---

			March 31,			June 30,
			2008			2007
ASSETS			(Unaudited)
CURRENT ASSETS:
Cash		$	5,958		$	7,135
Short-term deposits			8,342			7,815
Trade accounts receivable, less allowance for doubtful accounts of $44 and $42			7,083			7,410
Other receivables			682			245
Inventories, less provision for obsolete inventory of $817 and $781			2,144			1,946
Prepaid expenses and other current assets			222			122
Assets held for sale			219			--
	Total current assets		24,650			24,673
INVESTMENT IN CHINA (Note 11)			2,931			--
PROPERTY, PLANT AND EQUIPMENT, Net			7,713			7,458
OTHER INTANGIBLE ASSETS, Net			143			212
OTHER ASSETS			645			445
TOTAL ASSETS		$	36,082		$	32,788
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,413		$	2,265
Accrued expenses			3,658			4,354
Advances from buyer			22			--
Income taxes payable			544			948
Current portion of notes payable			1,417			536
Current portion of capital leases			93			125
	Total current liabilities		8,147			8,228
NOTES PAYABLE, net of current portion			1,961			139
CAPITAL LEASES, net of current portion			95			155
DEFERRED TAX LIABILITIES			499			373
TOTAL LIABILITIES		$	10,702		$	8,895
MINORITY INTEREST			2,728			2,459
SHAREHOLDERS' EQUITY:
Common stock; no par value, 15,000,000 shares authorized; 3,226,430 and 3,225,930 shares issued and outstanding as of March 31, 2008 and June 30, 2007, respectively			10,362			10,361
Paid-in capital			850			460
Retained earnings			9,286			10,135
Accumulated other comprehensive income			2,154			478
	Total shareholders' equity		22,652			21,434
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	36,082		$	32,788

See accompanying notes to condensed consolidated financial statements.

 

 

		March 31,				March 31,
		2008				2007
		(Unaudited)				(Unaudited)
Cash Flow from Operating Activities
Net income (loss)		$	(495	)		$	2,636
Adjustments to reconcile net income to net cash flow provided by operating activities
Depreciation and amortization			2,262				2,007
Bad debts expense, net			2				145
Inventory provision			36				151
Interest income on short-term deposits			(39	)			(66	)
Impairment loss			457				174
Stock compensation			390				4
Loss (gain) on sale of property			11				(41	)
Deferred tax provision			126				25
Minority interest			268				98
Changes in operating assets and liabilities, net of acquisition effects
Accounts receivables			325				(2,099	)
Other receivables			(437	)			69
Other assets			(200	)			(102	)
Inventories			(234	)			310
Prepaid expenses and other current assets			(100	)			4
Accounts payable and accrued liabilities			(548	)			(729	)
Income tax payable			(404	)			286
Net cash provided by operating activities			1,421				2,872
Cash Flow from Investing Activities
Proceeds from short-term deposits matured			25,537				10,238
Investments in short-term deposits			(25,946	)			(9,836	)
Additions to property, plant and equipment			(2,507	)			(2,409	)
Investment in Chongqing, China			(2,931	)			--
Proceeds from sale of property			15				50
Net cash used in investing activities			(5,832	)			(1,957	)
Cash Flow from Financing Activities
Net borrowings on lines of credit			22				316
Repayment of bank loans and capital leases			(1,305	)			(698	)
Proceeds from long-terms bank loans and capital leases			3,837				6
Proceeds from exercising stock options			1				23
Proceeds from 10% shareholder on the short swing profit of the company stock			--				118
Dividends paid to minority interest			--				(42	)
Paid dividends			(354	)			(323	)
Net cash provided (used) in financing activities			2,201				(600	)
Effect of Changes in Exchange Rate			1,033				614
NET INCREASE IN CASH			(1,177	)			929
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			7,135				2,551
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	5,958			$	3,480
Supplementary Information of Cash Flows
Cash paid during the period for:
Interest		$	186			$	119
Income taxes		$	732			$	433
Non-Cash Transactions
Capital lease of property, plant and equipment		$	--			$	52
Declaration of cash dividends to be paid		$	354			$	--

See accompanying notes to condensed consolidated financial statements.

 

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 the form 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 nine month period ended March 31, 2007.  The Company recognized stock-based compensation expense of $277 in the nine months ended March 31, 2008 under the 2007 Directors Plan.

