UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended December 31, 2004

OR

For the Transition Period from       to      

Commission File Number 1-14523

TRIO-TECH INTERNATIONAL

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed with the Commission 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 an accelerated filer (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, 2005 is 2,966,042.

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

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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES)

See notes to condensed consolidated financial statements.

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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

See notes to condensed consolidated financial statements.

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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)

See notes to condensed consolidated financial statements.

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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 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 test facilities in the United States and Europe. The Company also designs, develops, manufactures and markets a broad range of equipment and systems used in the manufacture and testing of semiconductor devices and electronic components. TTI conducts business in three industry segments: Testing Services, Manufacturing and Distribution. TTI has subsidiaries in the U.S., Singapore, Malaysia, Thailand, China and Ireland as follows:

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. Accordingly, 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, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005. 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, 2004, as amended by Form 10-K/A filed October 29, 2004.

Effective July 1, 2004, the Company changed its fiscal report period to end on the last day of the fiscal quarter. The quarter end dates for periods ending December 31, 2004 and December 31, 2003 were December 31, 2004 and December 26, 2003 respectively.

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2.	INVENTORIES

Inventories consist of the following:

3.	STOCK OPTIONS

The Company has adopted the intrinsic value method of accounting for employee stock options as permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-based Compensation” (SFAS No. 123) and discloses the pro forma effect on net loss and loss per share as if the fair value based method had been applied. For equity instruments, including stock options, issued to non-employees, the fair value of the equity instruments or the fair value of the consideration received, whichever is more readily determinable is used to determine the value of services or goods received and the corresponding charge to operations.

The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation.

As required by SFAS No. 123, the Company provides the following disclosure of estimated values for these awards. The weighted-average grant-date fair value of options granted during the first half of 2005 and the first half of 2004 was estimated to be from $4.40 to $4.50 for fiscal 2005, and $2.66 for fiscal 2004.

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The fair value of each option grant was estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions for the first half of fiscal 2005 and the first half of fiscal 2004, respectively: risk free interest rates of 3.01% and from 1.91% to 2.93%, expected lives of 2 years for the first half of fiscal 2005 and the first half of fiscal 2004; volatility of 36.84% and 41.41% and no assumed dividends.

4.	EARNINGS PER SHARE

The Company adopted SFAS No. 128, Earnings per Share (“EPS”). Basic Earnings per Share is 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 gives 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 exercise of stock options and warrants.

Stock options to purchase 381,000 shares at prices ranging from $2.25 to $6.00 per share were outstanding during the six months ended December 31, 2004. The following options were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.

Stock options to purchase 388,500 shares at prices ranging from $2.25 to $6.00 per share were outstanding during the six months ending December 31, 2003. 128,000 options were excluded in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares and therefore were anti-dilutive.

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:

5.	ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are customer obligations due under normal trade terms. We sell our products and services to manufacturers in the semiconductor industry. We perform continuing credit evaluations of our customers’ financial condition and although we generally do not require collateral, letters of credit may be required from our customers in certain circumstances.

Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. We include any accounts receivable balances that are determined to be uncollectible in our 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 to us, we believe our allowance for doubtful accounts for the six months ended December 31, 2004 is adequate. However, actual write-offs might exceed the recorded allowance.

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6.	WARRANTY ACCRUAL

7.	ACQUISITION OF A BUSINESS

On July 1, 2004, the Company acquired certain assets from TS Matrix Bhd. (“the Seller’) utilized by the burn-in testing division of Seller for an aggregate cash purchase price of approximately $1,218. Seller is one of our competitors. The Company paid approximately $92 by way of a deposit in fiscal 2004 and $731 of the purchase price in cash at the completion of the acquisition on July 1, 2004, and the balance of approximately $395 was payable in the form of a bank-guaranteed note, which matured at December 31, 2004. Our objectives in acquiring the burn-in testing division were to service a large electronic device manufacturer with whom we had been pursuing a business relationship for some time and to increase our market share in testing services. Upon completion of the acquisition, the customer signed a five-year agreement with the Company to provide testing services. The value of obtaining this customer relationship intangible is included in other intangible assets in the amount of $482. Results of the operations for the burn-in testing business are included in the Company’s income statement effective July 1, 2004.

In accordance with the Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations”, the Company allocated the purchase price to the tangible assets and intangible assets acquired based on their estimated fair values. The fair value assigned to intangible assets acquired was based on estimates and assumptions determined by the management. Purchase intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The total purchase price was allocated as follows (in thousands):

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The excess purchase price over the fair value of tangible assets acquired was attributed to the customer relationship obtained from the above business acquisition and recorded as other intangible assets. No goodwill is recognized in this context. The customer relationship intangible will be amortized over its economic life based on the contract term as stated in the sales agreement with the customer on a straight-line method over five years.

As previously reported in the Form 10-K, the customer relationship intangible is $493. The difference of $11 ($493 versus the above $482) was related to equipment given by the Seller to the Malaysia Testing operation subsequent to the completion date on July 1, 2004.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of the operations of the Company and the new burn-in testing division in Malaysia for the three and six months ended December 31, 2003 as if the acquisition had occurred on July 1, 2003. The results from operations for the three and six months ended December 31, 2004 included the business acquisition that was completed at the beginning of the first quarter of fiscal 2005.

The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of the three and six months ended December 31, 2003. The unaudited pro forma combined statement of operations for the three and six months ended December 31, 2003 combines the historical results for the Company for three and six months ended December 31, 2003 and the historical results for the new burn-in testing division for the period preceding the merger on July 1, 2004. The following amounts are in thousands, except per share amounts.

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UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003

(a)	Net earnings was adjusted for pro forma purposes to recognize the effect of the amortization of the other intangible assets over its economic life of five years on a straight-line method, assuming that the acquisition took place from July 1, 2003.

8.	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 on the basis of the primary purpose for which the equipment was acquired.

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All inter-segment sales are sales from the Manufacturing Segment to the Testing and Distribution Segment. Total inter-segment sales were $37 and $34 for the six months ended December 31, 2004 and 2003, respectively, and $8 and $9 for the three months ended 2004 and 2003, respectively. Corporate assets mainly consist of cash and prepaid expenses. Corporate expenses mainly consist of salaries, insurance, professional expenses and directors’ fees.

The following segment information is unaudited and is in thousands:

Business Segment Information:

Business Segment Information:

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Geographic Area Information:

Geographic Area Information:

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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

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 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 statement 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. See the discussions elsewhere in this Form 10-Q 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.

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 operates in three distinct segments: Distribution, Manufacturing, and Testing. At or from its facilities in California and Southeast Asia, the Company also designs, manufactures and markets equipment and systems used in the testing and production of semiconductors, and distributes semiconductor processing and testing equipment manufactured by others.

     (i) Results of operations and business outlook

The following table sets forth our revenue components for the three and six months ended December 31, 2004 and 2003, respectively.

Revenue Components

Geographically, we operate in the U.S., Singapore, Malaysia, Thailand and Ireland. Our customers are mainly concentrated in Southeast Asia and they are either semiconductor chip manufacturers or testing facilities that purchase our testing equipment.

Our Manufacturing segment replaced our core segment, the Testing segment, with the highest sales for the six months ended December 31, 2004. This increase in Manufacturing sales was primarily the result of a surge in burn-in systems and burn-in boards volume in Asia. In the Manufacturing segment, backlog in the Singapore operation remained high at approximately $1,700, an increase of 180% compared to the second quarter of fiscal year 2004. Currently, the business volume for the Singapore Manufacturing operation derives mainly from Asia, and will be focusing on back-end products, such as burn-in boards and systems, for the Asian region. The U.S. operation, however, will continue to listen to customer demand and market used and refurbished equipment, as it is more cost-effective for our customers than purchasing new equipment.

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The Testing segment experienced a decline in sales as a percentage of the overall sales for the six months ended December 31, 2004 as compared to December 31, 2003 as a result of a variety of factors. The operation in Singapore incorporated a change in product mix during the six months ended December 31, 2004. The operation will provide more services for an increasingly popular new type of microprocessor chip. Once they have set up additional facilities for the burn-in services of the said microprocessor chip component, it will more than make up for the drop in demand for the burn-in services of another type of microprocessor chip. Since the beginning of the fiscal year, the burn-in services provided by the Testing operation in Malaysia contributed approximately $950 to the overall sales for Southeast Asia. In addition, the semiconductor market in Thailand experienced a decline, and burn-in services for Thailand dropped to $450, their lowest point in two and half years.

The Company allocated the purchase price of the newly acquired burn-in division in Malaysia to the tangible assets and intangible assets acquired based on their estimated fair values. The fair value assigned to intangible assets acquired was based on estimates and assumptions determined by the management. Purchase intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The total purchase price was allocated as follows (in thousands):

The excess purchase price over the fair value of tangible assets acquired was attributed to the customer relationship obtained from the above business acquisition and recorded as other intangible assets. No goodwill is recognized in this context. The customer relationship intangible will be amortized over its economic life based on the contract term as stated in the sales agreement with the customer on a straight-line method over five years.

As previously reported in the Form 10-K, the customer relationship intangible was $493. The difference of $11 ($493 versus the above $482) was related to equipment given by the Seller to the Malaysia Testing operation subsequent to the completion date on July 1, 2004.

The sales volume in the Distribution segment declined due to a drop in demand for low margin front-end products. The backlog for the Singapore Distribution operation remained constant at approximately $400. The operation is currently working on new products to expand into the Printed Circuit Board Assembly (PCBA) manufacturing industry, as well as semiconductors for microelectronics, which are mostly in Asian countries. Additionally, the operation is working with research bodies in Asia on certain types of film equipment. In the long run, the operation will likely expand its capabilities to media maker storage. With the appreciation of the European euro, the operation will be purchasing less from European countries so as to avoid incurring higher costs.

The Company’s key performance indicators are based on market demand. Sales activities such as bookings, queries on products and backlog also formed part of our performance indicators, as well as customers’ forecasts and the financial results of customers and competitors. According to the analysts participating in the ISS2005 press conference, semiconductor device sales growth will be flat in 2005 while chip equipment sales will go down to 15% from 10% in the U.S. Double digit growth should resume in 2006 at 14.6%. Another analyst, IC Insights, predicted that China will emerge as the world’s largest consumer of Integrated Circuits (IC) in 2005, surpassing Japan and North America and accounting for more than 20% of global IC consumption.

The Company believes the current market trend indicates that the semiconductor industry in Asia is still positive, though the demand for computer and consumer electronics in Q2 2005 slowed down slightly as compared to Q1 2005. Cost conscious consumer spending translates to more price pressure through the supply chain, which means efficiency and productivity are of

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utmost importance. Moreover, current equipment spending remains slow in the U.S. due to high oil prices and continued concern with the ongoing instability in the Middle East. Therefore, many U.S. semiconductor companies plan to postpone back-end purchases until inventories are reduced and the semiconductor industry improves.

There are several influencing factors which create uncertainties when forecasting performance, such as the ever-changing nature of technology; for instance, the specific requirements from the customer, decline 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 itself. Another is that the life-cycles of certain types of burn-in products are falling more quickly than expected. Operations are given a very short lead time to generate products, as orders are confirmed at the last minute, not to mention the complications of special requirements from customers. Customers continue to exert pressure to cut selling prices. As a result, the Company has taken action to help protect itself from these uncertainties by, among other things, upgrading and improving its burn-in technology so as to gain customers’ confidence and maintain market shares, as well as looking for alternatives for burn-in and exploring new markets, as we have with the Distribution segment. The Company continues to cut costs, especially material costs, and maintain a lean headcount. The various operations continue to stockpile in order to meet short notices.

     (ii) Financial information

During the six months ended December 31, 2004, total assets increased by $86 from $18,000 at June 30, 2004 to $18,086. The majority of the increase was in other receivables, inventory, property, plant and equipment and other intangible assets, but offset with a decrease in cash, short term deposits and accounts receivable of $231, $1,922 and $217, respectively.

Inventories increased by $410 from June 30, 2004 to $1,819 at December 31, 2004. This was mainly due to an increase in raw materials and works-in-progress after provision for stock obsolescence of $408 and $52, respectively, which was offset with a $50 decrease in finished goods. The increase in raw materials and works-in-progress in the Singapore Manufacturing operation was mainly to meet orders anticipated in the third and fourth quarters. On the other hand, the increase in finished goods in the Singapore Distribution operation mainly related to the deferred revenue of equipment, which will be explained at a later point.

Property, plant and equipment increased substantially by $1,214 from $5,202 at June 30, 2004 to $6,416 at December 31, 2004 mainly due to the acquisition of fixed assets by the Testing segment in Southeast Asia. During the six months ended December 31, 2004, the additions to property, plant and equipment totaled $1,841, of which $368 was paid as a deposit before June 30, 2004, but the renovation was completed and the equipment was received in the first quarter of fiscal 2005. $736 of the additions were due to acquisition of fixed assets located in the new burn-in operation in Malaysia and $385 related to the purchases of new plant and machinery in Malaysia to meet the new customer’s requirements. In addition, we combined two of the facilities in the Singapore Testing operation to improve cost effectiveness, and hence incurred $427 for renovation of facilities. Other fixed asset purchases included office equipment and machinery by the Singapore and Thailand operations.

The Company recognized $482 in other intangible assets for the customer relationship intangible and it will be amortized over five years. The amortized expenses incurred were $48 for the six months ended December 31, 2004. Consequently, the balance of the customer relationship intangible amounted to $434 at December 31, 2004.

Other receivables also increased by $344 from June 30, 2004 to $927 at December 31, 2004. This was mainly due to the increase in upfront payment of $398 for fixed assets; deposits of $78 placed for rental and utilities in the Malaysia operation; $119 advance payment to the suppliers on inventories; and tax recoverable of $68 for the tax period between 1999 and 2001 in Singapore. This was offset with $368 in upfront payments on fixed assets paid before June 30, 2004, although the renovation was completed and the equipment was received in the first half of 2005.

The significant drop in cash and short term deposits, which decreased by $2,153 from $7,006 at June 30, 2004 to $4,853 at December 31, 2004, was due to several reasons. The total acquisition costs of the burn-in operation in Malaysia, which amounted to $1,218, was fully paid by December 31, 2004 through internal funding. In addition, more plant and machinery, in the amount of $193, were purchased to meet our new customer’s requirements and $78 was placed with Seller’s landlord as a deposit for the rental of the factory previously used by the Seller in such burn-in operation. The existing Malaysia operation paid out dividends of $122 to its minority interest, which was declared out of reserves for the year ended June 30, 2004. The Singapore and Ireland operations paid taxes of $57 and $21 respectively during the six months ended December 31, 2004. The Company also made payments of $115 for the 2004 year-end audit during the six months ended December 31, 2004.

The decrease in accounts receivable from $3,695 at June 30, 2004 to $3,478 at December 31, 2004 was mainly attributable to the higher sales for the Manufacturing and Testing segments in Southeast Asia during the first half of fiscal 2005 as compared to the first half of 2004, combined with more efficient collections. Sales for these operations for the six months ended December 31, 2004 were $11,280, which increased by 107% as compared to the sales for the six months ended December 31, 2003. At the same time, the operations in Southeast Asia maintained their efficiency in collection. The collection period in Southeast Asia was shortened from 71 days at June 30, 2004 to 48 days at December 31, 2004.

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Total liabilities as of December 31, 2004 were $6,601, reflecting a $265 decrease in total liabilities from $6,866 at June 30, 2004. Accounts payable at December 31, 2004 decreased by $1,140 since June 30, 2004 due mainly to fewer materials purchased in the Singapore Manufacturing operation as the inventories, which were previously stocked up, will be sufficient for usage in the next quarter. This offset the higher finished goods and raw materials of $385 purchased by the Singapore Distribution operation towards the end of the second quarter.

The decrease in accounts payable was offset by the increase in accrued expenses and lines of credit. Accrued expenses increased by $586 mainly attributable to the Singapore and Malaysia operations. In the Singapore operation, there was a higher provision for warranty of $75 due to higher equipment sales and commissions of $22 for a greater number of commissionable sales; higher accrued purchases of $130 due to the receipt of raw materials for work orders close to the quarter closing for which vendors have not yet billed; utilities of $64; final payment for fixed assets of $45 and higher sales tax of $48 at December 31, 2004. In the Malaysia operation, there was an increase in accrual of payroll for contract workers of $79, performance incentives of $33 for employees who previously worked for the Seller of the burn-in operation, and payroll related costs of $46. In addition, the Malaysia operation will incur higher audit fees of $15 for the SEC disclosure purposes and utilities costs of $21. The line of credit increased by $190 from $146 at June 30, 2004, mainly attributable to the drawdown of short-term loans in Singapore.

As of December 31, 2004, total liabilities (excluding minority interest) were 70% of total capital, compared with 76.1% at June 30, 2004. Total liabilities as a percentage of total capital was lower in fiscal 2005 mainly due to lower accounts payable as mentioned earlier.

Comparison of Second Quarter Ended December 31, 2004 (“2005”) and December 31, 2003 (“2004”)

The following table sets forth certain consolidated statements of income data as a percentage of net sales for the second quarters in fiscal years 2005 and 2004, respectively:

Overall Net Sales and Gross Margin

Overall, sales for the Company increased by $626 from $5,056 in Q2 2004 to $5,682 in Q2 2005, a 12.4% rise. The majority of this boost in sales was in the Manufacturing segment, which experienced a surge in sales volume for burn-in systems and burn-in boards, with a smaller contribution from the Testing segment. The overall gross margin declined by 5% from Q2 2004 mostly due to a change in product mix in the Manufacturing and Testing segments, where sales volume of lower margin products increased. This will be elaborated upon in the next few sections.

Manufacturing Segment

The revenue and gross margin for the Manufacturing Segment for the second quarters of 2005 and 2004 were as follows:

The improvement in sales of $710 for the Manufacturing segment was primarily due to an increase in sales of burn-in boards of $696 in Q2 2005 with a 165% increase in quantity sold and a 101.9% increase in average unit selling price, and burn-in systems, which experienced a sales increase of $395, a 75% increase in quantity sold with a 4.1% decrease in average unit selling price. Some of our customers, who are electronic device manufacturers, augmented their capital equipment in order to

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meet greater production capacity, thus accounting for our increased sales. Sales of burn-in boards also rose due to the increased demand for electronic components, primarily from customers in Asia.

However, the increase in burn-in board and burn-in systems sales was offset by lower sales of Artic Temperature Controlled Chucks and Wet Process Stations. Artic Temperature Controlled Chucks sales fell $88, a 100% drop in both quantities sold and selling price, as a result of low spending for capital equipment in the U.S. We believe the lower spending was due to higher oil prices and concern over the ongoing instability in the Middle East. Added to that was an oversupply of inventories which also forced semiconductor companies to push back certain purchases of capital equipment. Sales of Wet Process Stations fell by $545, also a 100% decrease in both quantities sold and selling price. Although there was an order for this particular equipment from a research institution in Q2 2005, the actual sales will not be completed until next quarter. The semiconductor market in the U.S. remained stagnant; hence we refocused on the Asian market.

The gross margin declined by 4.5%, as the majority of the sales was derived from burn-in boards. Despite doubling the average unit selling price of burn-in boards, the margin for this product remained weak and was unable to make a significant impact on the overall margin. In addition, the Company shifted focus from the weak market in the U.S. to the stronger market in Asia. Therefore, no Wet Process Station was sold in Q2 2005 as the transition was made, thereby foregoing its margin.

Testing Segment

The revenue and gross margin for the Testing Segment for the second quarters of 2005 and 2004 were as follows:

The increase in sales of $454 in the Testing Segment, a 19.3% rise, derived mainly from the newly acquired burn-in operation in Malaysia. The Testing operation in Malaysia attributed approximately $450 of sales to burn-in services, as the existing operation was of a small scale last year and generated no sales for Q2 2004. The increase in burn-in services for an increasingly popular new type of microprocessor chip in the Singapore Testing operation also contributed to the sales; however, this was offset by a drop in demand for services of another type of microprocessor chip. As a result, the net increase in sales for the Singapore Testing operation was approximately $46 from Q2 2004.

The gross margin for the Testing segment dropped 4.1% from 32.5% in Q2 2004 to 28.4% in Q2 2005. Despite the increase in burn-in services for the new type of microprocessor chip in the Singapore Testing operation, the average unit selling price dropped due to customers’ changing requirements. In addition, a 5% lower margin was generated in the new Malaysian Testing operation as the operation had already geared up its headcount for a new project, which did not come in as expected in Q2 2005. The utilities cost in the Testing segment, as a percentage of sales, increased from 20% in Q2 2004 to 21.6% in Q2 2005, primarily due to the Singapore Testing operation which required higher utilities consumption for the new type of burn-in device and higher administrative charges by an outside vendor.

Distribution Segment

The revenue and gross margin for the Distribution Segment for the second quarters of 2005 and 2004 were as follows:

Sales in the Distribution segment declined by 54.2% in Q2 2005, a drop of $538 when compared to Q2 2004. This decline was mainly the result of a decrease in sales of low margin front-end products due to declining customer demand for these products. Sales of these products dropped $282 compared to Q2 2004, with a 22.5% drop in quantities sold and a 31.2% decrease in average unit selling price. According to the president of Advanced Forecasting, wafer shipments will continue to decline in 2005. Additionally, sales of Vibration equipment and Reflow ovens also dropped in Q2 2005. Sales decreased $142 in spite of a 100% increase in quantities sold and a 71% decrease in selling price. Customers were hesitant to make large purchases of high-end products like Vibration products and therefore orders were infrequent, though the operation continues to liaise with customers on their requirements and future sales are hopeful. In addition, the recognition of revenue of a Reflow oven worth approximately $250 was deferred to the third quarter in the Singapore Distribution operation, as the delivery of said oven in the second quarter did not meet the revenue recognition policy. Nonetheless, based on the number of bookings on Test chambers and the interest in Vibration products, there was a steady demand from the PCBA manufacturing industry for these types of equipment.

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Gross margin for the Distribution segment decreased by 3.8% from Q2 2004 to Q2 2005. The cause of the decrease was mainly due to the sales of Test Chambers, which have a much lower margin than the Vibration equipment sold in Q2 2004, and the deferred revenue as mentioned earlier. The average unit selling price of Test Chambers fell by 71% as compared to Q2 2004. In addition, the Singapore Distribution operation was engaged as an agent to market personal electronic products, components for trading, and also delved into the knitting business. While the potential for this market was great, the margin was low and hence contributed to the decline in gross margin.

Sales by geographical area

Geographically, net sales into and within the United States in Q2 2005 decreased by 63% compared to Q2 2004. This occurred after the Manufacturing operation in San Jose relocated to Singapore as the Company focused more on capturing the promising Asian market instead. The decrease in sales from Universal Systems accounted for 64.1% of the total decline in sales within the U.S. Furthermore, sales of Artic Temperature Controlled Chucks in the U.S. declined due to an oversupply of inventories in the market and a decrease in equipment spending in this region. The drop in sales of low margin products of $282, mentioned earlier, also contributed to the decline of sales in the U.S. Net sales into and within Southeast Asia increased by 38.4% as compared to Q2 2004, mainly due to the higher demand for burn-in boards and burn-in systems in Malaysia, Singapore and China. In addition, the recovery of the consumer and electronic markets in the Asian region boosted the sales of the Testing and Manufacturing operations in this area. Sales generated from the new testing operation in Malaysia contributed to the increase as well. Net sales into and within Ireland and other countries doubled compared to Q2 2004. The reason for this rise was the increase in programming services in the Ireland operation. In addition, there were higher sales into other countries, derived mainly from the Singapore Distribution operation, which sold more equipment and peripherals to Japan, Taiwan and India.

Operating Expenses

The Company’s operating expenses for the second quarters of 2005 and 2004 were as follow:

As a percentage of sales, operating expenses increased by 2% from 23.9% in Q2 2004 to 25.9% in Q2 2005. This was due mainly to the increase in general and administrative expenses incurred in the Testing segment in Southeast Asia. As a percentage of sales, general and administrative expenses increased by 1.4% from 19.2% in Q2 2004 to 20.6% in Q2 2005, which was a result of an increase in these expenses at all the operations.

General and administrative expenses rose $198 compared to this same period last year for a number of reasons. Salaries increased $88 in Southeast Asia due to the newly opened test center in Malaysia and increased headcount in the Singapore cost center to support the operations in Southeast Asia. There was an increase in professional fees of $29 in Southeast Asia for expenses such as the ISO audit and the outsourcing of payroll and bookkeeping services. A higher provision for doubtful debts of $29 was accrued in Q2 2005 in Southeast Asia, whereas doubtful debts of $14 were recovered in Q2 2004. Similarly, there was a reversal of bonuses in Q2 2004 while no such reversal occurred in Q2 2005. Amortization costs of $23 for customer relation intangibles were derived from the new operation in Malaysia, as well as higher operating expenses of $38 for such expenses as printing and stationery, insurance, upkeep of the office and non-capitalized assets. The Singapore operation was charged higher bank fees of $8 and incurred higher depreciation of $6. Miscellaneous costs rose $9. However, all this was offset by the savings from the relocation of the San Jose operation to Singapore, primarily from $15 in salaries, $13 in insurance and $14 in professional and audit fees. Added to that was a savings of $34 in Corporate officer bonuses due to unmet criteria this quarter.

As a percentage of sales, selling expenses increased slightly from 4.2% in 2004 to 5% in 2005, a difference of $69. The increase was mainly attributed to the Singapore operation where greater headcount in the Distribution segment generated an increase in salaries of $29, as well as a higher provision for warranty costs of $53 due to higher equipment sales. Traveling expenses increased by $6 as we set up the new operation in Malaysia, and miscellaneous expenses increased by $9. This overall increase was offset with the transfer of the San Jose facility to Singapore which resulted in a savings of $20 in salaries for sales personnel and $7 for rentals and utilities.

Research and development expensed diminished by $4 due to slower activities in the Manufacturing operation in the U.S.

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Income (loss) from operations

The income (loss) from operations for the second quarters of 2005 and 2004 were as follow:

The Company incurred an operating loss of $158 in Q2 2005 compared to an operating profit of $213 in Q2 2004. The loss was primarily in the Testing and Distribution segments.

The Testing segment experienced a loss from operations of $77, down $209 from the Q2 2004 gain from operations of $132. Due to the lower margin generated by the operation as mentioned earlier, the Testing segment was not able to cover its fixed costs. $38 in fixed and semi-fixed operating expenses such as printing and stationery, insurance, upkeep of the office and non-capitalized assets were incurred in Q2 2005 in the Malaysian operation, as well as $77 in staff salaries. Although the customer paid promptly, there was a provision for doubtful debts of $29 in Q2 2005 from the Testing segment in the Southeast Asia operation, as we were in the process of synchronizing our billing function with the customer. The burn-in services for Thailand, as mentioned earlier, dropped to approximately $450, the lowest quarterly sales for the Testing segment in that region in two and half years. Hence sales for burn-in services were inadequate to cover the fixed and semi-fixed costs such as salaries, depreciation, insurance, and other similar expenses. As a result, the operating profit for the Thailand operation declined by $69 from an operating profit of $58 in Q2 2004.

The Distribution segment also experienced a loss from operations income, dropping $170 from an operating gain of $76 in Q2 2004 to an operating loss of $94 in Q2 2005. The main contributor to this decline in operating profit was the Singapore Distribution operation, which had a lower margin due to the 71% drop in average unit selling price of Test Chambers in Q2 2005, as mentioned earlier. In addition, the recognition of revenue of a Reflow oven was deferred to the third quarter in the Singapore Distribution operation, as the delivery of the said oven in the second quarter did not meet the revenue recognition policy, as previously mentioned. The drop in Singapore sales was unable to cover the fixed and semi-fixed costs such as salaries, rentals, depreciation, insurance, and other similar expenses, and salaries as a percentage of sales increased from 18.5% in Q2 2004 to 24.7% in Q2 2005. Salaries increased $29 due to the expansion of the Distribution operation in Singapore, but at the current level of sales as an agent, the margin was not sufficient to cover the increase in salaries and rental costs. The operation will continue to search for products with a higher margin.

The Manufacturing segment saw a slight increase in operating income, up $1 from 2004 to 2005. Though the sales increased by 41.4% from Q2 2004, the increase in income from operation was minimal due to the change in product mix mentioned earlier. Hence, the increase in sales from low-margin burn-in boards was not enough to significantly impact the margin. Also, a provision for warranty of $53 increased due to higher equipment sales in Q2 2005 compared to Q2 2004.

Corporate increased its income from operations from $1 in Q2 2004 to $8 in Q2 2005. The corporate office attempts to reimburse its operating expenses by imposing a fee on all subsidiaries on a fixed percentage of total revenue. The sudden surge in sales in the Singapore Manufacturing operation resulted in collected fees greater than Corporate’s operating expenses, despite a decrease in allocation charges of 30% to the subsidiaries.

Interest Expense

The interest expenses for the second quarters of 2005 and 2004 were as follow:

Interest expenses increased $26 from $31 in Q2 2004 to $57 in Q2 2005, primarily due to higher usage of credit line facilities in the Singapore operation. Higher interest expenses of $32 were incurred, though this was offset with the decrease in lease financing interest of $6.

Other Income

Other income for the second quarters of 2005 and 2004 was as follow:

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Other income decreased by $37, from $58 in Q2 2005 to $21 in Q2 2004. There was an increase in unrealized loss of $49, mostly from the Thailand operation, due to the depreciation of the Thailand baht against the U.S. dollar. Also, the Company accumulated lower interest income of $6 from the Malaysian subsidiary, though the overall loss of other income was offset by an increase of $18 in rental income from the leasing out of factories in Ireland and Malaysia.

Income Tax

The Company was in a tax refundable position of $60 for the three months ended December 31, 2004, as compared to the income tax provision of $18 in the second quarter of 2005, which was due mainly to the recoverable tax of $68 for the tax period between 1999 and 2001 in Singapore. In contrast, there was a provision for tax of $16 from the Thailand operation in Q2 2004 due to the higher profit of $128 generated in the second quarter of fiscal 2004 as compared to $60 the second quarter of fiscal 2005.

Net (Loss)/ Income

As a result of all of the factors analyzed above, the net loss attributable to common shares for the quarter ended December 31, 2004 was approximately $100, which represented a decline of $318 in income from a net income of approximately $218 attributable to common shares for the quarter ended December 31, 2003. Consequently, basic earnings per share for the quarter ended December 31, 2004 decreased by $0.10 from earnings per share of $0.07 in 2004 to a loss of $0.03 per share in 2005.

Year to Date Comparison of the Six Months Ended December 31, 2004 (“2005”) to the Six Months Ended December 31, 2003 (“2004”)

The following table sets forth certain consolidated statement of income data as a percentage of net sales for the first half of fiscal years 2005 and 2004, respectively:

Overall Net Sales and Gross Margin

Overall sales for 2005 were $13,533, up $4,627 from $8,906 for 2004, an increase of 52.0%. The sales increase mainly resulted from the sudden surge in sales volume for burn-in systems and burn-in boards. In addition, the new testing operation in Malaysia contributed to the rise of sales in the Testing segment. The gross margin receded slightly by 2.6%, from 26.4% in 2004 to 23.8% in 2005 due mainly to the Manufacturing segment, where there was an increase in sales volume of lower margin burn-in boards. Also, there was a change in product mix, which will be further explained at a later point.

Manufacturing Segment

The revenue and gross margin for the Manufacturing segment for the first half of 2005 and 2004 were as follows:

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The first half of fiscal year 2005 evidenced a conflicting trend in demand for computers and consumer electronic products in different regions. Sales improved in the Manufacturing segment by $3,782, or 144.3%, from 2004 to 2005. This increase was due in part to the increase in capital equipment spending by some of our electronic device manufacturing customers in Asia to meet their increased production capacity. The PC market is expanding in Asia with a high demand for electronic components, and the increase in burn-in board sales of $3,230 in 2005, with a 421.3% increase in quantity sold and a 104.3% increase in selling price, derived mainly from a new customer in Southeast Asia whom the operation there had pursued for some time. Sales of burn-in systems increased as well, with sales of $1,056, an increase in quantity sold of 213.9% with a 10.3% drop in selling price. HAST systems saw heightened sales of $76, a 20% increase in quantity sold and a 12.8% increase in selling price. This was offset, however, by lower sales of Artic Temperature Controlled Chucks due to decreased spending in the U.S. for capital equipment. Furthermore, the oversupply of inventories forced semiconductor companies to delay any plans for capital equipment purchases. Artic Temperature Controlled Chucks experienced a drop in sales of $119, with a 100% drop in quantity sold and 66.1% increase in selling price. Sales of Wet Process Stations dropped $574, a 100% decline in both quantities sold and selling price, although there was an order from a research institution for this piece of equipment in Q2 2005. However, the actual sale will not come to fruition until at least next quarter.

Even though sales increased 144.3% in the Manufacturing department, the gross margin decreased slightly by 1.3% as compared to 2004. In spite of a doubling in sales of burn-in boards, the margin for this product remained weak and was unable to make a significant impact on the margin. Sales in the U.S. operation dropped significantly by 64.9% from $1,603 in 2004. Cost of sales, however, which included fixed and semi-fixed costs, did not decrease proportionately as the facility was already operating at a minimum cost. As a result, the margin in the operation fell correspondingly with its sales.

Testing Segment

The revenue and gross margin for the Testing segment for the first half of 2005 and 2004 were as follows:

In the first half of fiscal year 2005 revenue increased $1,064 from $4,633 in 2004 to $5,697, a 23.0% increase. The increased sales mainly derived from our newly acquired burn-in operation in Malaysia. The testing segment in Malaysia contributed approximately $950 to burn-in services revenue. In addition, the slow but steady increase in demand for burn-in services for an increasingly popular new type of microprocessor chip aided the sales by $192 compared to 2004. However, this was offset by the fall in demand for burn-in services for another type of microprocessor chip.

Despite the change in sales mix, the overall margin in the Testing segment remained comparable to 2004. Higher margin derived from the burn-in services for the new type of microprocessor chip was able to make up for the loss of margin from the fall in burn-in services for another type of microprocessor chip. In addition, the utility costs as a percentage of sales remained constant at 15.2%, as in 2004; hence there was very little fluctuation in the gross margin.

Distribution Segment

The revenue and gross margin for the Distribution segment for the first half of 2005 and 2004 were as follows: