##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission File Number 1-14523
 TRIO-TECH INTERNATIONAL
  California
    
    95-2086631(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)14731 Califa StreetVan Nuys, California
    
    91411(Address of principle executive offices)
    
    (Zip Code)
 818-787-7000
 þ o
  o o þ
 o þ




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##### 



TRIO-TECH INTERNATIONAL  INDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30,
2006 (Unaudited) and June 30, 2006
    
    
    3Consolidated Statements of Operations and
Comprehensive Income (loss) for the Three Months
Ended September 30, 2006 (Unaudited) and
September 30, 2005 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2006
(Unaudited) and September 30, 2005
(Unaudited)
    
    
    6Notes to Consolidated Financial Statements
(Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of
Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about
Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    25Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use
of Proceeds
    
    
    26Item 3.
    
    Defaults upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security
Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
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##### Table of Contents



TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES)
 September 30,
    
    
    June 30,2006
    
    
    2006(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    5,639
    
    
    $
    2,551Short-term deposits
    
    
    5,293
    
    
    
    7,839Trade accounts receivable, less allowance for doubtful
accounts of $128 and $225
    
    
    7,936
    
    
    
    8,518Other receivables
    
    
    216
    
    
    
    306Inventories, less provision for obsolete inventory
of $449 and $448
    
    
    3,441
    
    
    
    2,447Prepaid expenses and other current assets
    
    
    244
    
    
    
    170Total current assets
    
    
    22,769
    
    
    
    21,831PROPERTY, PLANT AND EQUIPMENT, Net
    
    
    6,951
    
    
    
    7,073OTHER INTANGIBLE ASSETS, Net
    
    
    279
    
    
    
    311OTHER ASSETS
    
    
    688
    
    
    
    169TOTAL ASSETS
    
    $
    30,687
    
    
    $
    29,384LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Line of credit
    
    $
    363
    
    
    $
    116Accounts payable
    
    
    3,924
    
    
    
    3,809Accrued expenses
    
    
    3,388
    
    
    
    3,045Income taxes payable
    
    
    444
    
    
    
    311Current portion of notes payable
    
    
    761
    
    
    
    856Current portion of capital leases
    
    
    116
    
    
    
    107Current portion of deferred tax liabilities
    
    
    205
    
    
    
    319Total current liabilities
    
    
    9,201
    
    
    
    8,563NOTES PAYABLE, net of current portion
    
    
    486
    
    
    
    644CAPITAL LEASES, net of current portion
    
    
    224
    
    
    
    230DEFERRED TAX LIABILITIES
    
    
    359
    
    
    
    359TOTAL LIABILITIES
    
    
    10,270
    
    
    
    9,796MINORITY INTEREST
    
    
    2,236
    
    
    
    2,196SHAREHOLDERS EQUITY:Common stock; no par value, 15,000,000 shares authorized;
3,221,157 shares issued and outstanding as at September 30, 2006, and
3,219,407 shares issued and outstanding as at June 30, 2006, respectively
    
    
    10,343
    
    
    
    10,338Paid-in capital
    
    
    338
    
    
    
    337Accumulated retained earnings
    
    
    7,906
    
    
    
    7,150Accumulated other comprehensive loss-translation adjustments
    
    
    (406
    )
    
    
    (433
    )Total shareholders equity
    
    
    18,181
    
    
    
    17,392TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    30,687
    
    
    $
    29,384
 See notes to condensed consolidated financial statements.
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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 UNAUDITED, IN THOUSANDS, EXCEPT (LOSS) EARNINGS PER SHARE)
 Three Months EndedSep. 30,
    
    
    Sep. 30,2006
    
    
    2005(Unaudited)
    
    (Unaudited)RevenuesProducts
    
    $
    5,978
    
    
    $
    2,160Services
    
    
    3,898
    
    
    
    3,5459,876
    
    
    
    5,705Costs of SalesCost of products sold
    
    
    4,796
    
    
    
    1,695Cost of service rendered
    
    
    2,589
    
    
    
    2,1867,385
    
    
    
    3,881Gross Margin
    
    
    2,491
    
    
    
    1,824Operating Expenses:General and administrative
    
    
    1,391
    
    
    
    1,289Selling
    
    
    262
    
    
    
    285Research and development
    
    
    17
    
    
    
    17Impairment loss
    
    
    
    
    
    
    15Total operating expenses
    
    
    1,670
    
    
    
    1,606Income from Operations
    
    
    821
    
    
    
    218Other Income (Expenses)Interest expense
    
    
    (29
    )
    
    
    (35
    )Other income
    
    
    37
    
    
    
    30Total other income
    
    
    8
    
    
    
    (5
    )Income from Continuing Operations
before Income Taxes
    
    
    829
    
    
    
    213Income Tax Provision
    
    
    26
    
    
    
    73Income from Continuing Operations before
Minority Interest
    
    
    803
    
    
    
    140Minority Interest
    
    
    (47
    )
    
    
    24Income from continuing operations
    
    
    756
    
    
    
    164Discontinued Operations (Note7)Loss from discontinued operations
    
    
    
    
    
    
    (378
    )Net Income (Loss) Attributed to Common Shares
    
    $
    756
    
    
    $
    (214
    )
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##### Table of Contents



Three Months EndedSep. 30,
    
    
    Sep. 30,2006
    
    
    2005(Unaudited)
    
    (Unaudited)BASIC EARNINGS PER SHARE:Basic earnings per share from continuing operations
    
    $
    0.23
    
    
    $
    0.05Basic earnings (loss) per share from discontinued operations
    
    
    0.00
    
    
    
    (0.13
    )Basic earnings (loss) per share
    
    $
    0.23
    
    
    $
    (0.08
    )DILUTED EARNINGS PER SHARE:Diluted earnings per share from continuing operations
    
    $
    0.23
    
    
    $
    0.05Diluted earnings (loss) per share from discontinued
operations
    
    
    0.00
    
    
    
    (0.13
    )Diluted earnings (loss) per share
    
    $
    0.23
    
    
    $
    (0.08
    )Weighted Average Shares OutstandingBasic
    
    $
    3,220
    
    
    $
    2,994Diluted
    
    
    3,239
    
    
    
    3,043Comprehensive Income (Loss):Net income (Loss)
    
    $
    756
    
    
    $
    (214
    )Foreign currency translation adjustment
    
    
    27
    
    
    
    21Comprehensive Income (Loss)
    
    $
    783
    
    
    $
    (193
    )
 See notes to condensed consolidated financial statements.
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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED, IN THOUSANDS)
 Three Months EndedSep 30,
    
    
    Sep 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Cash Flow from Operating ActivitiesNet income
    
    $
    756
    
    
    $
    (214
    )Adjustments to reconcile net income to
net cash flow provided by operating activitiesDepreciation and amortization
    
    
    458
    
    
    
    392Bad debt expense, net
    
    
    (97
    )
    
    
    18Inventory provision
    
    
    1
    
    
    
    Interest income on short-term deposits
    
    
    (34
    )
    
    
    (15
    )Impairment Loss
    
    
    
    
    
    
    15Stock compensation
    
    
    1
    
    
    
    34Restructuring costs
    
    
    
    
    
    
    223Deferred tax provision
    
    
    (114
    )
    
    
    (2
    )Minority interest
    
    
    47
    
    
    
    (24
    )Changes in operating assets and liabilities,
net of acquisition effectsAccounts receivables
    
    
    679
    
    
    
    654Other receivables
    
    
    90
    
    
    
    (90
    )Other assets
    
    
    (519
    )
    
    
    (92
    )Inventories
    
    
    (995
    )
    
    
    (631
    )Prepaid expenses and other liabilities
    
    
    (74
    )
    
    
    (113
    )Accounts payable and accrued liabilities
    
    
    458
    
    
    
    381Income tax payable
    
    
    133
    
    
    
    27Net cash provided by operating activities
    
    
    790
    
    
    
    563Cash Flow from Investing ActivitiesProceeds from short-term deposit matured
    
    
    6,657
    
    
    
    382Investments in short-term deposits
    
    
    (4,077
    )
    
    
    (650
    )Additions to property, plant and equipment
    
    
    (274
    )
    
    
    (131
    )Net cash provided by (used in) investing activities
    
    
    2,306
    
    
    
    (399
    )Cash Flow from Financing ActivitiesNet borrowings (payments) on lines of credits
    
    
    247
    
    
    
    (51
    )Repayment of bank loans and capital leases
    
    
    (287
    )
    
    
    (236
    )Proceeds from long-terms bank loans and capital leases
    
    
    6
    
    
    
    199Proceeds from exercising stock options
    
    
    5
    
    
    
    64Net cash used in financing activities
    
    
    (29
    )
    
    
    (24
    )Effect of Changes in Exchange Rate
    
    
    21
    
    
    
    16NET INCREASE IN CASH
    
    
    3,088
    
    
    
    156CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,551
    
    
    
    1,439CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    5,639
    
    
    $
    1,595
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##### Table of Contents



Three Months EndedSep 30,
    
    
    Sep 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Supplementary Information Of Cash FlowsCash paid during the period for:Interest
    
    $
    29
    
    
    $
    37Income taxes
    
    $
    1
    
    
    $
    45Non-Cash TransactionsRestricted cash
    
    $
    
    
    
    $
    (1,067
    )Capital lease of property, plant and equipment
    
    $
    31
    
    
    $
    
 See notes to condensed consolidated financial statements.
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##### Table of Contents



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 PRESENTATIONTrio-Tech International (the Company or TTI thereafter) was incorporated in fiscal 1958
under the laws of the State of California. TTI provides third-party semiconductor testing
and burn-in services primarily through its laboratories in Southeast Asia. In addition, TTI
operates test facilities in the United States. The Company also designs, develops,
manufactures and markets a broad range of equipment and systems used in the manufacturing
and testing of semiconductor devices and electronic components. TTI conducts business in
three business segments: Testing Services, Manufacturing and Distribution. TTI has
subsidiaries in the U.S., Singapore, Malaysia, Thailand, China and Ireland as follows:
 Ownership
    
    LocationExpress Test
Corporation (Dormant)
    
    100%
    
    Van Nuys, CaliforniaTrio-Tech Reliability Services (Dormant)
    
    100%
    
    Van Nuys, CaliforniaKTS Incorporated, dba Universal Systems (Dormant)
    
    100%
    
    Van Nuys, CaliforniaEuropean Electronic Test Centre
(Operation ceased on November 1, 2005)
    
    100%
    
    Dublin, IrelandEuropean Electronic Test Centre(Operation ceased on November 1, 2005)
    
    100%
    
    Dublin, IrelandTrio-Tech International Pte. Ltd.
    
    100%
    
    SingaporeUniversal (Far East) Pte. Ltd.
    
    100%
    
    SingaporeTrio-Tech Thailand
    
    100%
    
    Bangkok, ThailandTrio-Tech Bangkok
    
    100%
    
    Bangkok, ThailandTrio-Tech Malaysia
    
    55%
    
    Penang and Selangor, MalaysiaTrio-Tech Kuala Lumpur  100% owned by
    
    55%
    
    Selangor, MalaysiaTrio-Tech MalaysiaPrestal Enterprise Sdn. Bhd.
    
    76%
    
    Selangor, MalaysiaTrio-Tech (Suzhou) Co. Ltd.
    
    100%
    
    Suzhou, ChinaTrio-Tech (Shanghai) Co. Ltd.
    
    100%
    
    Shanghai, China
 The accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant
inter-company accounts and transactions have been eliminated in consolidation. The unaudited
consolidated financial statements are presented in U.S. dollars. The accompanying financial
statements do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for fair
presentation have been included. Operating results for the three months ended September 30,
2006 are not necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2007. 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, 2006.2.
    
    INVENTORIESInventories consisted of the following:
 Sep. 30,2006
    
    
    June 30,(Unaudited)
    
    
    2006Raw materials
    
    $
    833
    
    
    $
    827Work in progress
    
    
    2,667
    
    
    
    1,803Finished goods
    
    
    390
    
    
    
    265Less: provision for obsolete inventory
    
    
    (449
    )
    
    
    (448
    )$
    3,441
    
    
    $
    2,447
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##### Table of Contents



3.
    
    STOCK OPTIONSThe Company had two share-based compensation plans, which are described below. The
Company historically adopted the APB No. 25 approach  intrinsic value method  and
presented the pro forma information in line with the requirements of SFAS No. 123.
Historically, there was no stock based compensation cost charged against income for the
fiscal years ended June 30, 2005 and 2004. There was no income tax benefit related to
share-based compensation for the fiscal years ended June 30, 2005 and 2004, as the Company
did not claim a deduction for corporate income tax purposes.Effective July 1, 2005, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payments, using the modified prospective application method.
Under this transition method, compensation cost recognized in the quarter ended September
30, 2006 includes the applicable amounts of: (a) compensation cost of all share-based
payments granted prior to, but not yet vested as of, July 1, 2005 (based on the grant-date
fair value estimated in accordance with the original provisions of SFAS No. 123) and (b)
compensation cost for all share-based payments granted subsequent to July 1, 2005 (based on
the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123R).
Amortization of unrecognized fair value of the non-vested options for the three months
ended September 30, 2006 and 2005 was $1.On December 2, 2005, the Board of Directors terminated these two share-based compensation
plans due to the cost of such compensation exceeding the benefits. There were no stock
options granted during the three months ended September 30, 2006.AssumptionsThe disclosure of the above fair value for these awards was estimated using the
Black-Scholes option pricing model with the assumptions listed below:
 Quarter Ended
    
    Years EndedSeptember 30, 2006
    
    June 30, 2006
    
    June 30, 2005
    
    June 30, 2004Expected volatility
    
    
    73.22
    %
    
    
    49.5-51.53
    %
    
    
    33.5 - 36.8
    %
    
    
    41.9
    %Weighted average volatility
    
    
    73.22
    %
    
    
    49.5
    %
    
    
    33.9
    %
    
    
    41.9
    %Risk free interest rate
    
    
    3.71-4.50
    %
    
    
    3.71-4.50
    %
    
    
    2.89 - 3.27
    %
    
    
    2.76
    %Expected life (years)
    
    
    2.00
    
    
    
    2.00
    
    
    
    2.00
    
    
    
    2.00
 The expected volatilities are based on the historical volatility of the Companys stock.
The observation is made on a weekly basis. The observation period covered is consistent
with the expected terms of options. The expected terms of stock options are based on the
average vesting period on a basis consistent with the historical experience of the similar
option grants. The risk-free rate is consistent with the expected terms of the stock option
and based on the United States Treasury yield curve in effect at the time of grant.1998 Stock Option PlanThe Companys 1998 Stock Option Plan (the 1998 Plan), which is shareholder-approved,
permits the grant of stock options to its employees of up to 300,000 shares of common stock.
Option awards are generally granted with an exercise price equal to the market price of the
Companys stock at the date of grant. These options have a five-year contractual life term.
Awards generally vest over four years; with 25% vesting on the grant date, and the balance
vesting in equal installments on the next three succeeding anniversaries of the grant date.
The share-based compensation will be amortized based on an accelerated method over the four
periods. Certain option awards provide for accelerated vesting if there is a change in
control (as defined in the 1998 Plan).
 9




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A summary of option activities under the 1998 Plan during the fist quarter of fiscal 2007
ended September 30, 2006 is presented as follows:
 Weighted -Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at July 1, 2006
    
    
    28,885
    
    
    $
    2.97Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,750
    )
    
    
    2.81Forfeited or expired
    
    
    (250
    )
    
    
    2.66Outstanding at September 30, 2006
    
    
    26,885
    
    
    $
    2.99
    
    
    
    2.00
    
    
    $
    241,285Exercisable at September 30, 2006
    
    
    25,510
    
    
    $
    2.91
    
    
    
    2.00
    
    
    $
    230,890
 The intrinsic value of the $1,750 options exercised was $6. Cash received from options
exercised during the three months ended September 30, 2006 was approximately $5. There were
no options granted during the three months ended September 30, 2006 under the 1998 Stock
Option Plan.A summary of the status of the Companys non-vested stock options during the three months
ended September 30, 2006 is presented below:
 Weighted-Average Grant-DateOptions
    
    
    Fair ValueNon-vested at July 1, 2006
    
    
    13,250
    
    
    $
    0.81Granted
    
    
    
    
    
    
    Vested
    
    
    (11,625
    )
    
    
    0.76Forfeited
    
    
    (250
    )
    
    
    0.68Non-vested at September 30, 2006
    
    
    1,375
    
    
    $
    1.31
 As of September 30, 2006, there was approximately $4 of accumulated unrecognized stock
compensation based on fair value on the grant date related to non-vested options granted
under the 1998 Plan. That cost was expected to be recognized during the weighted average
period of 1.5 years.Directors Stock Option PlanThe Directors Stock Option Plan (the Directors Plan), which is shareholder-approved,
permits the grant of stock options to its duly elected non-employee Directors and one of the
corporate officers of the Company (if he or she is also a director of the Company) and
covers 300,000 shares of common stock. Prior to July 1, 2003, option awards were granted
with an exercise price equal to 85% of the fair market price of the Companys stock at the
grant date. Subsequent to July 1, 2003, the Board approved an amendment to the Directors
Plan requiring options to purchase the Companys common stock to be exercisable at a price
equal to 100% of the fair market value of the underlying shares on the grant date. These
options have five-year contractual terms. Options awards are exercisable immediately as of
the grant date.As of July 1, 2006, there were no stock options outstanding under the Directors plan, and
there were no options exercisable. Because the Directors plan was terminated in December
2005, there were no options granted during the three months ended September 30, 2006.
 10




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##### Table of Contents



4.
    
    EARNINGS PER SHAREThe 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 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 the exercise
of stock options and warrants.Stock options to purchase 26,885 shares at exercise prices ranging from $2.66 to $4.40 per
share were outstanding as of September 30, 2006. No options were excluded in the
determination of common shares equivalents, because the average
market price of common shares was greater than the exercise price of the stock options. The resulted common shares
equivalents were approximately 19,000 shares and are presented in the following table for
earnings per share calculation purposes.Stock options to purchase 257,050 shares at exercise prices ranging from $2.25 to $4.50 per
share were outstanding as of September 30, 2005. 40,000 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 they 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:
 Three Months EndedSep. 30,
    
    
    Sep. 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Income from continuing operations
    
    $
    756
    
    
    $
    164Loss from discontinued operations
    
    $
    
    
    
    $
    (378
    )Net income (loss) attributed to common shares
    
    $
    756
    
    
    $
    (214
    )Basic (Loss) Earnings Per ShareBasic earnings per share from continuing operations
    
    $
    0.23
    
    
    $
    0.05Basic earnings (loss) per share from discontinued operations
    
    
    0.00
    
    
    
    (0.13
    )Basic earnings (loss) per share
    
    $
    0.23
    
    
    $
    (0.08
    )Diluted (Loss) Earnings Per ShareDiluted earnings per share from continuing operations
    
    $
    0.23
    
    
    $
    0.05Diluted earnings (loss) per share from discontinued operations
    
    
    0.00
    
    
    
    (0.13
    )Diluted earnings (loss) per share
    
    $
    0.23
    
    
    $
    (0.08
    )Weighted average number of common shares outstanding  basic
    
    
    3,220
    
    
    
    2,994Dilutive effect of stock options
    
    
    19
    
    
    
    49Number of shares used to compute earnings per share  diluted
    
    
    3,239
    
    
    
    3,043
 11




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5.
    
    NEW ACCOUNTING PRONOUNCEMENTIn June 2006, the Financial Accounting Standard Board FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions
for financial statement purposes. FIN 48 also requires expanded disclosure with respect to
the uncertainty in income tax assets and liabilities. FIN 48 will be effective as of the
beginning of our fiscal year 2008, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. We expect that the
adoption of FIN 48 will not have a material impact on our consolidated results of operations
or financial position.In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatement when Quantifying
Misstatements in Current Year Financial Statements (SAB 108), which will be effective for
the fiscal year ending after November 15, 2006. The objective of SAB 108 is to eliminate
diversity in practice surrounding how public companies quantify financial statement
misstatements. SAB requires quantification of financial statement misstatements based on the
effects of the misstatements on the consolidated statement of income, the consolidated
balance sheet and related financial statement disclosures.According to SAB 108, both rollover and iron curtain approaches must be considered when
evaluating a misstatement for materiality. This is referred to as the dual approach. For
the companies that have previously evaluated misstatements under one, but not both, of these
methods, SAB 108 provides companies with a one-time option to record the cumulative effect
of their prior unadjusted misstatements in a manner similar to a change in accounting
principle in their annual financial statements during the effective time period if (i) the
cumulative amount of the unadjusted misstatements at the beginning of the adopting year
would have been material under the dual approach to their annual financial statements for
the prior year or (ii) the effect of correcting the unadjusted misstatements during the
adopting year would cause these annual financial statements to be materially misstated under
the dual approach. In accordance with SAB 108, companies are allowed, upon adoption, to
record the effects as a cumulativeeffect adjustment to the retained earnings. We are
currently assessing what impact, if any, that adoption of SAB 108 will have on our financial
position and results of operations.6.
    
    ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTSAccounts 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 three months ended September 30, 2006 and the twelve months ended June 30,
2006 was adequate.The following table represents the changes in the allowance for doubtful accounts:
 Sep. 30,2006
    
    
    June 30,(Unaudited)


 2006Beginning
    
    $
    225
    
    
    $
    147Additions charged to expenses
    
    
    1
    
    
    
    260Recovered
    
    
    (98
    )
    
    
    (85
    )Actual write-offs
    
    
    
    
    
    
    (97
    )Ending
    
    $
    128
    
    
    $
    225
 12




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##### Table of Contents



7.
    
    WARRANTY ACCRUAL
 Sep. 30,2006
    
    
    June 30,(Unaudited)
    
    
    2006Beginning
    
    $
    142
    
    
    $
    155Additions charged to cost and expenses
    
    
    20
    
    
    
    Recovered
    
    
    
    
    
    
    (1
    )Actual write-offs
    
    
    
    
    
    
    (12
    )Ending
    
    $
    162
    
    
    $
    142
 8.
    
    ACQUISITION OF A SUBSIDIARYOn January 3, 2006, the Company acquired a 100% interest in Globetronics (Shanghai) Co.,
Ltd. The results of operations of Globetronics, which were not material, have been included
in the Condensed Consolidated Statements of Earnings (Loss) of the Company since January 3,
2006.Pro Forma Financial InformationThe following 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 on July 1, 2005. The unaudited pro forma statements of
operations combine the historical results of the Company and the historical results of the
acquired entity for the periods described above.
 PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
 HistoricalHistorical
    
    
    HistoricalInformation of the
    
    
    information of the
    
    
    Pro FormaCompany (1)
    
    
    acquired business (2)
    
    
    Adjustments (3)
    
    
    ProformaNet sales
    
    $
    5,705
    
    
    $
    115
    
    
    $
    
    
    
    $
    5,820Net (loss) income
    
    $
    (214
    )
    
    $
    1
    
    
    $
    (3
    )
    
    $
    (216
    )Basic loss per share
    
    $
    (0.08
    )
    
    
    
    
    
    
    
    
    
    $
    (0.08
    )Diluted loss per share
    
    $
    (0.08
    )
    
    
    
    
    
    
    
    
    
    $
    (0.08
    )Basic weighted
average common shares
outstanding
    
    
    2,994
    
    
    
    
    
    
    
    
    
    
    
    2,994Diluted weighted
average common shares
outstanding
    
    
    3,043
    
    
    
    
    
    
    
    
    
    
    
    3,043
 
 1.
    
    The historical information of the Company was based on the Form 10-Q filed with the SEC
for the three months ended September 30, 2005.2.
    
    The historical information of the acquired entity covers the three-month operating
results from the books and records of Globetronics for the period from July 1, 2005 to
September 30, 2005. 13




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##### Table of Contents



3.
    
    Pro forma adjustment was based on the assumption that the fair value of the identified
customer relationship needs to be amortized over a one-year period of time, assuming the
acquisition took place on July 1, 2005. 9.
    
    DISCONTINED OPERATIONSThe Companys Ireland operation, as a component of the testing segment, suffered continued
operating losses in the past three fiscal years and the cash flow was minimal for the past
three years. In August 2005, the Company established a restructuring plan to close the
testing operation in Dublin, Ireland. In November 2005, the Company completed the sale of
said property. In accordance with EITF 03-13, we presented the operation results from
Ireland as a discontinued operation.10.
    
    BUSINESS SEGMENTSThe 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.All inter-segment sales were sales from the manufacturing segment to the testing and
distribution segments. Total inter-segment sales were $8 and $30 for the three months ended
September 30, 2006 and 2005, 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
    
    CapitalSep. 30,
    
    Sales
    
    (loss)
    
    Assets
    
    Amort.
    
    ExpendituresManufacturing
    
    
    2006
    
    
    $
    5,484
    
    
    $
    441
    
    
    $
    4,718
    
    
    $
    42
    
    
    $
    1142005
    
    
    
    1,355
    
    
    
    (175
    )
    
    
    2,040
    
    
    
    23
    
    
    
    11Testing Services
    
    
    2006
    
    
    
    3,898
    
    
    
    402
    
    
    
    24,695
    
    
    
    412
    
    
    
    1912005
    
    
    
    3,545
    
    
    
    458
    
    
    
    16,455
    
    
    
    366
    
    
    
    120Distribution
    
    
    2006
    
    
    
    494
    
    
    
    (37
    )
    
    
    1,012
    
    
    
    4
    
    
    
    2005
    
    
    
    805
    
    
    
    (1
    )
    
    
    1,192
    
    
    
    3
    
    
    
    Corporate and unallocated
    
    
    2006
    
    
    
    
    
    
    
    15
    
    
    
    262
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    (64
    )
    
    
    162
    
    
    
    
    
    
    
    Total Company
    
    
    2006
    
    
    $
    9,876
    
    
    $
    821
    
    
    $
    30,687
    
    
    $
    458
    
    
    $
    3052005
    
    
    $
    5,705
    
    
    $
    218
    
    
    $
    19,849
    
    
    $
    392
    
    
    $
    131
 14




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##### Table of Contents



Geographic Area Information:
 Europe,
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimin-Quarter
    
    
    
    
    
    China
    
    
    
    
    
    
    
    
    
    
    
    
    
    ationsEnded
    
    United
    
    and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    TotalSep. 30,
    
    States
    
    countries
    
    Singapore
    
    Thailand
    
    Malaysia
    
    Other
    
    CompanyNet sales to customers
    
    
    2006
    
    
    $
    365
    
    
    $
    1,564
    
    
    $
    6,225
    
    
    $
    512
    
    
    $
    1,218
    
    
    $
    (8
    )
    
    $
    9,8762005
    
    
    
    434
    
    
    
    328
    
    
    
    3,791
    
    
    
    461
    
    
    
    721
    
    
    
    (30
    )
    
    
    5,705Operating Income (loss)
    
    
    2006
    
    
    
    (27
    )
    
    
    146
    
    
    
    533
    
    
    
    46
    
    
    
    108
    
    
    
    15
    
    
    
    8212005
    
    
    
    (18
    )
    
    
    (2
    )
    
    
    230
    
    
    
    28
    
    
    
    44
    
    
    
    (64
    )
    
    
    218Long-lived Assets
    
    
    2006
    
    
    
    21
    
    
    
    187
    
    
    
    3,594
    
    
    
    782
    
    
    
    2,686
    
    
    
    (40
    )
    
    
    7,2302005
    
    
    
    17
    
    
    
    40
    
    
    
    3,346
    
    
    
    852
    
    
    
    2,830
    
    
    
    (40
    )
    
    
    7,045
 15




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##### Table of Contents



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 following should be read in conjunction with the condensed consolidated financial
statements and notes in Item I above and with the audited consolidated financial statements and
notes, and with the information under the headings Risk factors and Managements discussion and
analysis of financial condition and results of operations in the most recent Annual Report on Form
10-K.
 Forward-Looking Statements
   Overview
     16




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##### Table of Contents



First Quarter Fiscal 2007 Highlights
 
    
    Revenue increased 731% to $9,876, compared with revenue of $5,705 for the first
quarter of fiscal 2006.
    
    Income from continuing operations was $756, an increase of $592, or 361.0%, compared
with the first quarter of fiscal 2006.
    
    Gross profit margins decreased by 6.8% to 25.2% from 32.0% for the first quarter of
fiscal 2006.
    
    Selling expenses approximated 2.7% of revenue, down from 5.0% of net revenue for the
first quarter of fiscal 2006.
    
    General and administrative expenses approximated 14.1% of revenue, a decrease of
8.5% compared with
the first quarter of fiscal 2006.
 Results of Operations and Business Outlook
  Three Months EndedSept. 30,
    
    
    Sept. 30,2006
    
    
    2005Net Sales:Manufacturing
    
    
    55.52
    %
    
    
    23.76
    %Testing
    
    
    39.47
    
    
    
    62.14Distribution
    
    
    5.01
    
    
    
    14.10Total
    
    
    100.00
    %
    
    
    100.00
    %
    Manufacturing Segment
  17




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##### Table of Contents



Testing Segment
  Distribution Segment
  Uncertainties and Remedies
  Comparison of First Quarters Ended September 30, 2006 (Q1 2007) and September 30, 2005 (Q1
2006)
  Q1 2007
    
    
    Q1 2006Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    74.8
    %
    
    
    68.0
    %Gross Margin
    
    
    25.2
    %
    
    
    32.0
    %Operating ExpensesGeneral and administrative
    
    
    14.1
    %
    
    
    22.6
    %Selling
    
    
    2.7
    %
    
    
    5.0
    %Research and development
    
    
    0.2
    %
    
    
    0.3
    %Impairment Loss
    
    
    0.0
    %
    
    
    0.3
    %Total Operating Expenses
    
    
    17.0
    %
    
    
    28.2
    %Income from operations
    
    
    8.2
    %
    
    
    3.8
    %
 18




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##### Table of Contents



Overall Gross Margin
     Operating Expenses
  (In Thousands, unaudited)
    
    Q1 2007
    
    
    Q1 2006General and administrative
    
    $
    1,391
    
    
    $
    1,289Selling
    
    $
    262
    
    
    $
    285Research and development
    
    $
    17
    
    
    $
    17Impairment Loss
    
    $
    
    
    
    $
    15Total
    
    $
    1,670
    
    
    $
    1,606
    Income from operations
  Interest Expense
  (In Thousands, unaudited)
    
    Q1 2007
    
    Q1 2006Interest expense
    
    $
    29
    
    
    $
    35
 19




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##### Table of Contents



Other Income
  (In Thousands, unaudited)
    
    Q1 2007
    
    Q1 2006Other income
    
    $
    37
    
    
    $
    30
  Income Tax
  Minority Interest
  Loss from Discontinued Operations
  Net Income
  Earnings per Share
  20




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##### Table of Contents



Segment information
  Manufacturing Segment
  (In Thousands, unaudited)
    
    Q1 2007
    
    Q1 2006Revenue
    
    $
    5,484
    
    
    $
    1,355Gross margin
    
    
    20.1
    %
    
    
    18.4
    %Income (loss) from operations
    
    $
    441
    
    
    $
    (175
    )
  Testing Segment
  (In Thousands, unaudited)
    
    Q1 2007
    
    Q1 2006Revenue
    
    $
    3,898
    
    
    $
    3,545Gross margin
    
    
    33.6
    %
    
    
    38.3
    %Income from operations
    
    $
    402
    
    
    $
    458
  Distribution Segment
  (In Thousands, unaudited)
    
    Q1 2007
    
    Q1 2006Revenue
    
    $
    494
    
    
    $
    805Gross margin
    
    
    16.3
    %
    
    
    26.9
    %Loss from operations
    
    $
    (37
    )
    
    $
    (1
    )
  21




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##### Table of Contents



Corporate
  (In Thousands, unaudited)
    
    Q1 2007
    
    Q1 2006Income (loss) from operations
    
    $
    15
    
    
    $
    (64
    )
  Financial Condition
         Liquidity and Capital Resources
   22




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##### Table of Contents



Corporate Guarantee Arrangement
  Critical Accounting Estimates & Policies
   
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Sep. 30,
    
    June 30,2006
    
    2006(unaudited)Loans:Denominated by Singapore dollars; interest is at the banks
prime rate (5.75% at September 30, 2006
and June 30, 2006) plus 0.5% per annum
    
    $
    17
    
    
    $
    70Denominated by Singapore dollars; interest rate fixed at 5.91%
    
    
    6
    
    
    
    23Denominated by Singapore dollars; interest is at the banks
prime rate (4.25% at September 30, 2006
and June 30, 2006) plus 1% per annum
    
    
    153
    
    
    
    198
 23




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##### Table of Contents



Sep. 30,
    
    June 30,2006
    
    2006(unaudited)Denominated by Singapore dollars; interest is at the banks
prime rate (4.25% at September 30, 2006
and June 30, 2006) plus 1% per annum
    
    
    301
    
    
    
    345Denominated by Thailand baht;
interest is at the banks prime rate (7.50% at September 30,
2006 and June 30, 2006)
    
    
    81
    
    
    
    95Denominated by Singapore dollars; interest is at the banks
prime rate (3.395% at September 30, 2006
and 3.41% at June 30, 2006) plus 3.5% per annum
    
    
    455
    
    
    
    509Denominated by Singapore dollars; interest is at the banks
prime rate (4.25% at September 30, 2006
and June 30, 2006) plus 1% per annum
    
    
    234
    
    
    
    260Subtotal
    
    $
    1,247
    
    
    $
    1,500Capital leases:denominated by Singapore dollars
with a fixed interest rate ranging from 4.19% to 6.02% per
annum
    
    $
    322
    
    
    $
    316denominated by Malaysia ringgit
with a fixed interest rate at 4.30% per annum
    
    
    12
    
    
    
    14denominated by U.S. dollars
with a fixed interest rate at 0.81% per annum
    
    
    6
    
    
    
    7Subtotal
    
    $
    340
    
    
    $
    337Line of credit:Denominated by Singapore dollars; interest is at the banks
prime rate (5.75% at September 30, 2006,
June 30, 2006) plus 0.25% per annum
    
    $
    363
    
    
    $
    116Subtotal
    
    $
    363
    
    
    $
    116Total
    
    $
    1,950
    
    
    $
    1,952
  Foreign Currency Exchange Rate Risk
  24




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  25




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##### Table of Contents



TRIO-TECH INTERNATIONAL
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 CERTAIN RISKS THAT MAY AFFECT OUR FUTURE RESULTS
  Possible dilutive effect of outstanding options
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer of Registrant31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer of Registrant32
    
    Section 1350 Certification.
 26




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##### Table of Contents



SIGNATURES
  TRIO-TECH INTERNATIONALBy:
    
    /s/ Victor H.M. TingVICTOR H.M. TINGVice President and
Chief Financial Officer(Principal Financial Officer)Dated: November 13, 2006
 27