A summary of option activities under the 2007 Directors Plan during the nine month period ended March 31, 2008 is presented as follow:

						Weighted- Average Exercise				Weighted - Average Remaining Contractual				Aggregate Intrinsic
		Options				Price				Term (Years)				Value
Outstanding at July 1, 2007			--
Granted			50,000			$	9.57
Exercised			--				--
Forfeited or expired			--				--
Outstanding at March 31, 2008			50,000			$	9.57				4.68				--
Exercisable at March 31, 2008			50,000			$	9.57				4.68				--

1998 Stock Option Plan

A summary of option activities under the 1998 Plan during the nine month period ended March 31, 2008 is presented as follow:

						Weighted- Average Exercise				Weighted - Average Remaining Contractual				Aggregate Intrinsic
		Options				Price				Term (Years)				Value
Outstanding at July 1, 2007			13,050			$	3.03
Granted			--				--
Exercised			500				--
Forfeited or expired			--				--
Outstanding at March 31, 2008			12,550			$	3.03				0.49			$	41,525
Exercisable at March 31, 2008			12,550			$	3.03				0.49			$	41,525

The intrinsic value of 500 options exercised was $2. Cash received from options exercised in the third quarter of 2008 was approximately $1.

 

A summary of the status of the non-vested stock options under the 1998 Plan during the nine month period ended March 31, 2008 is presented below:

Non-vested Options		Shares				Weighted Average Grant Date Fair Value
Non-vested at July 1, 2007			1,375			$	1.31
Granted			--				--
Vested			(1,375	)		$	1.31
Forfeited			--				--
Non-vested at March 31, 2008			--				--

 

5.	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 12,550 shares of Common Stock at exercise prices ranging from $2.66 to $9.57 per share were outstanding as of March 31, 2008 and were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

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 March 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 ­­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:

		Nine Months Ended								Three Months Ended
		March 31,				March 31,				March 31,				March 31,
		2008				2007				2008				2007
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income (loss) attributable to common shares		$	(495	)		$	2,636			$	(1,411	)		$	1,081
Basic Earnings (loss) Per Share		$	(0.15	)		$	0.82			$	(0.44	)		$	0.34
Diluted Earnings (loss) Per Share		$	(0.15	)		$	0.82			$	(0.44	)		$	0.33
Weighted average number of common shares outstanding - basic			3,226				3,225				3,226				3,226
Dilutive effect of stock options			--				10				--				10
Number of shares used to compute Earnings Per Share - diluted			3,226				3,235				3,226				3,236

 

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 SGD5,500, or approximately U.S. $3,837 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 principal payments of SGD153 (U.S. $107) with a final principal payment due on August 1, 2010 of SGD145 (U.S. $101).  The payment schedule of this loan for the next three years is presented in the following table:

As of March 31, 2008		Calendar Year 2008				Calendar Year 2009				Calendar Year 2010				Thereafter				Total				Fair Value
Loan:
Denominated in Singapore dollars; interest is at the bank's prime rate (2.51% at March 31, 2008) plus 3.0% per annum		$	999			$	1,332			$	962			$	-			$	3,293			$	3,293

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 $267 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

The following table presents our investment in China during the nine months ended March 31, 2008. The exchange rate is based on the exchange rate on March 31, 2008 published by the Federal Reserve System.

	Investment Date		Investment Amount				Investment Amount
			(RMB)				(U.S. Dollars)
Investment in property with Jiasheng	8/28/07			10,000				1,426
Investment in property with Jiasheng	12/17/07			5,000				713
Purchase an investment property	1/04/08			5,554				792
Total investment in China			RMB20,554				$	2,931

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 U.S. $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 U.S. $1,426 based on the exchange rate on March 31, 2008 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 the cost method as the Company accounted for less than 20% equity of this joint venture.

 

14.	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 expenses 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 $108 and $122 for the nine months ended March 31, 2008 and 2007, 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
	March 31,		Sales				(loss)				Assets				Amort.				Expenditures
Manufacturing	2008		$	4,367			$	(884	)		$	3,747			$	67			$	43
	2007		$	6,923			$	350			$	3,511			$	53			$	98
Testing services	2008			3,973				(553	)			31,814				662				966
	2007			6,348				1,077				27,978				826				313
Distribution	2008			115				(69	)			424				5				5
	2007			342				(91	)			556				4				-
Corporate and	2008			-				192				97				-				-
unallocated	2007			-				8				208				-				-
Total Company	2008		$	8,455			$	(1,314	)		$	36,082			$	734			$	1,014
	2007		$	13,613			$	1,344			$	32,253			$	883			$	411

 

Business Segment Information:
	Nine
	Months						Operating								Depr.
	Ended		Net				Income				Total				and				Capital
	March 31,		Sales				(loss)				Assets				Amort.				Expenditures
Manufacturing	2008		$	17,848			$	(92	)		$	3,747			$	174			$	258
	2007		$	20,602			$	1,041			$	3,511			$	147			$	246
Testing services	2008			15,186				1,110				31,814				2,074				2,233
	2007			15,519				2,421				27,978				1,848				2,214
Distribution	2008			342				(152	)			424				14				14
	2007			1,435				(101	)			556				12				1
Corporate and unallocated	2008			-				(343	)			97				-				2
	2007			-				53				208				-				-
Total Company	2008		$	33,376			$	523			$	36,082			$	2,262			$	2,507
	2007		$	37,556			$	3,414			$	32,253			$	2,007			$	2,461

 

Geographic Area Information:
																											Elimin-
	Quarter																										ations
	Ended		United								Other																and				Total
	March 31,		States				China				Countries				Singapore				Thailand				Malaysia				Other				Company
Net sales to	2008		$	1,052			$	467			$	551			$	2,312			$	471			$	3,618			$	(16	)		$	8,455
customers	2007		$	1,301			$	1,102			$	293			$	8,493			$	617			$	1,868			$	(61	)		$	13,613
Operating	2008			(183	)			(83	)			(96	)			(413	)			(84	)			(647	)			192				(1,314	)
income (loss)	2007			104				112				14				854				63				189				8				1,344
Long-lived	2008			5				995				-				1,850				774				4,272				(40	)			7,856
assets	2007			10				848				-				3,695				877				2,748				(40	)			8,138

Geographic Area Information:
	Nine																										Elimin-
	Months																										ations
	Ended		United								Other																and				Total
	March 31,		States				China				Countries				Singapore				Thailand				Malaysia				Other				Company
Net sales to	2008		$	4,096			$	1,239			$	1,468			$	15,024			$	1,544			$	10,113			$	(108	)		$	33,376
customers	2007		$	5,152			$	4,493			$	518			$	21,030			$	1,763			$	4,722			$	(122	)		$	37,556
Operating	2008			42				(12	)			(18	)			758				23				73				(343	)			523
income (loss)	2007			351				413				24				1,966				165				442				53				3,414
Long-lived	2008			5				995				-				1,850				774				4,272				(40	)			7,856
assets	2007			10				848				-				3,695				877				2,748				(40	)			8,138

Net sales into and within China and the Southeast Asia regions and other countries (except sales into and within the United Sates) decreased by $3,124 to $29,280 and by $4,909 to $7,403 for the nine months and three months ended March 31, 2008, respectively, compared to the same periods of the prior year.  This decrease was primarily due to a drop in sales in the testing segment in our Singapore and China operations.  Net sales into and within the United States were $4,096 and $1,052 for the nine and three months ended March 31, 2008, respectively, a decrease of $1,056 and $249, respectively, when compared to the same periods of the prior year.

The decrease in net sales in the nine and three months ended March 31, 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 53.48% and 51.65% for the nine and three months ended March 31, 2008, respectively, a decrease of 1.38% and an increase of 0.79% of total net sales, respectively, when compared to the same periods of the prior year.  The absolute amount of net sales was $17,848 and $4,367 for the nine and three months ended March 31, 2008 respectively, a decrease of $2,754 and $2,556, 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 45.50% and 46.99% for the nine and three months ended March 31, 2008, respectively, a decrease of 4.18% and 0.36%, 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 decreased by $333 to $15,186 and by $2,375 to $3,973 for the nine and three months ended March 31, 2008, respectively, compared to the same periods of fiscal 2007.

This considerable decrease in sales was due to a significant drop in orders from one of our main customers due to one of their product lines reaching the end of its life cycle earlier than expected, rendering our testing service for that product no longer necessary. Demand for testing services varies from time to time depending on changes taking place in the market and our customers’ forecasts.

Distribution Segment

Net sales in the distribution segment accounted for 1.02% and 1.36% of total net sales for the nine and three months ended March 31, 2008, respectively, a decrease of 2.80% and 1.15%, respectively, compared to the same periods in fiscal 2007.  The absolute amount of net sales decreased by $1,093 to $342 and by $227 to $115 for the nine and three months ended March 31, 2008, 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 Third Quarters Ended March 31, 2008 and 2007

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

		Three Months Ended March 31,
		2008				2007
Net Sales			100	%			100.0	%
Cost of sales			83.3	%			73.6	%
Gross Margin			16.7	%			26.4	%
Operating Expenses
General and administrative			24.6	%			14.5	%
Selling			2.2	%			1.9	%
Research and development			0.1	%			0.1	%
Impairment loss			5.2	%			0.0	%
Loss on disposal of property, plant and equipment			0.1	%			0.0	%
Total operating expenses			32.2	%			16.5	%
Income (Loss) from Operations			(15.5	)%			9.9	%

Overall Gross Margin

Overall gross margin as a percentage of revenue decreased by 9.7% for the three months ended March 31, 2008, from 26.4% in the third quarter of fiscal 2007 to 16.7%, due primarily to the decrease in the gross margin in the testing and manufacturing segments.  In terms of dollar value, the overall gross margin decreased by $2,188 for the three months ended March 31, 2008, from $3,597 to $1,409, compared to the same quarter of fiscal 2007, resulting from the decrease in revenue and an increase in cost of goods sold.

Gross profit margin as a percentage of revenue in the manufacturing segment decreased by 13.3% for the three months ended March 31, 2008, from 17.7% in the third quarter of fiscal 2007 to 4.4% in the third quarter of fiscal 2008.  The decrease in gross margin was due to a decrease in the average selling prices of burn-in boards and burn-in systems as a result of strong competition in the market place.  In absolute amounts, gross profits decreased by $1,034 to $191 for the three months ended March 31, 2008, from $1,225 for the three months ended March 31, 2007.

Gross profit margin as a percentage of revenue in the testing segment decreased by 7.4% for the three months ended March 31, 2008, from 37.0% to 29.6%, compared to the same quarter of fiscal 2007.  In terms of dollar amount, gross margin in the testing segment in the third quarter of fiscal 2008 was $1,175, a decrease of $1,176 compared to $2,351 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.  Another factor contributing to the decline in gross margin was the fact that significant portions of our operating costs are fixed in the testing segment; thus as product demands decrease and factory utilization decreases, the fixed costs are spread over the decreased output, resulting in a drop in profit margin.

Gross profit margin as a percentage of revenue in the distribution segment was 37.4% for the third quarter of fiscal 2008, from 6.1% in the third quarter of fiscal 2007.  The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices compared to related expenses in the third quarter of fiscal 2008 compared to the same period of fiscal 2007. In absolute amounts, gross margin was $43, an increase of $22 compared to $21 in the same period of fiscal 2007.

 

Operating Expenses

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

		Three Months Ended March 31,
(In Thousands, unaudited)		2008				2007
General and administrative		$	2,075			$	1,971
Selling			189				262
Research and development			7				18
Impairment loss			441				2
Loss on disposal of property, plant and equipment			11				-
Total		$	2,723			$	2,253

During the third quarter of fiscal year 2008, we reclassified $84 of selling expenses into general and administrative expenses and cost of sales to reflect a better presentation of our operations. Accordingly, $84 of selling expense was reclassified to general and administrative expenses and cost of sales in the third quarter of fiscal 2007 for the purpose of comparison. General and administrative expenses increased by $104, or 5.28%, compared to the same period of fiscal 2007, from $1,971 to $2,075 for the three months ended March 31, 2008.   The increase was attributable to an increase in payroll and related expenses in the Malaysia operation to handle a rise in sales volume and an increase of  $57 in unemployment benefits in the Singapore operations.  In order to lower our costs to match with production activity, we laid off 65 employees in our Singapore operation in March.  In addition, share based compensation expenses, as a result of the stock options granted in the second quarter of fiscal 2008, increased by $32 when compared to the same quarter of fiscal 2007.

Selling expenses decreased by $73, or 27.86%, for the three months ended March 31, 2008, from $262 to $189 compared to the same quarter of fiscal 2007. This was mainly due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment.  In addition, we incurred some selling expenses in demo sets, which were given to customers free of charge for promotional purposes in the same quarter of last fiscal year.

Research and development expenses were $7 compared to $18 for the third quarter of fiscal 2007 due to a decrease in payroll expenses in the U.S. operation.

The impairment loss increased by $439 for the three months ended March 31, 2008, from $2 to $441 compared to the same quarter of fiscal 2007.  The impairment loss of $441 in the third quarter of fiscal year 2008 consisted of $221 from certain advanced burn-in testing equipment in the Singapore operation as a result of the termination of the advanced burn-in testing service contract with one of our major customers.  An impairment of $75 related to the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in services, which in turn made certain of our existing burn-in facilities obsolete.  An impairment of $57 related to the building renovations for certain testing projects due to a decrease in a customer’s order in our Shanghai operation in China. The remaining impairment of $88 related to certain testing machinery and equipment in our Singapore operation due to a decrease in our testing backlog and projected future sales.

The impairment loss for the three months ended March 31, 2007 consisted of building renovations with a cost of $4 and related accumulated depreciation of $2. The carrying value of these assets was written down to zero as a result of relocating to a new office unit to accommodate the needs of the testing segment in the Suzhou operation in China.

(Loss) Income from Operations

Loss from operations increased by $2,658 from an income from operations of $1,344 for the three months ended March 31, 2007 to a loss of $1,314 for the three months ended March 31, 2008, mainly due to a decrease in sales in the manufacturing and testing segments and an increase in operating expenses, as previously discussed.

Interest Expense

Interest expense for the third quarters of fiscal 2008 and 2007 were as follow:

		Three Months Ended March 31,
(In Thousands, unaudited)		2008				2007
Interest expense		$	93			$	53

 

Interest expenses increased by $40 for the three months ended March 31, 2008, from $53 to $93, primarily due to a new term loan facility of $3,837 entered into during the first quarter of fiscal 2008 to support the expansion plans and potential business opportunities of the Singapore and China operations.

Other (Expenses) Income

Other (expenses) income for the third quarters of fiscal 2008 and 2007 were as follow:

		Three Months Ended March 31,
(In Thousands, unaudited)		2008				2007
Other (expenses) income		$	(33	)		$	45

Other expenses increased by $78 to $33 for the three months ended March 31, 2008 from an income of $45 in the same quarter of fiscal 2007, primarily due to an increase in the currency transaction loss and an increase in provision for the value added tax in our China operation, but offset by an increase in investment income generated from short-term deposits and rental income.  Currency transaction loss increased by $148 for the three months ended March 31, 2008, from $27 to $175, compared to the same quarter of fiscal 2007.  This was attributable to the weakening of the U.S. dollar against foreign currency with regard to transactions denominated in U.S. dollars.  The provision for the value added tax was $25, which was the result of a change in the local tax policy in our Suzhou operation in China.  Investment income was $57 for the three months ended March 31, 2008 and was $18 higher than the interest income generated in the same quarter of fiscal 2007 due to an increase in short-term deposits by placing the idle cash into income generating investments. Rental income, which consisted mainly of space in the Malaysia operation rented to    outside vendors, increased by $12 to $41 for the three months ended March 31, 2008 from $29 in the same period of fiscal 2007.

Income Tax

The net income tax benefit for the three months ended March 31, 2008 was $46, an increase of $285 compared to the income tax provision of $239 for the three months ended March 31, 2007.  Our Singapore operations suffered a loss of $938 for the three months ended March 31, 2008, a decrease of $2,452 compared to a profit of $1,514 for the same period of 2007.  This loss resulted in an income tax benefit of $133 for the third quarter of fiscal 2008. In addition, we reversed a deferred tax liability of $119 in the Singapore operation in the third quarter of fiscal 2008 due to a decrease in the book value of fixed assets as a result of provision from impairment loss.  However, the income tax benefit was offset by a provision for deferred tax liability of $206 as a result of the timing differences related to the recording of depreciation expenses for book and tax purposes in the Malaysia operation.

We assessed our income tax liability of $364 as of March 31, 2008 in accordance with FIN 48, which was related to the allocation of corporate management expenses to our Singapore operation in terms of Singapore tax law.  We did not see any potential benefits arising from this tax position.  Accordingly, no impact of this tax position was recognized in the statement of operations for this quarter of fiscal 2008.  We did not include any potential income tax position in federal and state income tax returns currently filed.

Minority Interest

As of March 31, 2008, we held a 55% interest in Trio-Tech Malaysia.  In the third quarter of fiscal 2008, minority interest in the net income of subsidiaries was $17, an increase of $1, compared to a minority interest in the net income of $16 for the same quarter of fiscal 2007.  The increase in the minority interest was attributable to an improvement in the net income generated from the Malaysia testing operation due to stronger market demands from our customers there.

Net (loss) Income

Net loss was $1,411 in the third quarter of fiscal 2008, representing a decrease of $2,492, from a net income of $1,081 during the same period of fiscal 2007.  The decrease in net income was mainly due to a decrease in revenue, an increase in operating expenses, interest expense and a decrease in other income, as previously discussed.

Earnings per Share

The basic loss per share for the three months ended March 31, 2008 increased by $0.78 to $0.44 from an earning of $0.34 per share, and the diluted loss per share increased by $0.77 to $0.44 from an earning of $0.33 per diluted share as compared to the same quarter of the prior year.

Loss from operations in the distribution segment decreased by $22 to $69 for the three months ended March 31, 2008, compared to $91 in the same period of fiscal 2007. The decrease in operating loss was mainly due to an increase in gross margin of $22, as previously discussed. Operating expenses remained the same at $112 for the three months ended March 31, 2008 and 2007.

Corporate

The income from operations for corporate for the third quarters of fiscal 2008 and 2007 were as follow:

		Three Months Ended March 31,
(In Thousands, unaudited)		2007				2006
Income from operations		$	192			$	8

Corporate operating income increased by $184 to $192 for the three months ended March 31, 2008, compared to $8 in the same period of fiscal 2007. The improvement in corporate income was mainly attributable to an increase in the percentage of revenue imposed on all the subsidiaries in the third quarter of fiscal 2008 due to a decrease in the revenue from subsidiaries. The revenue percentage charged on subsidiaries is a reimbursement to the corporate office to cover its operating expenses. Management reviews this percentage periodically to make sure the amount charged is sufficient to cover corporate expenses. This improvement was primarily offset by an increase of $32 in stock option compensation expenses.

Comparison of the Nine Months Ended March 31, 2008 and 2007

The following table sets forth certain consolidated statements of (loss) income data as a percentage of net sales for the nine months ended March 31, 2008 and 2007, respectively:

		Nine Months Ended March 31,
		2008				2007
Net Sales			100	%			100.0	%
Cost of sales			77.1	%			74.9	%
Gross Margin			22.9	%			25.1	%
Operating Expenses
General and administrative			18.4	%			13.6	%
Selling			1.4	%			1.8	%
Research and development			0.1	%			0.1	%
Impairment loss			1.3	%			0.5	%
Loss on disposal of property, plant and equipment			0.1	%			0.0	%
Total operating expenses			21.3	%			16.0	%
Income from Operations			1.6	%			9.1	%

Overall Gross Margin

Overall gross margin as a percentage of revenue decreased by 2.2% to 22.9% for the nine months ended March 31, 2008, from 25.1% for the same period of fiscal 2007. The decrease in the overall gross margin was due primarily to the decrease in the gross margin in the manufacturing and testing segments. However, this was offset by an increase in gross margin in the distribution segment. In terms of dollar value, the overall gross margin decreased by $1,775, or 18.8%, for the nine months ended March 31, 2008, from $9,421 to $7,646 compared to the same period of fiscal 2007, as a result of a decrease in revenue and an increase in cost of goods sold.

Gross profit margin as a percentage of revenue in the manufacturing segment decreased by 2.9% for the nine months ended March 31, 2008 compared to the same period of fiscal 2007, from 16.2% to 13.3%.  In absolute amounts, gross profit was $2,374, a decrease of $969, or 29.0%, for the nine months ended March 31, 2008, from $3,343 in the same period of fiscal 2007. The decrease in gross margin was due to a decrease in average selling prices of burn-in boards and burn-in systems as a result of strong competition in the market place.

Gross profit margin in the testing segment decreased by 3.7% for the nine months ended March 31, 2008 compared to the same period of the prior year, from 37.8% to 34.1%. In absolute amount, gross profits in the testing segment were $5,171, a decrease of $693, or 11.8%, for the nine months ended March 31, 2008, from $5,864 in the same period of fiscal 2007. The decrease in the gross margin was attributable to a considerable decrease in sales volume due to the fact that one of our significant customer’s product lines reached the end of its life cycle in the third quarter of fiscal 2008, as previously discussed. Significant portions of our operating costs are fixed in the testing segment; thus as product demands decrease and factory utilization decreases, the fixed costs are spread over the decreased output, which in turn decreases profit margin.

Gross profit margin as a percentage of revenue in the distribution segment improved by 14.6%, from 14.9% for the nine months ended March 31, 2007 to 29.5% in the same period this fiscal year. The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices compared to related expenses in the nine months of fiscal 2008 compared to the same period of fiscal 2007. In absolute amount, gross profits decreased by $113, or 52.8%, to $101 for the nine months ended March 31, 2008 from $214 for the nine months ended March 31, 2007, due to a drop in sales volume as previously discussed.

Operating Expenses

The following table presents the operating expenses for the nine months ended March 31, 2008 and 2007, respectively:

		Nine Months Ended March 31,
(In Thousands, unaudited)		2008				2007
General and administrative		$	6,144			$	5,121
Selling			466				660
Research and development			45				52
Impairment loss			457				174
Loss on disposal of property, plant and equipment			11				--
Total		$	7,123			$	6,007

During the nine months ended March 31, 2008, we reclassified payroll expenses of $301 from selling expenses to general and administrative expenses and cost of sales to reflect a better presentation of our operations.  Accordingly, $222 of selling expenses was reclassified to general and administrative expenses and cost of sales in the nine months ended March 31, 2007 for the purpose of comparison. General and administrative expenses increased by $1,023, or 20.0%, from $5,121 to $6,144 for the nine months ended March 31, 2008, compared to the same period of fiscal 2007. The increase was primarily attributable to a hike in payroll and related expenses in the Malaysia operation in order to handle the rise in sales volume there, an increase of $57 in unemployment benefits in the third quarter of 2008 resulting from the layoff of 65 employees in our Singapore operation in order to lower our costs to match with production activity, and an increase of $386 was related to stock option compensation expenses for the 100,000 options granted on December 4, 2007.

Selling expenses decreased by $194, or 29.4 %, for the nine months ended March 31, 2008, from $660 to $466, compared to the same period of fiscal year 2007. This was mainly due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment, and a reversal of $92 in overprovided commission expenses in the manufacturing segment and distribution segment. Part of our commission payable was based on the estimated profit margin of sales when the sales were recorded, and it was reduced when the actual profit margin decreased as the result of an increase in unexpected service expenses following the sales.  In addition, in the nine months ended March 31, 2007 there were expenses incurred for free demo sets which were given to customers for promotional purposes, while there were no such expenses in the same period of fiscal 2008.

Research and development costs decreased by $7 from $52 in the nine months ended March 31, 2007 to $45 in same period of 2008 due primarily to a decrease in payroll expenses in the U.S. operation.

The impairment loss increased by $283 for the nine months ended March 31, 2008, from $174 to $457, compared to the same period of fiscal 2007. Of this loss, $11 was related to the disposal of certain fixed asset in our Suzhou operation in China in the second quarter of fiscal 2007. $5 was related to the asset held for sale in Malaysia.  $221 was related to certain advanced burn-in testing equipment as a result of the termination of the advance burn-in testing service contract with one of our major customers.  $75 was related to the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in testing services, which in turn made certain of our existing burn-in facilities obsolete. Additionally, $57 of the impairment loss was related to the building renovations for certain testing projects due to a decrease in a customer’s order in our Shanghai operation in China, and the remaining impairment loss of $88 was related to certain machinery and equipment in our Singapore operation due to a decrease in backlog and projected future sales.

 

The impairment loss in the nine months ended March 31, 2007 consisted of $423 in machinery and equipment net of accumulated depreciation of $251, as well as $4 in building renovations and related accumulated depreciation of $2. Due to the decrease in demand for the slower speed microprocessor chips, those of our existing burn-in facility assets in the Singapore operation used for testing such chips became obsolete, and the carrying amount was written down to zero in the second quarter of fiscal 2007. The building renovation was impaired as we moved to a new office unit in order to accommodate the needs of the testing operation in the Suzhou operation in China. Since there will be no future cash flows from those assets, the carrying value of these assets was written down to zero, and the impairment cost was recorded.

Income from Operations

Income from operations decreased by $2,891 to $523 for the nine months ended March 31, 2008, from $3,414 for the same period of fiscal year 2007. The decrease in income from operations was due to a decrease in gross margin of $1,775 and an increase in operating expense of $1,116.

Interest Expense

The following table presents the interest expenses for the nine months ended March 31, 2008 and 2007, respectively:

		Nine Months Ended March 31,
(In Thousands, unaudited)		2008				2007
Interest expense		$	257			$	119

Interest expenses increased by $138 during the nine months ended March 31, 2008, from $119 to $257 compared to the same period of fiscal 2007, primarily due to a new term loan facility of $3,837 entered into during the first quarter of fiscal 2008 to support the expansion plans and potential business opportunities of the Singapore and China operations. The other contributing factor was an interest loss of $80 in the nine months ended March 31, 2008 due to an interest swap agreement on one of our loans that we entered into during the first quarter of fiscal 2008.

Other Income

The following table presents the other income for the nine months ended March 31, 2008 and 2007, respectively:

		Nine Months Ended March 31,
(In Thousands, unaudited)		2008				2007
Other (expenses) income		$	(224	)		$	155

Other expenses increased by $379 to $224 for the nine months ended March 31, 2008, from an income of $155 in the same period of the prior year, primarily due to an increase in the currency transaction loss and an increase in provision for the value added tax in our China operation, but offset by an increase in investment income generated from short-term deposits and rental income. Currency transaction loss increased by $500 for the nine months ended March 31, 2008, from $5 to $505, compared to the same period fiscal 2007. This was attributable to the weakening of the U.S. dollar against foreign currency with regard to transactions denominated in U.S. dollars. The provision for the value added tax was $121, which was the result of a change in the local tax policy in our Suzhou operation in China.  Investment income was $199 for the nine months ended March 31, 2008 and was $108 higher than the investment income generated in the same period of the prior year due to an increase in the placement of short-term deposits by placing idle cash into income generating investments. Rental income, which consisted mainly of space in the Malaysia operation rented to outside vendors, increased by $34 to $117 for the nine months ended March 31, 2008 from $83 in the same period of fiscal 2007.

Income Tax

Income tax provision for the nine months ended March 31, 2008 was $268, a decrease of $449 compared to an income tax provision of $717 for the same period of fiscal 2007. The decrease in income tax provision was mainly due to a lower tax provision for the decreased income generated from the Singapore operations during the nine months ended March 31, 2008 and a reversal of deferred tax liability of $119 in the Singapore operations. This benefit was offset by a provision for deferred tax liability of $206 as the result of the timing differences related to the recording of depreciation expenses for book and tax purposes in the Malaysia operation.

 

At March 31, 2008, the accounts receivables balance decreased by $327 from the balance at June 30, 2007 due primarily to a decrease in sales in the third quarter of fiscal 2008.  The accounts receivables turnover was 59 days for the third quarter of fiscal 2008 compared with 78 days for the fourth quarter of fiscal 2007.  The decrease in the accounts receivable turnover rate was primarily due to improvements in collections at the Singapore operation.

Other receivables at March 31, 2008 increased by $437 from that balance at June 30, 2007, due mainly to an increase of $130 in advanced payments to our vendors by the Singapore operation.

Inventory at March 31, 2008 was $2,144, reflecting an increase of $198, or 10.2%, compared to June 30, 2007.  The increase in inventory was mainly from an increase in raw materials.  Most of the increased inventory was bought in the first two quarters of fiscal year 2008, which was for the expected product shipments in the third and fourth quarter that we forecasted. The inventory was reduced by $329 as compared to the inventory of $2,473 as of December 31, 2007 due to a decrease in projected sales. The turnover of inventory was 22 days for the third quarter of fiscal 2008 compared with 23 days for the fourth quarter of fiscal 2007.

Prepaid expenses and other current assets at March 31, 2008 were $222, an increase of $100 from that balance at June 30, 2007, due primarily to an increase in prepaid insurance for the calendar year 2008 in the Singapore operations.

Asset held for sale of $219 at March 31, 2008 was comprised of the market value of the property located in Malaysia, which is subject to the terms under a definitive sales agreement dated December 31, 2007, less the cost to sell, in accordance with SFAS No. 144.

On August 27, 2007 and November 15, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement and a Supplement Agreement, respectively, with Jiasheng Property Development Co. Ltd. to jointly develop a piece of property with 24.91 acres owned by Jiasheng located in Chongqing, China.  Pursuant to the signed agreement, an investment of $1,426 was transferred into a special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng.

On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list of additional costs incurred for this project. Accordingly, the Company only transferred RMB5,000, approximately $713, from its bank account into the special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng

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 U.S. $792 based on the exchange rate as of March 31, 2008 published by the Federal Reserve System.  Under the terms of the agreement, the Company paid the purchase price in full on January 4, 2008.  As of March 31, 2008, the total of all the Company’s investments in China was $2,931.

Property, plant and equipment increased by $255 from $7,458 at June 30, 2007 to $7,713 at March 31, 2008. Capital expenditures were $2,507 in the first nine months of fiscal 2008, compared with $2,409 for the first nine months of fiscal 2007.  The increase in capital expenditures was mainly from our operation in Malaysia in order to meet customers’ requirements.

Depreciation and amortization was $2,262 for the nine months ended March 31, 2008, compared with $2,007 for the same period of fiscal 2007.  The increase in depreciation expenses was due mainly to an increase in property, plant and equipment acquired after June 30, 2007.

Other assets were $645 at March 31, 2008, an increase of $200 from that balance at June 30, 2007.  The increase in other assets was primarily due to a decrease of $110 for a down payment on certain fixed assets in the Singapore operation, and a decrease of $50 for the down payment for certain fixed assets, rent and utilities in the China operation, but was offset by an increase of $360 in down payment for the Malaysia operation.

Liquidity Comparison

Net cash provided by operating activities decreased by $1,451 to $1,421 for the nine months ended March 31, 2008 from $2,872 in the same period of fiscal 2007.  The decrease in net cash provided by operating activities was primarily due to a decrease of $3,131 in net income from $2,636 to a loss of $495 during the nine months ended March 31, 2008 as compared to the same period of the prior year.  This decrease was offset by an increase of $1,017 in net impact from non-cash items and an increase of $663 from change in balance sheet items. In the nine months ended March 31, 2008, the non-cash impairment expenses increased by $283, primarily due to the termination of the advance burn-in testing service contract, depreciation and amortization increased by $255 due to an increase in fixed assets and stock option compensation expenses increased by $386 for the 100,000 options granted on December 4, 2007.

 

Net cash used in investing activities increased by $3,875 to $5,832 for the nine months ended March 31, 2008 from $1,957 for the same period of fiscal 2007.  The proceeds from maturing short-term deposits of $25,537 were not adequate to cover the higher investment in short-term deposits of $25,946 in the nine months ended March 31, 2008, thereby incurring a negative investing cash flow. As we anticipated that funds would be required in the next quarter of fiscal 2008 for working capital purposes, we invested in short-term deposits to generate investment income.  We invested $2,931 in Chongqing, China in the nine months ended March 31, 2008 to jointly develop a piece of property with 24.91 acres with Jiasheng Property Development Co., Ltd and purchase an office space of 827.2 square meters in Chongqing. The capital expenditure also increased by $98, as previously discussed.

Net cash provided by financing activities in the nine months ended March 31, 2008 was $2,201, representing an increase of $2,801 compared to the net cash used in financing activities of $600 during the same period of fiscal 2007.  The increase was mainly due to proceeds from the long-term bank loans of $3,837 entered into during the nine months ended March 31, 2008 as compared to bank loans of $6 in the same period of fiscal 2007. However, this was offset by a decrease of $294 from net borrowing on lines of credit and an increase of $607 in prepayment of bank loans and capital leases.

We believe we have the necessary financial resources to meet our projected cash requirements for at least the next twelve months.

Corporate Guarantee Arrangement

The Company provides a corporate guarantee of approximately $1,813 to one of its subsidiaries in Southeast Asia to secure line-of-credit and term loans from a bank to finance the operations of such subsidiary. With the strong financial position of the subsidiary company, the Company believes this corporate guarantee arrangement will have no material impact on its liquidity or capital resources.

Critical Accounting Estimates and Policies

There have been no significant changes in the critical accounting polices disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the most recent Annual Report on Form 10-K.

We prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Management periodically evaluates the estimates and judgments made.  Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates as a result of different assumptions or conditions.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK