant. The fair market value of 50,000 shares of the Company’s Common Stock issuable upon exercise of stock options granted was approximately $277 based on the fair value of $5.55 per share determined by the Black Scholes option pricing model. There were no options exercised during the six month period ended December 31, 2007. The Company recognized stock-based compensation expense of $277 in the three months ended December 31, 2007 under the 2007 Directors Plan.

A summary of option activities under the 2007 Directors Plan during the six month period ended December 31, 2007 is presented as follow:

										Weighted-Average
						Weighted-Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Options				Price				Term (Years)				Value
Outstanding at July 1, 2007			—
Granted			50,000				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at December 31, 2007			50,000			$	9.57				4.93				—
Exercisable at December 31, 2007			50,000			$	9.57				4.93				—

      1998 Stock Option Plan

A summary of option activities under the 1998 Plan during the six month period ended December 31, 2007 is presented as follow:

										Weighted-Average
						Weighted-Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Options				Price				Term (Years)				Value
Outstanding at July 1, 2007			13,050			$	3.03
Granted			—				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at December 31, 2007			13,050			$	3.03				0.74			$	80,040
Exercisable at December 31, 2007			13,050			$	3.03				0.74			$	80,040

A summary of the status of the non-vested stock options under the 1998 Plan during the six month period ended December 31, 2007 is presented below:

						Weighted Average
						Grant Date
Non-vested Options		Shares				Fair Value
Non-vested at July 1, 2007			1,375			$	1.31
Granted			—				—
Vested			(1,375	)		$	1.31
Forfeited			—				—
Non-vested at December 31, 2007			—				—

6.

EARNINGS PER SHARE

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share (“EPS”). Basic EPS are computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during a period. In computing diluted EPS, the average price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.

In August 2007, the American Stock Exchange notified the Company that there had been an overstatement of the Company’s Common Stock outstanding in the amount of 2,062 shares since fiscal year 1998. The overstatement resulted from an error when the Company had incorrectly issued shares in that amount to an employee. This employee returned the wrongly issued share certificate and the matter remained pending until it was finally cleared in the first quarter of fiscal 2008. At that time the shares were canceled, and the number of outstanding shares was corrected.

Options to purchase 113,050 shares of Common Stock at exercise prices ranging from $2.66 to $9.57 per share were outstanding as of December 31, 2007. No options were excluded in the determination of common shares equivalents, because the average market price of common shares was greater than the exercise price of the stock options. The resulting common shares equivalents were approximately 33,000 shares and are presented in the following table for earnings per share calculation purposes.

Options to purchase 15,800 shares of Common Stock at exercise prices ranging from $2.66 to $4.40 per share were outstanding as of December 31, 2006. No options were excluded in the determination of common shares equivalents, because the average market price of common shares was greater than the exercise price of the stock options. The resulting common shares equivalents were approximately 12,000 shares and are presented in the following table for earnings per share calculation purposes.

The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted EPS for the years presented herein:

		Six Months Ended								Three Months Ended
		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2007				2006				2007				2006
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income attributable to common shares		$	916			$	1,555			$	165			$	799
Basic Earnings Per Share		$	0.28			$	0.48			$	0.05			$	0.25
Diluted Earnings Per Share		$	0.28			$	0.48			$	0.05			$	0.25
Weighted average number of common shares outstanding — basic			3,226				3,221				3,226				3,221
Dilutive effect of stock options			33				12				2				12
Number of shares used to compute earnings per share — diluted			3,259				3,233				3,228				3,233

7.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are customer obligations due under normal trade terms. The Company sells products and services to manufacturers in the semiconductor industry. The Company performs continuing credit evaluations of our customers’ financial conditions, although the Company generally does not require collateral, letters of credit may be required from our customers in certain circumstances.

Senior management of the Company reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible in allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, the Company believes that its allowance for doubtful accounts for the six months ended December 31, 2007 and the twelve months ended June 30, 2007 was adequate.

The following table represents the changes in the allowance for doubtful accounts:

		Dec. 31,
		2007				June 30,
		(Unaudited)				2007
Beginning		$	42			$	225
Additions charged to expenses			15				18
Recovered			(15	)			(159	)
Actual write-offs			—				(42	)
Ending		$	42			$	42

8.

WARRANTY ACCRUAL

The Company provides for the estimated costs that may be incurred under its warranty program at the time the sale is recorded. The Company provides warranty for products manufactured in the term of one year. The Company estimates the warranty costs based on the historical rates of warranty returns. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.

		Dec. 31,
		2007				June 30,
		(Unaudited)				2007
Beginning		$	211			$	142
Additional accruals			—				74
Warranty expenses incurred			(14	)			(3	)
Reverse			(7	)			(2	)
Ending		$	190			$	211

9.

LONG TERM DEBT

In April 2007, Trio-Tech International Pte. Ltd in Singapore entered a new loan agreement with a local bank in Singapore. The term loan facility was SGD 5,500, or approximately US$3,687, with a fixed interest rate of 3% plus the Market Reference Rate based on the inter-bank offered rate. The loan has a term of three years from the date of draw down. On August 1, 2007, the Company began to draw down the money on this loan. The loan is due with 35 monthly principle payments of SGD153 (US$107) with a final principle payment due on August 1, 2010 of SGD145 (US$101). The payment schedule of this loan for the next three years is presented in the following table:

						Calendar
				As of December 31,		Year 2007				Calendar Year 2008				Calendar Year 2009				Thereafter				Total				Fair Value
Loan:
		Denominated in Singapore dollars; interest is at the bank’s prime rate (2.51% at December 31, 2007) plus 3.0% per annum				$	1,329			$	1,279			$	846			$	—			$	3,454			$	3,454

10.

ADOPTION OF FIN 48

The Company adopted the provisions of FIN 48 on July 1, 2007 and has had no material adjustments to its liabilities for unrecognized income tax benefits since its adoption. The Company has not included any uncertain tax positions as defined by FIN 48 in its currently filed federal or state income tax returns. As of June 30, 2007, and the adoption date, the Company had $256 of income tax liability related to the allocation of corporate management expenses to its Singapore operations. The Company has not recognized any income tax benefit for this position during the current quarter in accordance with the provisions of FIN 48.

11.		INVESTMENT IN CHONGQING, CHINA
		In June 2007, Trio-Tech International Pte. Ltd. established a subsidiary in Chongqing, China. This newly established subsidiary, Trio-Tech (Chongqing) Co., Ltd., has a registered capital of RMB20,000 (Chinese yuan), or equivalent to approximately US$2,600, and is wholly owned by Trio-Tech International Pte Ltd. In June 2007, Trio-Tech International Pte. Ltd. infused $2,600 to Trio-Tech (Chongqing) Co., Ltd. to fulfill its capital injection obligation. The source of the funds was from the proceeds of disposing short-term deposits 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 hereafter) 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. Pursuant to the signed agreement, the capital to be invested by Trio-Tech (Chongqing) Co., Ltd. was RMB10,000, equivalent to approximately $1,371 based on the exchange rate on December 31, 2007 published by the Federal Reserve System. On August 28, 2007, Trio-Tech (Chongqing) Co., Ltd. transferred the required amount from its bank account into a special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng. The investment was accounted under cost method as the Company accounted for less than 20% equity of this joint venture.
		On October 22, 2007, the parties received approval from the Chinese District Zoning Regulation Bureau to increase the square meters of the buildings specified in the original Memorandum Agreement dated August 27, 2007 by 9,885 square meters. As a result, the construction costs of the proposed building project were also increased. On November 15, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Supplement Agreement to the Memorandum Agreement dated August 27, 2007 with Jiasheng. The purpose of this Supplement Agreement was to document another agreement reached by both parties regarding the additional capital infusion to be committed by respective parties in order to finance the increase in construction costs. The Supplement Agreement does not modify the terms and obligations of both parties specified in the original Memorandum Agreement. Under the terms of the Supplement Agreement, the Company agreed to invest an additional RMB9,000, or approximately US$1,234 based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. By infusing the additional capital of RMB9,000, the Company increased its equity ratio from 16% to 24% of the total capital infused by both parties. However, the profit sharing percentage remains at 20% as specified in the original Memorandum Agreement because management of the Company believes that the return on the total investment is still reasonable. On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list of additional costs incurred for this project, which were RMB4,000 less than the estimated costs of RMB9,000. Accordingly, the Company only transferred RMB5,000, approximately $686, from its bank account into the special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng. After that extra infusion, the equity ratio owned by the Company in that joint venture was 20%. As Jiasheng is responsible for the daily business operations and development of that project and the Company has been a passive investor role since the inception of this joint venture, the cost method of accounting was still applicable. There was no operating activity in Trio-Tech (Chongqing) Co., Ltd in the six months ended December 31, 2007, and there was no income generated from the entity during this period.
12.		ASSETS HELD FOR SALE
		In the first quarter of fiscal 2008, the Company initiated a plan to sell the property located in Malaysia and ceased the depreciation of that property in accordance with SFAS No. 144. The book value of this asset was $217 at December 31, 2007. In late December 2007, the Company entered into a definite sale and purchase agreement with a buyer with a selling price of RM700 (Malaysia ringgit), equivalent to approximately to US$212, and received a deposit of RM70, equivalent to approximately US$21, based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. It is anticipated that the sale will be consummated in the third quarter of fiscal 2008. Accordingly, the Company believes that the assets held for sale should be presented as part of current assets. In accordance with SFAS No 144, the asset held for sale was recorded at the lower of fair value less cost to sell of $212. Impairment loss of $5 was recorded for the six months ended December 31, 2007.
13.		BUSINESS SEGMENTS
		The Company operates principally in three industry segments; the testing service industry (which performs structural and electronic tests of semiconductor devices), the designing and manufacturing of equipment (which equipment tests the structural integrity of integrated circuits and other products) and the distribution of various products from other manufacturers in Singapore and Southeast Asia. The following net sales were based on customer location rather than subsidiary location.
		The allocation of the cost of equipment, the current year investment in new equipment and depreciation expense have been made based on the primary purpose for which the equipment was acquired.

All inter-segment sales were sales from the manufacturing segment to the testing and distribution segments. Total inter-segment sales were $92 and $61 for the six months ended December 31, 2007 and 2006, respectively. Corporate assets mainly consisted of cash and prepaid expenses. Corporate expenses mainly consisted of salaries, insurance, professional expenses and directors’ fees.

     The following segment information is unaudited:

Business Segment Information:

		Quarter								Operating								Depr.
		Ended				Net				Income				Total				and				Capital
		Dec. 31				Sales				(loss)				Assets				Amort.				Expenditures
Manufacturing			2007			$	7,085			$	466			$	4,086			$	67			$	182
			2006			$	8,196			$	250			$	3,698			$	52			$	34
Testing Services			2007				5,670				645				33,445				664				757
			2006				5,273				942				31,101				610				1,710
Distribution			2007				116				(61	)			566				(8	)			9
			2006				598				28				811				4				1
Corporate and			2007				—				(467	)			368				—				—
Unallocated			2006				—				30				562				—				—
Total Company			2007			$	12,871			$	583			$	38,465			$	723			$	948
			2006			$	14,067			$	1,250			$	36,172			$	666			$	1,745

Business Segment Information:

		Six
		Months								Operating								Depr.
		Ended				Net				Income				Total				and				Capital
		Dec. 31				Sales				(loss)				Assets				Amort.				Expenditures
Manufacturing			2007			$	13,481			$	792			$	4,086			$	107			$	215
			2006			$	13,679			$	690			$	3,698			$	94			$	148
Testing Services			2007				11,213				1,663				33,445				1,412				1,267
			2006				9,171				1,344				31,101				1,022				1,901
Distribution			2007				227				(83	)			566				9				9
			2006				1,093				(9	)			811				8				1
Corporate and			2007				—				(535	)			368				—				2
Unallocated			2006				—				45				562				—				—
Total Company			2007			$	24,921			$	1,837			$	38,465			$	1,528			$	1,493
			2006			$	23,943			$	2,070			$	36,172			$	1,124			$	2,050

Geographic Area Information:

																														Elimin-
		Quarter																												ations
		Ended				United								Other																and				Total
		Dec. 31				States				China				Countries				Singapore				Thailand				Malaysia				Other				Company
Net sales to			2007			$	1,584			$	553			$	529			$	7,140			$	559			$	2,539			$	(33	)		$	12,871
customers			2006			$	3,486			$	2,008			$	43			$	6,313			$	634			$	1,636			$	(53	)		$	14,067
Operating			2007				102				45				37				579				45				242				(467	)			583
Income			2006				277				178				4				560				56				145				30				1,250
Long-lived			2007				4				1,019				—				2,456				858				3,536				(40	)			7,833
Assets			2006				14				903				—				4,082				774				2,688				(40	)			8,421

Geographic Area Information:

		Six																												Elimin-
		Months																												ations
		Ended				United								Other																and				Total
		Dec. 31				States				China				Countries				Singapore				Thailand				Malaysia				Other				Company
Net sales to			2007			$	3,044			$	772			$	917			$	12,712			$	1,073			$	6,495			$	(92	)		$	24,921
customers			2006			$	3,851			$	3,391			$	225			$	12,537			$	1,146			$	2,854			$	(61	)		$	23,943
Operating			2007				225				71				78				1,171				107				720				(535	)			1,837
Income			2006				247				301				10				1,112				102				253				45				2,070
Long-lived			2007				4				1,019				—				2,456				858				3,536				(40	)			7,833
Assets			2006				14				903				—				4,082				774				2,688				(40	)			8,421

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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, and with the information under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the most recent Annual Report on Form 10-K.

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 six testing facilities, one in the United States, three in Southeast Asia and two in China. 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 and China with facilities in Singapore, Malaysia, Thailand and China. 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 should improve profit margins.

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.

Recent Events

Corporate Headquarters change of location

In January 2008, our U.S. office moved to a new location. Our new address is 16139 Wyandotte Street, Van Nuys, California 91406. Our corporate phone number is still 818-787-7000.

Purchase of an office space in Chongqing

On January 4, 2008, Trio-Tech (Chongqing) Co. Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd., a Chinese company, to purchase an office space of 827.2 square meters on the 35th floor of a 40 story office building located in Chongqing, China. The total cash purchase price was RMB5,554 (Chinese yuan), equivalent to approximately US$762 based on the exchange rate on December 31, 2007 published by the Federal Reserve System. Under the terms of the agreement, the Company paid the purchase price in full on January 4, 2008 using internally generated funds of the Company.

Second Quarter Fiscal 2008 Highlights

	•		Total revenue decreased 8.5% to $12,871 for the second quarter of fiscal 2008, compared with revenue of $14,067 for the second quarter of fiscal 2007 as the result of reduced revenue from product sales.
	•		Testing segment revenue increased by $397, or 7.5%, to $5,670 compared with $5,273 for the second quarter of fiscal 2007.
	•		Manufacturing segment revenue decreased by $1,111, or 13.6%, to $7,085 compared with $8,196 for the second quarter of fiscal 2007.
	•		Distribution segment revenue decreased by $482, or 80.6%, to $116 compared with $598 for the second quarter of fiscal 2007.
	•		Income from operations decreased by $667, or 53.4%, to $583 compared with $1,250 for the second quarter of fiscal 2007.
	•		Gross profit margins improved by 1.0% to 24.8% from 23.8% for the second quarter of fiscal 2007.
	•		Selling expenses decreased by 0.3% from 1.5% of revenue for the second quarter of fiscal 2008.
	•		General and administrative expenses increased by 6.7% from 12.1% of revenue for the second quarter of fiscal 2007.
	•		General and administrative expenses in the second quarter of fiscal 2008 include stock options expenses of $358 related to 100,000 options we granted on December 4, 2007.
	•		On November 15, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Supplement Agreement to the Memorandum Agreement dated August 27, 2007 with Jiasheng. Under the terms of the Supplement Agreement, the Company agreed to invest an additional RMB9,000, or approximately US$1,234 based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. By infusing the additional capital of RMB9,000, the Company increased its equity ratio from 16% to 24% of the total capital infused by both parties. However, the profit sharing percentage remains at 20% as specified in the original Memorandum Agreement because management of the Company believes that the return on the total investment is still reasonable. On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list for additional costs incurred for this project, which were RMB4,000 less than the estimated costs of RMB9,000. Accordingly, the Company only transferred RMB5,000, approximately $686, from its bank account into the special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng After that extra infusion, the equity ratio owned by the Company in that joint venture was 20%. The investment in China increased to $2,057.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended December 31, 2007. 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.

Results of Operations and Business Outlook

The following table sets forth our revenue components for the six and three months ended December 31, 2007 and 2006, respectively.

Revenue Components

		Six Months Ended December 31,								Three Months Ended December 31,
		2007				2006				2007				2006
Net Sales:
Manufacturing			54.09	%			57.13	%			55.05	%			58.26	%
Testing			45.00				38.30				44.05				37.49
Distribution			0.91				4.57				0.90				4.25
Total			100.00	%			100.00	%			100.00	%			100.00	%

Net sales for the six months and three months ended December 31, 2007 were $24,921 and $12,871, respectively, an increase of $978 and a decrease of $1,196, respectively, when compared to the same sales periods of the prior year. As a percentage, total net sales increased by 4.1% for the six months and decreased by 8.5% for the three months ended December 31, 2007, respectively, 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) increased by $1,785 to $21,877 and by $706 to $11,287 for the six months and three months ended December 31, 2007, respectively, compared to the same period of the prior year. This increase was primarily due to sales improvement in the testing segment in our Malaysia operation and China operations. Net sales into and within the United States were $3,044 and $1,584 for the six months and three months ended December 31, 2007, respectively, a decrease of $807 and $1,902, respectively, when compared to the same periods of the prior year.

The increase in net sales in the six months ended December 31, 2007 and a decrease in net sales in the second quarter of fiscal 2008 can be discussed within three segments as follows:

Manufacturing Segment

Net sales in the manufacturing segment as a percentage of total net sales were 54.09% and 55.05% for the six months and three months ended December 31, 2007, respectively, a decrease of 3.04% and 3.21% of total net sales, respectively, when compared to the same periods of the prior year. The absolute amount of net sales were $13,481 and $7,085 for the six months and three months ended December 31, 2007, respectively, a decrease of $198 and $1,111, respectively, when compared to the same periods of the prior year. The decrease in revenue generated by the manufacturing segment was due to the fact that fewer orders were placed by one of our major customers, which was the result of slowing in that customer’s product line and equipment capacity.

Testing Segment

Net sales in the testing segment as a percentage of total net sales were 45.00% and 44.05% for the six months and three months ended December 31, 2007, respectively, an increase of 6.70% and 6.56%, 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 increased by $2,042 to $11,213 and by $397 to $5,670 for the six months and three months ended December 31, 2007, respectively, compared to the same periods of fiscal 2007. We believe the testing segment continued to show improvement in revenue due to an increase in demand for testing services in Asia, which resulted from the strong economic growth and robust development in the electronics manufacturing industries in China and an improvement in performance by our testing operations in Southeast Asia. Furthermore, our China testing operation in Suzhou, which started its testing operation in the second quarter of fiscal 2007, achieved a better sales performance compared to their performance in the same period in fiscal 2007 due to a hike in demand for testing services in Southeast Asia. Demand for testing services varies from time to time depending on changes taking place in the market and our customers’ forecasts. We anticipate that our customers will continue to request our services to perform “burn-in” on chips to be used in wireless handsets, automotive applications and wired communications, which chips are currently in high demand in their respective markets.

Distribution Segment

Net sales in the distribution segment accounted for 0.91% and 0.90% of total net sales for the six months and three months ended December 31, 2007, respectively, a decrease of 3.66% and 3.35%, respectively, compared to the same periods in fiscal 2007. The absolute amount of net sales decreased by $866 to $227 and by $482 to $116 for the six months and three months ended December 31, 2007, respectively, compared to the same periods in fiscal 2007. 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. However, we have taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors. For example, in order to meet customers’ demands upon short notice, we maintain higher inventories, but continue to work closely with our customers to avoid stock piling. We continue to cut costs by upgrading some of our existing facilities to cater to the changing requirements of customers and 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. We anticipate that this chain effect will hit the Company’s business gradually 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 Second Quarters Ended December 31, 2007 and 2006

The following table sets forth certain consolidated statements of income data as a percentage of net sales for the second quarters of fiscal 2008 and 2007, respectively:

		Three Months Ended December 31,
		2007				2006
Net Sales			100	%			100.0	%
Cost of sales			75.2	%			76.2	%
Gross Margin			24.8	%			23.8	%
Operating Expenses
General and administrative			18.8	%			12.2	%
Selling			1.2	%			1.5	%
Research and development			0.1	%			0.1	%
Impairment loss			0.1	%			1.2	%
Total operating expenses			20.2	%			15.0	%
Income from Operations			4.6	%			8.8	%

Overall Gross Margin

Overall gross margin as a percentage of revenue increased slightly by 1.0% for the three months ended December 31, 2007, from 23.8% in the second quarter of fiscal 2007 to 24.8%, due primarily to the improvement in gross margin in the manufacturing segments. However, this was offset by a decrease in gross margin in the testing segment. In terms of dollar value, the overall gross margin decreased by $155 for the three months ended December 31, 2007, from $3,350 to $3,195, compared to the same quarter of fiscal 2007 resulting from the decrease in revenue.

Gross profit margin as a percentage of revenue in the manufacturing segment increased by 4.8% for the three months ended December 31, 2007, from 12.6% in the second quarter of fiscal 2007 to 17.4% in the second quarter of fiscal 2008. The increase in gross margin was due to a decrease in sales of lower margin burn-in systems and pass-through products in the second quarter of fiscal 2008 compared with the same period of fiscal 2007. In absolute amounts, gross profits increased by $200 to $1,233 for the three months ended December 31, 2007, from $1,033 for the three months ended December 31, 2006.

Gross profit margin as a percentage of revenue in the testing segment decreased by 8.1% for the three months ended December 31, 2007, from 41.8% to 34.1%, compared to the same quarter of fiscal 2007. In terms of dollar amount, gross margin in the testing segment in the second quarter of fiscal 2008 was $1,933, a decrease of $271, or 12.3% compared to $2,204 in the same period of fiscal 2007. 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.

Gross profit margin as a percentage of revenue in the distribution segment improved by 6.1% to 25.0% for the second quarter of fiscal 2008, from 18.9% in the second quarter of fiscal 2007. However, in absolute amounts, gross margin was $29, a decrease of $84 compared to $113 in the same period of fiscal 2007. The decrease in the gross profit was due to a drop in sales volume and revenue, as previously discussed.

Operating Expenses

Operating expenses for the second quarters of fiscal 2008 and 2007 were as follow:

		Three Months Ended December 31,
(In Thousands, unaudited)		2007				2006
General and administrative		$	2,424			$	1,704
Selling		$	153			$	207
Research and development		$	19			$	17
Impairment loss		$	16			$	172
Total		$	2,612			$	2,100