10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended December 31, 2007

OR

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

For the Transition Period from                  to                 

Commission File Number 1-14523

TRIO-TECH INTERNATIONAL

(Exact name of Registrant as specified in its Charter)

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

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

14731 Califa Street, Van Nuys, California 91411

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

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

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

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

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

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

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

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

2

FORWARD-LOOKING STATEMENTS

          The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and assumptions regarding future activities and results of operations of the Company. In light of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among others, could cause actual results to differ materially from those reflected in any forward-looking statements made by or on behalf of the Company: market acceptance of Company products and services; changing business conditions or technologies and volatility in the semiconductor industry, which could affect demand for the Company’s products and services; the impact of competition; problems with technology; product development schedules; delivery schedules; changes in military or commercial testing specifications which could affect the market for the Company’s products and services; difficulties in profitably integrating acquired businesses, if any, into the Company; risks associated with conducting business internationally and especially in Southeast Asia, including currency fluctuations and devaluation, currency restrictions, local laws and restrictions and possible social, political and economic instability; and other economic, financial and regulatory factors beyond the Company’s control. World-wide oil prices increased caused companies to incur higher costs. We believe customers have tightened and will continue to tighten their spending resulting in a decline in the demand for electronic products and semiconductor equipment. We anticipate that this chain effect will hit the Company’s business gradually in the future. See the discussions elsewhere in this Form 10-Q, including under the heading “Certain Risks That May Affect Our Future Results,” for more information. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology.

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

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

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

See accompanying notes to condensed consolidated financial statements.

4

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

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

See accompanying notes to condensed consolidated financial statements.

5

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

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

6

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

See accompanying notes to condensed consolidated financial statements.

7

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

1.

ORGANIZATION AND BASIS OF PRESENTATION

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

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

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

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

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

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

8

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

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

2.

SUBSEQUENT EVENT

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

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

9

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

4.	INVENTORIES
	Inventories consisted of the following:

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

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

      Assumptions

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

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

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

      2007 Employee Stock Option Plan

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

10

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

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

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

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

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

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

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

2007 Directors Equity Incentive Plan

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

11

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

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

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

      1998 Stock Option Plan

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

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

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

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

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6. EARNINGS PER SHARE

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

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

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

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

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

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

7. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

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

13

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

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

8. WARRANTY ACCRUAL

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

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

9. LONG TERM DEBT

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

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

10. ADOPTION OF FIN 48

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

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11.	INVESTMENT IN CHONGQING, CHINA
	In June 2007, Trio-Tech International Pte. Ltd. established a subsidiary in Chongqing, China. This newly established subsidiary, Trio-Tech (Chongqing) Co., Ltd., has a registered capital of RMB20,000 (Chinese yuan), or equivalent to approximately US$2,600, and is wholly owned by Trio-Tech International Pte Ltd. In June 2007, Trio-Tech International Pte. Ltd. infused $2,600 to Trio-Tech (Chongqing) Co., Ltd. to fulfill its capital injection obligation. The source of the funds was from the proceeds of disposing short-term deposits by Trio-Tech International Pte. Ltd.
	On August 27, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with Jiasheng Property Development Co., Ltd. (Jiasheng hereafter) to jointly develop a piece of property with 24.91 acres owned by Jiasheng located in Chongqing City, China, which is intended for sale after the completion of development. Pursuant to the signed agreement, the capital to be invested by Trio-Tech (Chongqing) Co., Ltd. was RMB10,000, equivalent to approximately $1,371 based on the exchange rate on December 31, 2007 published by the Federal Reserve System. On August 28, 2007, Trio-Tech (Chongqing) Co., Ltd. transferred the required amount from its bank account into a special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng. The investment was accounted under cost method as the Company accounted for less than 20% equity of this joint venture.
	On October 22, 2007, the parties received approval from the Chinese District Zoning Regulation Bureau to increase the square meters of the buildings specified in the original Memorandum Agreement dated August 27, 2007 by 9,885 square meters. As a result, the construction costs of the proposed building project were also increased. On November 15, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Supplement Agreement to the Memorandum Agreement dated August 27, 2007 with Jiasheng. The purpose of this Supplement Agreement was to document another agreement reached by both parties regarding the additional capital infusion to be committed by respective parties in order to finance the increase in construction costs. The Supplement Agreement does not modify the terms and obligations of both parties specified in the original Memorandum Agreement. Under the terms of the Supplement Agreement, the Company agreed to invest an additional RMB9,000, or approximately US$1,234 based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. By infusing the additional capital of RMB9,000, the Company increased its equity ratio from 16% to 24% of the total capital infused by both parties. However, the profit sharing percentage remains at 20% as specified in the original Memorandum Agreement because management of the Company believes that the return on the total investment is still reasonable. On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list of additional costs incurred for this project, which were RMB4,000 less than the estimated costs of RMB9,000. Accordingly, the Company only transferred RMB5,000, approximately $686, from its bank account into the special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng. After that extra infusion, the equity ratio owned by the Company in that joint venture was 20%. As Jiasheng is responsible for the daily business operations and development of that project and the Company has been a passive investor role since the inception of this joint venture, the cost method of accounting was still applicable. There was no operating activity in Trio-Tech (Chongqing) Co., Ltd in the six months ended December 31, 2007, and there was no income generated from the entity during this period.
12.	ASSETS HELD FOR SALE
	In the first quarter of fiscal 2008, the Company initiated a plan to sell the property located in Malaysia and ceased the depreciation of that property in accordance with SFAS No. 144. The book value of this asset was $217 at December 31, 2007. In late December 2007, the Company entered into a definite sale and purchase agreement with a buyer with a selling price of RM700 (Malaysia ringgit), equivalent to approximately to US$212, and received a deposit of RM70, equivalent to approximately US$21, based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. It is anticipated that the sale will be consummated in the third quarter of fiscal 2008. Accordingly, the Company believes that the assets held for sale should be presented as part of current assets. In accordance with SFAS No 144, the asset held for sale was recorded at the lower of fair value less cost to sell of $212. Impairment loss of $5 was recorded for the six months ended December 31, 2007.
13.	BUSINESS SEGMENTS
	The Company operates principally in three industry segments; the testing service industry (which performs structural and electronic tests of semiconductor devices), the designing and manufacturing of equipment (which equipment tests the structural integrity of integrated circuits and other products) and the distribution of various products from other manufacturers in Singapore and Southeast Asia. The following net sales were based on customer location rather than subsidiary location.
	The allocation of the cost of equipment, the current year investment in new equipment and depreciation expense have been made based on the primary purpose for which the equipment was acquired.

15

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

     The following segment information is unaudited:

Business Segment Information:

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

Business Segment Information:

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

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Geographic Area Information:

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

Geographic Area Information:

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

17

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

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

The following should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the most recent Annual Report on Form 10-K.

Overview

Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. The Company also designs, manufactures and markets equipment and systems, and distributes semiconductor processing and testing equipment manufactured by others. The Company operates in three business segments: Testing Services, Manufacturing and Distribution.

We own and operate facilities that provide testing services for semiconductor devices and other electronic components to meet the requirements of military, aerospace, industrial and commercial applications. We currently operate six testing facilities, one in the United States, three in Southeast Asia and two in China. The Company uses its own proprietary equipment for certain burn-in, centrifugal and leak tests, and commercially available equipment for various other environmental tests. The Company conducts the majority of its testing operations in Southeast Asia and China with facilities in Singapore, Malaysia, Thailand and China. Our facilities require substantial investment to construct and are largely fixed-costs assets once in operation. Because we own most of the testing capacity, a significant portion of our operating costs is fixed. In general, these costs do not decline with reductions in customer demand or the utilization of our testing capacity, and can adversely affect profit margins as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over the increased output, which should improve profit margins.

Our manufacturing segment manufactures Artic Temperature Controlled Wafer Chucks, which are used for test, characterization and failure analysis of semiconductor wafers, Wet Process Stations, which wash and dry wafers at a series of 100 to 300 additional processing steps after the etching or deposition of integrated circuits, and other microelectronic substrates in what is commonly called the “front-end”, or creation, of semiconductor circuits. Additionally, we also manufacture centrifuges, leak detectors, HAST (Highly Accelerated Stress Test) systems and “burn-in” systems that are used primarily in the “back-end” of the semiconductor manufacturing process to test finished semiconductor devices and electronic components.

In the United States, our manufacturing segment focused on marketing used and refurbished equipment, which some of our customers are more willing to purchase since it is less expensive than new equipment.

Due to the competitive environment in the manufacturing segment, we anticipate that we will continue to implement our cost reduction plan by outsourcing a portion of our manufacturing process to outside suppliers, such as electrical and mechanical fabrication houses, and seek competitively priced materials.

Our distribution segment operates primarily in Southeast Asia. This segment markets and supports distribution of our own manufactured equipment in addition to distributing complementary products supplied by other manufacturers that are used by our customers and other semiconductor and electronics manufacturers. We expanded the distribution business to include a strategic business unit mainly to serve as a distributor of electronic components to customers.

Recent Events

Corporate Headquarters change of location

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

Purchase of an office space in Chongqing

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

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Second Quarter Fiscal 2008 Highlights

• Total revenue decreased 8.5% to $12,871 for the second quarter of fiscal 2008, compared with revenue of $14,067 for the second quarter of fiscal 2007 as the result of reduced revenue from product sales.

• Testing segment revenue increased by $397, or 7.5%, to $5,670 compared with $5,273 for the second quarter of fiscal 2007.

• Manufacturing segment revenue decreased by $1,111, or 13.6%, to $7,085 compared with $8,196 for the second quarter of fiscal 2007.

• Distribution segment revenue decreased by $482, or 80.6%, to $116 compared with $598 for the second quarter of fiscal 2007.

• Income from operations decreased by $667, or 53.4%, to $583 compared with $1,250 for the second quarter of fiscal 2007.

• Gross profit margins improved by 1.0% to 24.8% from 23.8% for the second quarter of fiscal 2007.

• Selling expenses decreased by 0.3% from 1.5% of revenue for the second quarter of fiscal 2008.

• General and administrative expenses increased by 6.7% from 12.1% of revenue for the second quarter of fiscal 2007.

• General and administrative expenses in the second quarter of fiscal 2008 include stock options expenses of $358 related to 100,000 options we granted on December 4, 2007.

• On November 15, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Supplement Agreement to the Memorandum Agreement dated August 27, 2007 with Jiasheng. Under the terms of the Supplement Agreement, the Company agreed to invest an additional RMB9,000, or approximately US$1,234 based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. By infusing the additional capital of RMB9,000, the Company increased its equity ratio from 16% to 24% of the total capital infused by both parties. However, the profit sharing percentage remains at 20% as specified in the original Memorandum Agreement because management of the Company believes that the return on the total investment is still reasonable. On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list for additional costs incurred for this project, which were RMB4,000 less than the estimated costs of RMB9,000. Accordingly, the Company only transferred RMB5,000, approximately $686, from its bank account into the special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng After that extra infusion, the equity ratio owned by the Company in that joint venture was 20%. The investment in China increased to $2,057.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended December 31, 2007. These highlights are not intended to be a full discussion of our operating results for this quarter. These highlights should be read in conjunction with the following discussion and with our unaudited consolidated financial statements and notes thereto accompanying this Quarterly Report.

Results of Operations and Business Outlook

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

Revenue Components

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

Net sales for the six months and three months ended December 31, 2007 were $24,921 and $12,871, respectively, an increase of $978 and a decrease of $1,196, respectively, when compared to the same sales periods of the prior year. As a percentage, total net sales increased by 4.1% for the six months and decreased by 8.5% for the three months ended December 31, 2007, respectively, when compared to total net sales for the same periods of the prior year.

Net sales into and within China and the Southeast Asia regions and other countries (except sales into and within the United Sates) increased by $1,785 to $21,877 and by $706 to $11,287 for the six months and three months ended December 31, 2007, respectively, compared to the same period of the prior year. This increase was primarily due to sales improvement in the testing segment in our Malaysia operation and China operations. Net sales into and within the United States were $3,044 and $1,584 for the six months and three months ended December 31, 2007, respectively, a decrease of $807 and $1,902, respectively, when compared to the same periods of the prior year.

19

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

Manufacturing Segment

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

Testing Segment

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

Distribution Segment

Net sales in the distribution segment accounted for 0.91% and 0.90% of total net sales for the six months and three months ended December 31, 2007, respectively, a decrease of 3.66% and 3.35%, respectively, compared to the same periods in fiscal 2007. The absolute amount of net sales decreased by $866 to $227 and by $482 to $116 for the six months and three months ended December 31, 2007, respectively, compared to the same periods in fiscal 2007. The drop in revenue was due to lower demand in the current market for back-end products such as Vibration equipment and chambers and, we believe, a saturation of equipment and electronic components in the current market. Product volume for the distribution segment depends on sales activities such as placing orders, queries on products and backlog. Equipment and electronic component sales are very competitive, as the products are prevalent in the market.

Uncertainties and Remedies

There are several influencing factors which create uncertainties when forecasting performance, such as the ever-changing nature of technology, specific requirements from the customer, declines in demand for certain types of burn-in devices or equipment, and other similar factors. One of these factors is the highly competitive nature of the semiconductor industry. Another is that some customers are unable to provide a forecast of the products required in the upcoming weeks; hence it is difficult to plan for the resources needed to meet these customers’ requirements due to short lead time and last minute order confirmation. This will normally result in a lower margin for these products, as it is more expensive to purchase materials in a short time frame. However, we have taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors. For example, in order to meet customers’ demands upon short notice, we maintain higher inventories, but continue to work closely with our customers to avoid stock piling. We continue to cut costs by upgrading some of our existing facilities to cater to the changing requirements of customers and by maintaining a lean headcount, while still keeping quality high so as to sell new products at a competitive price. We have also been improving our customer service by keeping our staff updated with regard to the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. We believe customers have tightened and will continue to tighten their spending resulting in a decline in the demand for electronic products and semiconductor equipment. We anticipate that this chain effect will hit the Company’s business gradually in the future. We are exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology while at the same time searching for improved testing methods of higher technology chips.

20

Comparison of the Second Quarters Ended December 31, 2007 and 2006

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

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

Overall Gross Margin

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

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

Gross profit margin as a percentage of revenue in the testing segment decreased by 8.1% for the three months ended December 31, 2007, from 41.8% to 34.1%, compared to the same quarter of fiscal 2007. In terms of dollar amount, gross margin in the testing segment in the second quarter of fiscal 2008 was $1,933, a decrease of $271, or 12.3% compared to $2,204 in the same period of fiscal 2007. The decrease in the gross margin was due primarily to a drop in the average selling price of services in the Singapore testing operations. Our customers changed their demands and specifications for burn-in hours, which resulted in a lower average unit selling price for burn-in services.

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

Operating Expenses

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

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

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During the second quarter of fiscal 2008, we reclassified $98 of selling expenses into general and administrative expenses and cost of sales to reflect a better presentation of our operations. Accordingly, $67 of selling expenses was reclassified into general and administrative expenses and cost of sales in the second quarter of fiscal 2007 for the purpose of comparison. General and administrative expenses increased by $720, or 42.3% compared to the same period of fiscal 2007, from $1,704 to $2,424 for the three months ended December 31, 2007. The increase was attributable to an increase in payroll and related expenses in the testing segment in the Singapore and Malaysia operations to handle the rise in sales volume of the testing segment. In addition, share based compensation expenses, as a result of granting stock options in the second quarter of fiscal 2008, increased by $357 when compared to the same quarter of fiscal 2007.

Selling expenses decreased by $54, or 26.1%, for the three months ended December 31, 2007, from $207 to $153 compared to the same quarter of fiscal 2007, mainly due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment and a reversal of $39 in overprovided commission expenses in the manufacturing and the distribution segments. Part of our commission payable was based on the estimated profit margin of sales when the sales were recorded, and it was reduced when the actual profit margin decreased due to an increase in unexpected service expenses following the sales.

Research and development expenses were $19 compared to $17 for the second quarter of fiscal 2007, due to an increase in payroll expenses in the U.S. operation.

The impairment loss decreased by $156, or 90.7%, for the three months ended December 31, 2007, from $172 to $16 compared to the same quarter of fiscal 2007. The impairment loss of $16 consisted of a loss of $11 related to the disposal of certain fixed assets in our China operation in Suzhou, while $5 was related to the asset held for sale in Malaysia. In the first quarter of fiscal 2008, we initiated a plan to sell this property. In late December 2007, we entered a definite sale and purchase agreement with a buyer with a selling price of RM 700 (Malaysia ringgit), or equivalent to US$212, and received a deposit of RM70, equivalent to US$21 based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. Impairment loss of $5 was recorded in the second quarter of fiscal 2008. The impairment loss in the second quarter of fiscal 2007 consisted of machinery and equipment with a cost of $423 and related accumulated depreciation in the amount of $251. Due to the decrease in demand for the slower speed microprocessor chips, those of our existing burn-in facility assets in the Singapore operations used for testing such chips became obsolete. Since there will be no future cash flows from those assets, their carrying value was written down to zero, and the impairment cost was recorded.

Income from Operations

Income from operations decreased by $667, or 53.4%, from $1,250 for the three months ended December 31, 2006 to $583 for the three months ended December 31, 2007, mainly due to a decrease in sales in the manufacturing and distribution segments and an increase in operating expenses, as previously discussed.

Interest Expense

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

	Three Months Ended December 31,
(In Thousands, unaudited)	2007		2006
Interest expense	$	79	$	37

Interest expenses increased by $42 for the three months ended December 31, 2007, from $37 to $79, primarily due to a new term loan facility of $3,687 taken up in the first quarter of fiscal 2008 to support the expansion plans and potential business opportunities of the Singapore and China operations.

Other (Expenses) Income

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

	Three Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Other (expenses) income	$	(141	)	$	73

Other expenses increased by $214 to $141 for the three months ended December 31, 2007 from an income of $73 in the same quarter of fiscal 2007, primarily due to an increase in the currency transaction loss and an increase in provision for the value added tax, but offset by an increase in investment income generated from short-term deposits and rental income. Currency transaction loss increased by $261 for the three months ended December 31, 2007, from an exchange gain of $48 to an exchange loss of $213, compared to the same quarter of fiscal 2007. This was attributable to the weakening of the U.S. dollar against foreign currency with regard to the transactions denominated in U.S. dollars. The provision for the value added tax was $40, which was the result

22

of a change in the local tax policy in our China operations in Suzhou. Investment income was $75 for the three months ended December 31, 2007 and was $59 higher than the interest income generated in the same quarter of fiscal 2007 due to an increase in short-term deposits by placing the idle cash into income generating investments.

Income Tax

The provision for income taxes for the three months ended December 31, 2007 was $142, a decrease of $311 compared to the income tax provision of $453 for the three months ended December 31, 2006. The decrease in the income tax provision is mainly due to the decrease in income from the Singapore operations. The Singapore operations generated a profit of $522 for the three months ended December 31, 2007, a decrease of $777 compared to the profit of $1,299 for the three months ended December 31, 2006.

We assessed our income tax liability of $314 as of December 31, 2007 in accordance with FIN 48, which was related to the allocation of corporate management expenses to our Singapore operation in terms of Singapore tax law. We did not see any potential benefits arising from this tax position. Accordingly, no impact of this tax position was recognized in the statement of operations for this quarter of fiscal 2008. We did not include any potential income tax position in federal and state income tax returns currently filed.

Minority Interest

As of December 31, 2007, we held a 55% interest in Trio-Tech Malaysia. In the second quarter of fiscal 2008, minority interest in the net income of subsidiaries was $56, an increase of $22, or 64.7%, compared to a minority interest in the net income of $34 for the same quarter of fiscal 2007. The increase in the minority interest was attributable to the improvement in the net income generated from the Malaysia testing operation due to stronger market demands from our customers.

Net Income

Net income was $165 in the second quarter of fiscal 2008, representing a decrease of $634, or 79.3%, from a net income of $799 during the same period of fiscal 2007. The decrease in net income was mainly due to a decrease in revenue, an increase in operating expenses, interest expense and a decrease in other income, as previously discussed.

Earnings per Share

Basic and diluted earnings per share for the three months ended December 31, 2007 were $0.05, a decrease of $0.20 from $0.25 in the same quarter of the prior year

Segment Information

The revenue, gross margin and income from each segment for the second quarter of fiscal 2008 and the second quarter of fiscal 2007, respectively, are presented below. As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.

Manufacturing Segment

The revenue, gross margin and income from operations for the manufacturing segment for the second quarters of fiscal 2008 and 2007 were as follows:

	Three Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Revenue	$	7,085		$	8,196
Gross margin		17.4	%		12.6	%
Income from operations	$	466		$	250

Income from the manufacturing segment increased by $216, or 86.4%, to $466 for the three months ended December 31, 2007 from $250 in the same quarter of fiscal 2007. The increase in operating income was attributable to an increase in gross profit of $200 and a decrease in operating expenses of $16. Operating expenses for the manufacturing segment were $767 and $783 for the three months ended December 31, 2007 and 2006, respectively. The decrease in operating expenses was mainly due to a reversal of $23 in warranty liability in the second quarter of fiscal 2008 during our periodic assessment of the adequacy of recorded warranty liability based on the historical rate of warranty expense incurred.

23

Testing Segment

The revenue, gross margin and income from operations for the testing segment for the second quarters of fiscal 2008 and 2007 were as follows:

	Three Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Revenue	$	5,670		$	5,273
Gross margin		34.1	%		41.8	%
Income from operations	$	645		$	942

Income from operations in the testing segment in the second quarter of fiscal 2008 was $645, a decrease of $297, or 31.5%, compared to $942 in the same period of fiscal 2007. The decrease in operating income was attributable to a decrease in gross profit of $271 due to a drop in the average selling price of services in the Singapore testing operation and an increase in operating expenses of $26. Operating expenses were $1,288 and $1,262 for the three months ended December 31, 2007 and 2006, respectively. This increase in operating expenses was due to a hike in payroll and related expenses in the testing segment in the Singapore and Malaysia operations to handle the rise in sales volume.

Distribution Segment

The revenue, gross margin and loss from operations for the distribution segment for the second quarters of fiscal 2008 and 2007 were as follows:

	Three Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Revenue	$	116		$	598
Gross margin		25.0	%		18.9	%
(Loss) Income from operations	$	(61	)	$	28

Loss from operations in the distribution segment increased by $89 for the three months ended December 31, 2007, from an operating income of $28 in the second quarter of fiscal 2007 to a loss of $61 in the second quarter of fiscal 2008. The increase in operating loss was mainly due to a decrease in gross margin of $84 as the result of a decrease in revenue and an increase in operating expenses of $5. Operating expenses were $90 and $85 for the three months ended December 31, 2007 and 2006, respectively. The increase in operating expenses was mainly attributable to an increase in general and administrative expenses in the distribution segment in our Singapore operations due to an increase in employee headcount.

Corporate

The income (loss) from operations for corporate for the second quarters of fiscal 2008 and 2007 were as follow:

	Three Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Income (loss) from operations	$	(467	)	$	30

Corporate operating loss increased by $497 to an operating loss of $467 for the three months ended December 31, 2007, from an operating income of $30 in the same period of the prior year. The increase in operating loss from corporate was mainly due to an increase of $68 in the remuneration for executive officers, and an increase of $357 in stock option compensation expenses.

24

Comparison of the Six Months Ended December 31, 2007 and 2006

The following table sets forth certain consolidated statements of (loss) income data as a percentage of net sales for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
	2007			2006
Net Sales		100	%		100.0	%
Cost of sales		75.0	%		75.7	%
Gross Margin		25.0	%		24.3	%
Operating Expenses
General and administrative		16.3	%		13.1	%
Selling		1.1	%		1.6	%
Research and development		0.2	%		0.2	%
Impairment loss		0.1	%		0.7	%
Total operating expenses		17.7	%		15.6	%
Income from operations		7.3	%		8.7	%

Overall Gross Margin

Overall gross margin as a percentage of revenue increased slightly by 0.7% to 25.0% for the six months ended December 31, 2007, from 24.3% for the same period of fiscal 2007. The increase in the overall gross margin was primarily due to the improvement in gross margins in the manufacturing segment. However, this was offset by a decrease in gross margin in the testing segment. In terms of dollar value, the overall gross margin increased by $413, or 7.1%, for the six months ended December 31, 2007, from $5,824 to $6,237 compared to the same period of fiscal 2007, as a result of better sales performance in the testing segment.

Gross profit margin as a percentage of revenue in the manufacturing segment increased by 0.7% for the six months ended December 31, 2007 compared to the same period of fiscal 2007, from 15.5% to 16.2%. In absolute amounts, gross profit was $2,183, an increase of $65, or 3%, for the six months ended December 31, 2007, from $2,118 in the same period of fiscal 2007. The increase in gross margin was mainly due to a decrease in sales of lower margin burn-in systems pass-through products in the six months ended December 31, 2007 compared to the same period of fiscal 2007.

Gross profit margin in the testing segment decreased by 2.7% for the six months ended December 31, 2007 compared to the same period of the prior year, from 38.3% to 35.6%, due primarily to a drop in the average selling price of services, as compared to related expenses. In absolute amount, gross profits in the testing segment were $3,996, an increase of $483, or 13.7%, for the six months ended December 31, 2007, from $3,513 in the same period of fiscal 2007. The improvement in the gross margin in absolute amount was primarily due to a hike in revenue in the six months ended December 31, 2007, as previously discussed.

Gross profit margin as a percentage of revenue in the distribution segment improved by 7.9%, from 17.7% for the six months ended December 31, 2006 to 25.6% in the same period this fiscal year. The improvement in the gross profit as a percentage of sales was due to an increase in average sale price compared to the related expenses in the first two quarters of fiscal 2008 compared to the same period of fiscal 2007. Gross profits decreased by $135, or 70.0%, to $58 for the six months ended December 31, 2007 from $193 for the six months ended December 31, 2006, due to a drop in sales volume and revenue, as previously discussed.

Operating Expenses

The following table presents the operating expenses for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007		2006
General and administrative	$	4,069	$	3,150
Selling		277		398
Research and development		38		34
Impairment loss		16		172
Total	$	4,400	$	3,754

25

During the six months ended December 31, 2007, we reclassified payroll expenses of $186 from selling expenses to general and administrative expenses and cost of sales to reflect a better presentation of our operation. Accordingly, $138 of selling expenses was reclassified to general and administrative expenses and cost of sales in the six months ended December 31, 2007 for the purpose of comparison. General and administrative expenses increased by $919, or 29.2%, from $3,150 to $4,069 for the six months ended December 31, 2007, compared to the same period of fiscal 2007. The increase was attributable to a hike in payroll and related expenses in the testing segment in the Singapore and Malaysia operations to handle the rise in sales volume, an increase of $137 in the remuneration for executive officers, and an increase of $356 in stock option compensation expenses. The increase in general and administrative expenses was offset by a reversal of bonus provision of $154 for fiscal year 2007 in the first quarter of fiscal 2008 due to a change in estimate as discussed in Note 1.

Selling expenses decreased by $121, or 30.4%, for the six months ended December 31, 2007, from $398 to $277, compared to the same period of fiscal 2007 year. This was mainly due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment and a reversal of $82 in overprovided commission expenses in the manufacturing segment and distribution segment. Part of our commission payable was based on the estimated profit margin of sales when the sales were recorded, and it was reduced when the actual profit margin decreased as the result of an increase in unexpected service expenses following the sales.

Research and development costs increased slightly from $34 in the six months ended December 31, 2007 to $38 in the six months ended December 31, 2007 due primarily to the increase in payroll expenses in the U.S. operation

The impairment loss decreased by $156 for the six months ended December 31, 2007, from $172 to $16, compared to the same period of fiscal 2007. The impairment loss of $16 consisted of a loss of $11 related to the disposal of certain fixed assets in our China operation in Suzhou, China, while $5 was related to the asset held for sale in Malaysia. In the first quarter of fiscal 2008, we initiated a plan to sell this property. In late December 2007, we entered into a definite sale and purchase agreement with a buyer with a selling price of RM700 (Malaysia ringgit), or equivalent to US$212, and received a deposit of RM70, equivalent to US$21, based on the exchange rate as of December 31, 2007 published by the Federal Reserve Statistical Release. Impairment loss of $5 was recorded for the six months ended December 31, 2007. The impairment loss in the six months ended December 31, 2006 consisted of machinery and equipment with a cost of $423 and related accumulated depreciation in the amount of $251. Due to the decrease in demand for the slower speed microprocessor chips, those of our existing burn-in facility assets in the Singapore operation used for testing such chips became obsolete. Since there will be no future cash flows from those assets, their carrying value was written down to zero, and the impairment cost was recorded.

Income from Operations

Income from operations decreased by $233 to $1,837 for the six months ended December 31, 2007, from $2,070 for the same period of fiscal year 2007. The decrease in income from operations was due to an increase in operating expense of $646 as the result of an increase in general and administrative expenses, but offset by an increase in gross margin of $413, as previously discussed.

Interest Expense

The following table presents the interest expenses for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007		2006
Interest expense	$	164	$	66

Interest expenses increased by $98 during the six months ended December 31, 2007, from $66 to $164 compared to the same period of fiscal 2007, primarily due to a higher usage of credit line facilities and term loan facilities to support the expansion plans and potential business opportunities of the Singapore and China operations. The other contributing factor was an interest loss of $49 in the six months ended December 31, 2007 due to an interest swap agreement on one of our loans that we entered into during the first quarter of fiscal 2008.

Other Income

The following table presents the other income for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Other (expenses) income	$	(191	)	$	110

26

Other expenses increased by $301 to $191 for the six months ended December 31, 2007, from an income of $110 in the same quarter of the prior year, primarily due to an increase in the currency transaction loss and an increase in provision for the value added tax, but offset by an increase in investment income generated from short-term deposits and rental income. Currency transaction loss increased by $352 for the six months ended December 31, 2007, from a currency transaction gain of $21 to a currency transaction loss of $331, compared to the same period fiscal 2007. This was attributable to the weakening of the U.S. dollar against foreign currency with regard to the transactions denominated in U.S. dollars. The provision for the value added tax was $87, which was the result of a change in the local tax policy in our China operation in Suzhou. Investment income was $143 for the six months ended December 31, 2007 and was $90 higher than the investment income generated in the same period of the prior year due to an increase in the placement of short-term deposits by placing the idle cash into income generating investments. Rental income, which consisted mainly of space in the Malaysia operation rented to outside vendors, increased by $21 to $75 for the six months ended December 31, 2006 from $54 in the same period of fiscal 2007.

Income Tax

Income tax provision for the six months ended December 31, 2007 was $314, a decrease of $164 compared to an income tax provision of $478 for the same period of fiscal 2007. The decrease in income tax provision was mainly due to a lower tax provision for the decreased income generated from the Singapore operations in the six months ended December 31, 2007.

Minority Interest

As of December 31, 2007, we held a 55% interest in Trio-Tech Malaysia. The minority interest for the six months ended December 31, 2007 in the net income of subsidiaries was $252, an increase of $171 compared to a minority interest in the net income of $81 for the same period of the prior year. The increase in the minority interest was attributable to the improvement in the net income generated from the Malaysia testing operation due to stronger market demands from our customers.

Net Income

Net income for the six months ended December 31, 2007 was $916 a decrease of $639, or 43.1%, compared to $1,555 in the same period of fiscal 2007. Such decrease was primarily due to an increase in operating expenses and other expenses, but was offset by an increase in revenues and a decrease in income tax expenses, as previously discussed.

Earnings per Share

Basic and diluted earnings per share for the six months ended December 31, 2007 were $0.28, a decrease of $0.20 from $0.48 in the same period of the prior year.

Segment Information

The revenue, gross margin and income from each segment for the first half of fiscal 2008 and 2007, respectively, are presented below. As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.

Manufacturing Segment

The following table presents the revenue, gross margin and income from operations for the manufacturing segment for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Revenue	$	13,481		$	13,679
Gross margin		16.2	%		15.5	%
Income from operations	$	792		$	690

Income from operations in the manufacturing segment increased by $102, or 14.8%, to $792 for the six months ended December 31, 2007 from $690 in the same period of fiscal 2007. The improvement in operating profit was attributable to an increase of $65 in gross profit, and a decrease of $37 in operating expenses. Operating expenses for the manufacturing segment were $1,391 and $1,428 for the six months ended December 31, 2007 and 2006, respectively. The decrease in operating expenses was mainly due to a reversal of $43 in bonus provision for fiscal year 2007 as a result of a change in estimate in the first quarter of fiscal 2008, as discussed in Note 1, and a reversal of $23 in warranty liability in the second quarter of fiscal 2008 during our periodic assessment of the adequacy of recorded warranty liability based on the historical rate of warranty expenses incurred.

27

Testing Segment

The following table presents the revenue, gross margin and income from operations for the testing segment for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Revenue	$	11,213		$	9,171
Gross margin		35.6	%		38.3	%
Income from operations	$	1,663		$	1,344

Income from the testing segment increased by $319, or 23.7%, to $1,663 for the six months ended December 31, 2007 from $1,344 in the same period fiscal 2007. Such increase in operating income was attributable to an increase in gross profits of $483, but offset by an increase in operating expenses of $164. Operating expenses were $2,333 and $2,169 for the six months ended December 31, 2007 and 2006, respectively. This increase in operating expenses was mainly due to an increase in payroll and related expenses as a result of the rise in headcount in the Singapore and Malaysia operations in the six months ended December 31, 2007 to handle the rise in sales volume, This was offset by a reversal of $111 in bonus provision for fiscal 2007 as a result of a change in estimate, as discussed in Note 1, in the first quarter of fiscal 2008.

Distribution Segment

The following table presents the revenue, gross margin and income (loss) from operations for the distribution segment for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Revenue	$	227		$	1,093
Gross margin		25.6	%		17.7	%
Loss from operations	$	(83	)	$	(9	)

Loss from the distribution segment increased by $74 to $83 for the six months ended December 31, 2007 from an operating loss of $9 in the same period of fiscal 2007. The operating loss was attributable to a decrease in gross profit of $135, but offset by a decrease in operating expenses of $61. This decrease in operating expenses was mainly due to lower commission expenses due to a drop in net sales. Operating expenses were $141 and $202 for the six months ended December 31, 2007 and 2006, respectively.

Corporate

The following table presents the income (loss) from operations for Corporate for the six months ended December 31, 2007 and 2006, respectively:

	Six Months Ended December 31,
(In Thousands, unaudited)	2007			2006
Income (loss) from operations	$	(535	)	$	45

Corporate operating loss increased by $580 for the six months ended December 31, 2007, from an operating income of $45 in the same period of fiscal 2007 to an operating loss of $535 this fiscal year. The increase in operating loss from corporate was mainly due to an increase of $137 in the remuneration for executive officers and an increase of $356 in stock option compensation expenses for the options we granted on December 4, 2007, as compared to the same period of fiscal 2007.

Financial Condition

During the six months ended December 31, 2007, total assets increased $5,677, or 17.3%, from $32,788 at June 30, 2007 to $38,465 at December 31, 2007. The majority of the increase was in accounts receivables, other receivables, inventory, prepaid expenses, investment and property, plants and equipment, but offset by a decrease in cash, other intangible assets and other assets.

At December 31, 2007, total cash and short-term deposits were $14,206, a decrease of $744 from the sum of those two balances at June 30, 2007. The decrease in cash was mainly due to a decrease in net cash provided by operating activities as a result of a decrease in net income and an investment in Chongqing, China of $2,057 and capital expenditure of $1,493 in the six months ended December 31, 2007. This decrease was offset by an increase in proceeds from long-term loans. In the first quarter of fiscal 2008, we obtained a new term loan of $3,687 to support its long-term investment and potential business expansion opportunities.

28

At December 31, 2007, accounts receivables balance increased by $3,223 from the balance at June 30, 2007 due primarily to an increase in sales in the second quarter of fiscal 2008 as compared to the fourth quarter of fiscal 2007. The accounts receivables turnover was 66 days for the second quarter of fiscal 2008, compared with 78 days for the fourth quarter of fiscal 2007. The decrease in the accounts receivables turnover was due primarily to improvement in collections in the Singapore operations.

Other receivables at December 31, 2007 increased by $119 from that balance at June 30, 2007, due mainly to an increase of $130 in advanced payments to our vendors by the Singapore operation.

Inventory at December 31, 2007 was $2,473, reflecting an increase of $527, or 27.1%, compared to that balance at June 30, 2007. The increase in inventory was mainly from an increase in works-in-process and raw materials. The increase in inventory was a result of building up inventory to support expected product shipments in the next two quarters of fiscal 2008. The turnover of inventory was 22 days for the second quarter of fiscal 2008 compared with 23 days for the fourth quarter of fiscal 2007.

Asset held for sale of $212 at December 31, 2007 was comprised of the market value of the property located in Malaysia, which is subject to the terms under a definitive sales agreement dated December 31, 2007, less the cost to sell, in accordance with SFAS No. 144.

Prepaid expenses and other current assets at December 31, 2007 were $283, an increase of $161 from those balances at June 30, 2007, due primarily to an increase in prepaid insurance for the calendar year 2008 in the Singapore operations.

In fiscal 2008, Trio-Tech (Chongqing) Co. Ltd. entered into a Memorandum Agreement and a Supplement Agreement with Jiasheng Property Development Co. Ltd. to jointly develop a piece of property with 24.91 acres owned by Jiasheng located in Chongqing, China. Pursuant to the signed agreement, an investment of $2,057 was transferred into a special bank account jointly monitored by both Trio-Tech (Chongqing) Co. Ltd. and Jiasheng.

Property, plant and equipment increased by $209 from $7,458 at June 30, 2007 to $7,667 at December 31, 2007. Capital expenditures were $1,493 in the first six months of fiscal 2008, compared with $2,050 for the first six months of fiscal 2007. The decrease in capital expenditures was mainly due to higher purchases of machinery and equipment during the first six months of fiscal 2007 for the Singapore Testing operation and China Testing operation in Suzhou in order to meet customers’ requirements at that time.

Depreciation and amortization was $1,528 for the six months ended December 31, 2007, compared with $1,124 for the six months ended December 31, 2006. The increase in depreciation expenses was due mainly to an increase in property, plant and equipment acquired after June 30, 2007.

Other assets were $404 at December 31, 2007, a decrease of $41 from that balance at June 30, 2007. The decrease in other assets was due primarily to a decrease of $63 for a down payment of certain fixed assets in the Singapore operation, but offset by an increase of $22 in deposits for rent and utilities in the China operations.

Liquidity Comparison

Net cash used in operating activities increased by $1,037 to $727 for the six months ended December 31, 2007 from a net cash inflow of $310 in the same period of fiscal 2007. The increase in net cash used in operating activities was primarily due to (i) a decrease of $639 in net income from $1,555 to $916 during the six months ended December 31, 2007 as compared to the same period of the prior year, and; (ii) the decrease of $2,489 in cash inflow from change in accounts payable and accrued liabilities. Offsetting the increase in cash used in operating activities was an increase in net impact of adjusting non-cash items. In the six months ended December 31, 2007, the depreciation and amortization increased by $404 as compared with the same period of fiscal 2007. The other non-cash item which offset the increase in cash used in operating activities was stock option compensation expenses of $358 that we recognized in the second quarter of fiscal 2008 for the 100,000 options granted on December 4, 2007.

Net cash used in investing activities increased by $4,908 to $4,526 for the six months ended December 31, 2007 from a cash inflow of $385 for the same period of fiscal 2007. The proceeds from maturing short-term deposits of $21,443 were not adequate to cover the higher investment in short-term deposits of $22,416 in the six months ended December 31, 2007, thereby incurring a negative cash flow. As we anticipated that funds would be required in the next two quarters of fiscal 2008 for working capital purposes, we invested in short-term deposits to generate investment income. We invested $2,057 in Chongqing, China in the first two quarters of fiscal 2008 to jointly develop a piece of property with 24.91 acres with Jiasheng Property Development Co., Ltd. Offsetting the increase in net cash used in investing activities was the $527 decrease in capital expenditures as previously discussed.

Net cash provided by financing activities in the first two quarters of fiscal 2008 was $2,833, representing an increase of $1,367 compared to the net cash provided by financing activities of $1,466 during the first two quarters of fiscal 2007. The increase was mainly due to higher proceeds from long-term bank loans of $3,687 during the first two quarters of fiscal 2008 as compared to a repayment of bank loans of $6 in the same period of fiscal 2007. However, this was offset by a decrease of $1,831 from net borrowing on lines of credit.

29

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

Corporate Guarantee Arrangement

The Company provides a corporate guarantee of approximately $1,741 to one of its subsidiaries in Southeast Asia to secure line-of-credit and term loans from a bank to finance the operations of such subsidiary. With the strong financial position of the subsidiary company, the Company believes this corporate guarantee arrangement will have no material impact on its liquidity or capital resources.

Critical Accounting Estimates and Policies

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

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

30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk We do not use derivative financial instruments in our investment portfolio. Our investment portfolio is generally comprised of cash deposits. Our policy is to place these investments in instruments that meet high credit quality standards. These securities are subject to interest rate risk, and could decline in value if interest rates fluctuate and thus subject us to market risk due to those fluctuations. Due to the short duration and conservative nature of our investment portfolio, we do not expect any material loss with respect to our investment portfolio, though no assurances can be given that material losses will not occur.

New Office Lease Commitments

We entered into a lease agreement for our U.S. office space on October 10, 2007. The lease has a term of three years, with a commencement date of January 1, 2008 and covers approximately 5,200 total rentable square feet. The annual rent is approximately $66 and the lease provides us with an option to renew for an additional three-year terms at the then-current market rate.

As of December 31, 2007, the outstanding aggregate principal balance on these loans and capital leases was approximately $3,837. The interest rates on our loans and lines of credit range from 0.81% to 7.00% per annum. These interest rates are subject to change and we cannot predict an increase or decrease in rates, if any.

	Dec.31,		June 30,
	2007		2007
	(unaudited)
Loans:
Denominated in Singapore dollars; interest is at the bank’s prime rate (4.25% at December 31, 2007 and June 30, 2007) plus 1% per annum	$	—	$	16
Denominated in Singapore dollars; interest rate is at the bank’s prime rate (4.25% at December 31, 2007 and June 30, 2007) plus 1% per annum		40		150
Denominated in Thailand baht; interest is at the bank’s prime rate (7.00% at December 31, 2007 and June 30, 2007)		1		39
Denominated in Singapore dollars; interest is at the bank’s prime rate (2.48% at December 31, 2007 and June 30, 2007) plus 3.5% per annum		—		309
Denominated in Singapore dollars; interest is at the bank’s prime rate (4.25% at December 31, 2007 and June 30, 2007) plus 1% per annum		112		161
Denominated in Singapore dollars; interest is at the bank’s prime rate (2.51% at December 31, 2007) plus 3.0% per annum		3,454		—
Subtotal	$	3,607	$	675
Capital leases:
Denominated in Singapore dollars with a fixed interest rate ranging from 4.19% to 6.02% per annum	$	225	$	269
Denominated in Malaysia ringgit with a fixed interest rate of 4.30% per annum		2		7
Denominated in U.S. dollars with a fixed interest rate of 0.81% per annum		3		4
Subtotal	$	230	$	280
Total	$	3,837	$	955

31

In the six months ended December 31, 2007, we have entered into the following contractual obligation with minimum annual payments for the indicated period as follows:

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

The outstanding aggregate principal balance on these loans and capital leases was mainly utilized by our Singapore operations. In the first quarter of fiscal 2008, the Company took out a new term loan of $3,687 to support its long-term investment and potential business expansion opportunities in Singapore and China. As the majority of our overall net sales were contributed from the Singapore operations, we believe that the Singapore operations will be able to meet repayment of its loans and capital obligations. The Thailand operation utilized term loans to finance the extension of a building in Bangkok and it will be able to meet its obligations thereunder, as the operation has been generating cash for the past few years.

Foreign Currency Exchange Rate Risk Although the majority of our sales, cost of manufacturing and marketing are transacted in U.S. dollars, significant portions of our revenue are denominated in Singapore dollars, European euros, Malaysian ringgit, Thai baht and other currencies. During the six months ended December 31, 2007, we had no material derivative financial instruments or other foreign exchange risk hedging devices. With or without hedges, a portion of our costs, revenues and operating margins may be affected by fluctuations in exchange rates, primarily between the U.S. dollar and such foreign currencies, although foreign exchange risks have not been material to our financial position or results of operations to date. We are also affected by fluctuations in exchange rates if there is a mismatch between our foreign currency denominated assets and liabilities. Foreign currency translation adjustments resulted in an increase of $918 and $508 to shareholders’ equity for the six months ended December 31, 2007 and 2006, respectively.

We try to reduce our risk of foreign currency fluctuations by purchasing certain equipment and supplies in U.S. dollars and seeking payment, when possible, in U.S. dollars. However, we may not be successful in our attempts to mitigate our exposure to exchange rate fluctuations. Those fluctuations could have a material adverse effect on the Company’s financial results.

ITEM 4T. CONTROLS AND PROCEDURES

An evaluation was carried out by the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2007, the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at a reasonable level.

Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.

During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control overall financial reporting.

32

TRIO-TECH INTERNATIONAL
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

Item 1A. Risk Factors

     CERTAIN RISKS THAT MAY AFFECT OUR FUTURE RESULTS

In addition to the other information set forth in this report, shareholders should carefully consider the factors discussed in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended June 30, 2007, which factors could materially affect our business, financial condition and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. In addition to the risks so noted, we also note as follows:

     Possible dilutive effect of outstanding options

As of December 31, 2007 there were 113,050 shares of Common Stock reserved for issuance upon exercise of outstanding stock options. The outstanding options are currently exercisable at exercise prices ranging from $2.66 to $9.57 per share. We anticipate that the trading price of our Common Stock at the time of exercise of any such outstanding options will exceed the exercise price under those options. Thus such exercise will have a dilutive effect on our shareholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Malaysian and Singapore regulations prohibit the payment of dividends if the Company does not have sufficient retained earnings and tax credit. In addition, the payment of dividends can only be made after making deductions for income tax pursuant to the regulations. Furthermore, the cash movements from the Company’s 55% owned Malaysian subsidiary to overseas are restricted and must be authorized by the Central Bank of Malaysia. California law also prohibits the payment of dividends if the Company does not have sufficient retained earnings or cannot meet certain asset to liability ratios.

Item 3. Defaults upon Senior Securities

Not applicable

Item 4. Submission of Matters to Vote of Security Holders

An annual meeting of shareholders was held on December 3, 2007. The matters voted on at the annual meeting were the election of directors and approval of the 2007 Employee Stock Option Plan and 2007 director Equity Incentive Plan. Proxies for the annual meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s nominees for Directors as listed in the Proxy Statement. All of such nominees were elected. The number of votes for each of such nominees was as follows:

Director	Votes For		Votes Withheld		No Vote		Total
Jason Adelman		1,962,226		586,958		676,747		3,225,930
Richard Horowitz		2,149,479		399,705		676,747		3,225,930
A. Charles Wilson		2,049,219		483,465		693,247		3,225,930
Yong Siew Wai		1,907,890		624,794		693,247		3,225,930

Both the 2007 Employee Stock Option Plan and 2007 Director Equity Incentive Plan were approved and adopted in the meeting.

For the Company’s 2007 Employee Stock Option Plan, there were 292,616 shares in favor, 106,998 shares against, and 1,140 shares abstaining. The broker non-votes of 1,546,093 shares were not included in the determination of the number of shares present at the meeting and entitled to vote according to the Company’s Proxy Statement.

33

For the Company’s 2007 Director Equity Incentive Plan, there were 1,289,754 shares in favor, 110,090 shares against, and 910 shares abstaining. The broker non-votes of 1,546,093 shares were not included in the determination of the number of shares present at the meeting and entitled to vote according to the Company’s Proxy Statement

Item 5. Other Information

Not applicable

Item 6. Exhibits

10.1	Sales and purchase agreement on office units at Jiang Bei No. 21 Road, Chongqing
10.2	Tenant lease of U.S. office
31.1	Rule 13a-14(a) Certification of Principal Executive Officer of Registrant
31.2	Rule 13a-14(a) Certification of Principal Financial Officer of Registrant
32	Section 1350 Certification.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TRIO-TECH INTERNATIONAL
By:	/s/ Victor H.M. Ting
	VICTOR H.M. TING
	Vice President and Chief Financial Officer (Principal Financial Officer)
	Dated: February 12, 2008

35

EX-10.1

Exhibit 10.1

SALES AND PURCHASE AGREEMENT ON OFFICE UNITS AT
JIANG BEI NO. 21 ROAD, CHONGQING

Party A refers to Chongqing MaoYe Property Ltd “Seller” and Party B refers to Trio-Tech Chongqing Co., Ltd “Buyer.”

Whereas

Clause 1. On January 04, 2008, Party A and Party B entered into a Sale and Purchase Agreement concerning 15 units of a 40 story high office building built on 11479 sqm land area located at Jiang Bei No 21 Road, Chongqing. The land has a lease of 40 years, expiring in the year 2044.

Clause 2. The units’ ownership certificate number is: 103 land parcel 2005 09469

Clause 3. The building has in total 40 stories of office and retail space. The 15 units purchased by party B are located on the 35^th story.

Clause 4. The total purchase price for the 15 units purchased is RMB 5,553,804 (Chinese yuan) (including fees and taxes of Rmb399,889.00).

Clause 5. The investment will be paid via XinYe Industrial Bank. For payment mode, please refer to Appendix 4.

Clause 6. In the event of any unforeseen circumstances Party A has to amend the terms and conditions of this contract, Party A will inform Party B within 30 days before any changes take effect.

Clause 7. Upon the completion of the sale, Party A should advise Party B on the handover procedures. Once both parties are ready for the handover, Party A should sign the handover documents . If the units are used for residential purposes, Party A needs to advise on the Rules and Regulations regarding the use of the purchased property. If Party A is not able to furnish all the proper documents, Party A will be responsible for the delay in the handover proceedings.

Clause 8. Party B’s Responsibilities for Late Payment — Refer to Appendix 4

Clause 9. If Party A delays less than 30 days in handing over the said property, Party A is liable to pay 0.015 % in compensation fees. If the delay extends to 60 days or more, Party B can cancel the contract whereby Party A will have to refund the money in full plus compensation of 1% of the payment which has been made by Party B.

Clause 10. Disputes over the contractual unit size and the actual unit size — Refers to Appendix 4.

Clause 11. Party A guarantees that there are no prior ownership nor outstanding debt issues with regards to the property sold. If there are issues over the ownership, Party A should inform Party B before the sale of the property in writing.

Clause 12. Party A will inform Party B should there be any changes in the design and layout within 10 days after getting the approval from the approving government bodies, failing which Party B will have the right to return the property to Party A. Party B should respond within 15 days whether they still wish to keep the property or return the property to Party A. If Party B wants to return the property, Party A requires Party B to send in a request within 30 days to refund the money to Party A together with the interest at the prevailing bank rates.

Should Party B decide to keep the property, Party B should sign another agreement with Party A in acceptance of the property.

Clause 13. Refers to attachment.

Clause 14. With regards to the basic structure of the unit purchased, Party A is responsible for the common areas and public facilities.

Clause 15. With regards to the registration of the contractual agreement and property rights — refer to Appendix 4.

In the event that Party A is unable to complete the registration of the contractual agreement and property rights within the stipulated timeframe, Party A will compensate Party B according to the loan rate published by the People’s Bank should Party B not wish to return the unit.

Clause 16. Property Maintenance Responsibility

Party B should abide by the rules of the agreement (property maintenance). In the event of damages under unforeseen circumstances, Party A will not be responsible for the damages, but will assist to reinstate or repair, and all such costs will be borne by Party B.

Clause 17. Supplementary Provisions

With regards to the outside walls and signboards, Party B is not allowed to alter the units’ main structure and authorized usage for the units. Party B is authorized to use the common shared areas and facilities around the units but has no rights to make any changes to the common shared areas. As currently there is no management committee, Party B is to entrust the management of the units to existing property management services offered by the present management.

Clause 18. In the case of disputes, both parties will first go on mutual discussion, and in the event of disagreement, the disputes will be settled in the Chinese court of law.

Clause 19. This agreement is effective within the date herein and both parties are to sign the agreement.

Appendix 2 Supplement Agreement

     According to Chinese laws and regulations, both parties mutually hereby agree to sign a Supplement Agreement to Sales and Purchase Agreement on office units at Jiang Bei No. 21 Road, Chongqing “, hereafter termed as the Contract :

Clause 1. With reference to Clause 4 in the Sales & Purchase Agreement, the price payable for the sales of the units does not include expenses related to the contract, including legal expenses, certification fees, government taxes and fees and so on. In the above expenses, unless stipulated by law, all expenses are borne by Party B.

Clause 2. With reference to Clause 6 in the Sales & Purchase Agreement, when Party A receives the money for the purchased units, and once Party B has fulfilled all the standard obligations on the contractual agreements, Party A should notify Party B the date of the handover and other related procedures. Once Party A has issued the notice to Party B, all risks and responsibilities will be transferred to Party B. Party B shall be responsible for the units’ taxes, fees and estate management expenses.

     In the event of unforeseen circumstances and Acts of God, such as strong gale, heavy rains, fire, flood, earthquakes, wars, etc. causing a delay in the handover of the property units from Party A to Party B, Party A should notify Party B in writing and Party A will not be required to compensate for the delay.

Clause 3. With reference to Clause 7, once Party B receives the written notice from Party A, Party B should within 7 days acknowledge receipt and within 15 days advise whether to accept the property.

     Clause 4. With regards to Clause 8, if Party B has not paid for the units according to Clause 5, it must be penalized.

     1. If Party B exceeds 90 days of late payment, and if it has paid for the units more than 50%, Party B is expected to pay Party A 0.3% penalty. If the amount paid falls below 50%, then Party B is expected to compensate 10%.

     2. If Party B exceeds 90 days of late payment, and has not paid the penalty fees as well, Party A holds the right to dissolve the contract. Alternatively, it can continue with the contract with a 20% penalty charge.

     Should Party B elect to dissolve the contract, Party B should pay 20% compensation fees to Party A and this will be deducted from the purchase price. The balance will be returned to Party B within 30 days. If Party B decides to continue with the agreement, Party B should pay the 20% compensation. If Party B receives the late payment notice within 10 working days, Party A will deduct the penalty fees from the amount that has already been paid earlier. Party A will return the rest of the balance payment within 30 days after the contract has been dissolved.

     Clause 5. If Party B is arranging for mortgage payments for the purchases, Party B will be responsible for all expenses and charges related to the banking arrangement.

     If Party B is unable to fulfill the mortgage payments accordingly, Party A has the right to penalize Party B according to Clause 4 in this Appendix.

     Clause 6. With regards to Clause 10, where there is a difference between the actual space in the contract and the space recorded in the title deed, the recorded space in the contract will be taken as the accurate information for the purpose of this Sales & Purchase.

     Should there be any differences between the actual space and space recorded in the contract, and should both parties agreed not to dispute over this, the payment for the unit will be based on the contracted price.

     However, if the registered area space is bigger than the contracted size by more than 3%, Party A promises that Party B need not pay for the additional space.

     Clause 7. With regards to Clause 13, the layout and design of the purchased unit should follow the standards laid out in the contract. Party A has the right to build the units according to the contract. However, if the design built is different from what is stated in the contract, Party B has the right to demand compensation from Party A.

     If Party A is willing to compensate, Party B should not reject the purchased unit and the carry on with the handover procedures.

     Clause 8. With regards to Clause 15, Party A should within 90 days after the handover provide all the necessary information and documents related to the Property Deed. to Party B. However, in the event of the following, Party A has the right not to undertake compensation for breach of contract:

1.	Has not paid in full the installment payment.
2.	Has bad issues with the bank and thus delay in the payments
3.	Party B has not assisted Party A to register the Property Deed with the local government. Issues imposed by the Government, causing the Deed delay in endorsement.

     Clause 9. Party A and Party B hereby covenants as Party B’s rights as owner of the purchased units:

1.	Party B is allowed usage of the carpark within the building.
2.	Party B is allowed to use the outer walls of the building and the roofs.
3.	Party B can put up names for the business in the purchased units.
4.	Party A will allow Party B right to choose the fixtures and furniture of those units which have not been sold.

     Clause 10. Once Party A has transferred the property to Party B, Party B will have the rightful ownership.

     Clause 11. This agreement is binding through the following ways:

1.	Once Party B has signed the agreement.
2.	Once Agreement has been sent over via postal service.
3.	Once the administrative office in charge of the district has signed and stamped the notice.
4.	Once notice issued is posted in the local Chonqqing publications.

     Clause 12. All clauses in the main Sales and Purchase Agreement on office units at Jiang Bei No. 21 Road, Chongqing forms the main part of the agreement.

     Clause 13. Once Party A has transferred the rights of ownership to Party B, all the handover conditions shall follow in accordance with the terms of this contract.

     Clause 14. After signing the contract, Party B should within 3 days pay to Party A related fees and taxes totalling RMB 399,889 (Chinese yuan).

     Clause 15. Party A and Party B hereby agrees to enforce the agreement.

Party A :( signature and seal)
By:	/s/ Jing Zhang
	Jing Zhang, Legal representative of Chongqing MaoYe Property Ltd
Party B: (signature and seal)
By:	/s/ Victor Ting
	Victor Ting, Legal representative of Trio-Tech (Chongqing) Co., Ltd

Date: January 4, 2008

EX-10.2

Exhibit 10.2

AIR COMMERCIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE — GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1. Basic Provisions (“Basic Provisions”).

     1.1 Parties: This Lease (“Lease”), dated for reference purposes only OCTOBER 10 2007,

is made by and between CHARMANT BELTS, INC., A CALIFORNIA CORPORATION

     (“Lessor”) and TRIO-TECH INTERNATIONAL, A CALIFORNIA CORPORATION (“Lessee”),
(collectively the “Parties,” or individually a “Party”).

     1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and
commonly known as 16139 WYANDOTTE STREET, VAN NUYS, located in the County of LOS ANGELES, State of CALIFORNIA, and generally described as (describe briefly the nature of the property and, if applicable, the “Project”, if the property is located within a Project)
A FREE STANDING BUILDING OF APPROXIMATLEY 5,200 SQUARE FEET

(“Premises”). (See also Paragraph 2)

     1.3 Term: THREE years and 0 months (“Original Term” ) commencing JANUARY 1, 2008 (“Commencement Date ”) and ending DECEMBER 31, 2010 (“Expiration Date”). (See also Paragraph 3)

     1.4 Early Possession: DECEMBER 15, 2007 (“Early Possession Date” ). (See also Paragraphs 3.2 and 3.3) LESSOR AGREES TO USE BEST EFFORTS TO GAIN EARLY ACCESS TO THE PREMISES.. LESSEE SHALL BE PERMITTED LIMITED ACCESS UPON EXISTING TENANT VACATING PREMISES.

     1.5 Base Rent: $5,460.00 per month (“Base Rent”), payable on the FIRST day of each month commencing JANUARY 2008.

. (See also Paragraph 4)

þ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.

     1.6 Base Rent and Other Monies Paid Upon Execution:

          (a) Base Rent: $5,460.00 for the period JANUARY 2008. THE BASE YEAR SHALL BE 2008 FOR OPERATING EXPENSES AND REAL ESTATE TAXES.

          (b) Security Deposit: $5,700.00(“Security Deposit”). (See also Paragraph 5)

          (c) Association Fees: $N/A for the period N/A

          (d) Other: $N/A for N/A.

          (e) Total Due Upon Execution of this Lease: $11,160.00          .

     1.7 Agreed Use: SELL, SERVICE AND MANUFACTURE SEMI-CONDUCTOR TEST EQUIPMENT AND ALL RELATED LEGAL ACTIVITIES (See also Paragraph 6)

     1.8 Insuring Party: Lessor is the “Insuring Party”. The annual “Base Premium” is $TO BE PROVIDED (See also Paragraph 8)

     1.9 Real Estate Brokers: (See also Paragraph 15)

          (a) Representation: The following real estate brokers (the “Brokers”) and brokerage relationships exist in this transaction (check applicable boxes):

þ THE CARDINAL CO. — B. COURTNEY represents Lessor exclusively (“Lessor’s Broker”);

þ CRESA PARTNERS — DAN GALLUP represents Lessee exclusively (“Lessee’s Broker”); or

o N/A represents both Lessor and Lessee (“Dual Agency”).

          (b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of or FIVE (5%) % of the total Base Rent) for the brokerage services rendered by the Brokers.

     1.10 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A

(“Guarantor”). (See also Paragraph 37)

     1.11 Attachments. Attached hereto are the following, all of which constitute a part of this Lease:

þ an Addendum consisting of Paragraphs 51 through 57;

o a plot plan depicting the Premises;

o a current set of the Rules and Regulations;

o a Work Letter;

o other (specify):

2. Premises.

     2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease,

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or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Lessee is advised to verify the actual size prior to executing this Lease.

     2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ( “Start Date”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ( “HVAC”), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the surface and structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the “Building”) shall be free of material defects, and that the Unit does not contain hazardous levels of any mold or fungi defined as toxic under applicable state or federal law. If a non-compliance with said warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor’s sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Building. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense, except for the roof, foundations, and bearing walls which are handled as provided in paragraph 7.

     2.3 Compliance. Lessor warrants that to the best of its knowledge the improvements on the Premises comply with the building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances ( “Applicable Requirements” ) that were in effect at the time that each improvement, or portion thereof, was constructed. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (see Paragraph 50), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning, are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor’s expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building ( “Capital Expenditure” ), Lessor and Lessee shall allocate the cost of such work as follows:

          (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

          (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor shall pay for such Capital Expenditure and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date that on which the Base Rent is due, an amount equal to 144th of the portion of such costs reasonably attributable to the Premises. Lessee shall pay Interest on the balance but may prepay its obligation at any time. If, however, such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

          (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not, however, have any right to terminate this Lease.

     2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

     2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

3. Term.

     3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

     3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect the Expiration Date.

     3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 45 60  days after the Commencement Date, Lessee may, at its option, by notice in writing within 20 10 days after the end of such 45 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 20 10 day period, Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 90 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

     3.4 Lessee Compliance. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

4. Rent.

     4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ( “Rent”).

     4.2 Payment. . Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other

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instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future payments to be made by Lessee to be by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent and Operating Expense Increase, and any remaining amount to any other outstanding charges or costs.

     4.3 Association Fees. In addition to the Base Rent, Lessee shall pay to Lessor each month an amount equal to any owner’s association or condominium fees levied or assessed against the Premises. Said monies shall be paid at the same time and in the same manner as the Base Rent.

5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due already due Lessor, for Rents which will be due in the future, and/ or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 45 90 days after the expiration or termination of this Lease, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.

6. Use.

     6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets, animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

     6.2 Hazardous Substances.

          (a) Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

          (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

          (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

          (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

          (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

          (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

          (g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

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     6.3 Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the such Requirements, without regard to whether such Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises.

     6.4 Inspection; Compliance. Lessor and Lessor’s “Lender” (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of a written request therefor.

7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.

     7.1 Lessee’s Obligations.

          (a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises, Utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee is also responsible for keeping the roof and roof drainage clean and free of debris. Lessor shall keep the surface and structural elements of the roof, foundations, and bearing walls in good repair (see paragraph 7.2). Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition (including, e.g. graffiti removal) consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.

          (b) Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) clarifiers, and (vi) basic utility feed to the perimeter of the Building. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost thereof.

          (c) Failure to Perform. If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

          (d) Replacement. Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay Interest on the unamortized balance but may prepay its obligation at any time.

     7.2 Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee, except for the surface and structural elements of the roof, foundations and bearing walls, the repair of which shall be the responsibility of Lessor upon receipt of written notice that such a repair is necessary. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.

     7.3 Utility Installations; Trade Fixtures; Alterations.

          (a) Definitions. The term “Utility Installations” refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

          (b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum equal to one month’s Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

          (c) Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

     7.4 Ownership; Removal; Surrender; and Restoration.

          (a) Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

          (b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of

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this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

          (c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises, or if applicable, the Premises) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

8. Insurance; Indemnity.

     8.1 Payment of Premium Increases.

          (a) Lessee shall pay to Lessor any insurance cost increase (“Insurance Cost Increase”) occurring during the term of this Lease. Insurance Cost Increase is defined as any increase in the actual cost of the insurance required under Paragraph 8.2(b), 8.3(a) and 8.3(b) (“Required Insurance”), over and above the Base Premium as hereinafter defined calculated on an annual basis. Insurance Cost Increase shall include but not be limited to increases resulting from the nature of Lessee’s occupancy, any act or omission of Lessee, requirements of the holder of mortgage or deed of trust covering the Premises, increased valuation of the Premises and/or a premium rate increase. The parties are encouraged to fill in the Base Premium in paragraph 1.8 with a reasonable premium for the Required Insurance based on the Agreed Use of the Premises. If the parties fail to insert a dollar amount in Paragraph 1.8, then the Base Premium shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the commencement of the Original Term for the Agreed Use of the Premises. In no event, however, shall Lessee be responsible for any portion of the increase in the premium cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence.

          (b) Lessee shall pay any such Insurance Cost Increase to Lessor within 30 days after receipt by Lessee of a copy of the premium statement or other reasonable evidence of the amount due. If the insurance policies maintained hereunder cover other property besides the Premises, Lessor shall also deliver to Lessee a statement of the amount of such Insurance Cost Increase attributable only to the Premises showing in reasonable detail the manner in which such amount was computed. Premiums for policy periods commencing prior to, or extending beyond the term of this Lease, shall be prorated to correspond to the term of this Lease.

     8.2 Liability Insurance.

          (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization’s “Additional Insured-Managers or Lessors of Premises” Endorsement. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “ insured contract” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

          (b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

     8.3 Property Insurance — Building, Improvements and Rental Value.

          (a) Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full insurable replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.

          (b) Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“ Rental Value insurance”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee shall be liable for any deductible amount in the event of such loss.

          (c) Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

     8.4 Lessee’s Property; Business Interruption Insurance.

          (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.

          (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

          (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

     8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least A-, VI, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

     8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

     8.7 Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use

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and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

     8.8 Exemption of Lessor and its Agents from Liability. Notwithstanding the negligence or breach of this Lease by Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s business or for any loss of income or profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of paragraph 8.

     8.9 Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existance of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/ costs that Lessor will incur by reason of Lessee’s failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

9. Damage or Destruction.

     9.1 Definitions.

          (a) “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. Notwithstanding the foregoing, Premises Partial Damage shall not include damage to windows, doors, and/or other similar items which Lessee has the responsibility to repair or replace pursuant to the provisions of Paragraph 7.1.

          (b) “Premises Total Destruction” shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

          (c) “Insured Loss” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

          (d) “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

          (e) “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises which requires repair, remediation, or restoration.

     9.2 Partial Damage — Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee’s responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

     9.3 Partial Damage — Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

     9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

     9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

     9.6 Abatement of Rent; Lessee’s Remedies.

          (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

          (b) Remedies. If Lessor is obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the

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beginning of the actual work on the Premises, whichever first occurs.

     9.7 Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

10. Real Property Taxes.

     10.1 Definition. As used herein, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises or the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises, and (ii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

     10.2

          (a) Payment of Taxes. Lessor shall pay the Real Property Taxes applicable to the Premises provided, however, that Lessee shall pay to Lessor the amount, if any, by which Real Property Taxes applicable to the Premises increase over the fiscal tax year during which the Commencement Date Occurs (“Tax Increase”). Payment of any such Tax Increase shall be made by Lessee to Lessor within 30 days after receipt of Lessor’s written statement setting forth the amount due and computation thereof. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee’s share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect. In the event lessee incurs a late charge on any Rent payment, Lessor may estimate the current Real Property Taxes, and require that the Tax Increase be paid in advance to Lessor by Lessee monthly in advance with the payment of the Base Rent. Such monthly payment shall be an amount equal to the amount of the estimated installment of the Tax Increase divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable Tax Increase is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable Tax Increase. If the amount collected by Lessor is insufficient to pay the Tax Increase when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. Advance payments may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any such advance payments may be treated by Lessor as an additional Security Deposit.

          (b) Additional Improvements. Notwithstanding anything to the contrary in this Paragraph 10.2, Lessee shall pay to Lessor upon demand therefor the entirety of any increase in Real Property Taxes assessed by reason of Alterations or Utility Installations placed upon the Premises by Lessee or at Lessee’s request or by reason of any alterations or improvements to the Premises made by Lessor subsequent to the execution of this Lease by the Parties.

     10.3 Joint Assessment. If the Premises are not separately assessed, Lessee’s liability shall be an equitable proportion of the Tax Increase for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available.

     10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

11. Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered or billed to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

12. Assignment and Subletting.

     12.1 Lessor’s Consent Required.

          (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.

          (b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

          (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

          (d) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

          (e) Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

          (f) Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.

          (g) Notwithstanding the foregoing, allowing a de minimis portion of the Premises, ie. 20 square feet or less, to be used by a third party vendor in connection with the installation of a vending machine or payphone shall not constitute a subletting.

     12.2 Terms and Conditions Applicable to Assignment and Subletting.

          (a) Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

          (b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

          (c) Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

          (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

          (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

          (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

          (g) Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

     12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

          (a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may

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collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

          (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

          (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

          (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

          (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

13. Default; Breach; Remedies.

     13.1 Default; Breach. A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

          (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

          (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee.

          (c) The commission of waste, act or acts constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period of 3 business days following written notice to Lessee.

          (d) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42, (viii) material safety data sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

          (e) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

          (f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. §101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

          (g) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

          (h) If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

     13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

          (a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

          (b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

          (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

     13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

     13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time

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late charge equal to 10% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

     13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

     13.6 Breach by Lessor.

          (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

          (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation” ), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the Building, or more than 25% of that portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation paid by the condemnor for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

15. Brokerage Fees.

     15.1 Additional Commission. In addition to the payments owed pursuant to Paragraph 1.9 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee or anyone affiliated with Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of the Brokers in effect at the time of the execution of this Lease.

     15.2 Assumption of Obligations. Any buyer or transferee of Lessor’s interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.9, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee’s Broker when due, Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed.

     15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

16. Estoppel Certificates.

          (a) Each Party (as “Responding Party”) shall within 10 days after written notice from the other Party (the “Requesting Party” ) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “Estoppel Certificate” form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

          (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

          (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. Definition of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19. Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.

23. Notices.

     23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a

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Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

     23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

24. Waivers.

          (a) No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent.

          (b) The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

          (c) THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS LEASE.

25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

          (a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

               (i) Lessor’s Agent. A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor : a. Diligent exercise of reasonable skills and care in performance of the agent’s duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

               (ii) Lessee’s Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor : a. Diligent exercise of reasonable skills and care in performance of the agent’s duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

               (iii) Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. b. Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

          (b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys’ fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

          (c) Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

30. Subordination; Attornment; Non-Disturbance.

     30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

     30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Devise to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor which was not paid or credited to such new owner.

     30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement” ) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall, if requested by Lessee, use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the

                                        
                                        
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execution and delivery of a Non-Disturbance Agreement.

     30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

32. Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee.

33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. Signs. Lessor may place on the Premises ordinary “For Sale” signs at any time and ordinary “For Lease” signs during the last 6 months of the term hereof. Except for ordinary “for sublease” signs, Lessee shall not place any sign upon the Premises without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

37. Guarantor.

     37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the AIR Commercial Real Estate Association.

     37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. Options. If Lessee is granted an Option, as defined below, then the following provisions shall apply:

     39.1 Definition. “Option” shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

     39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

     39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

39.4 Effect of Default on Options.

          (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

          (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

          (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

40. Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by and conform to all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessee also agrees to pay its fair share of common expenses incurred in connection with such rules and regulations.

41. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid “under protest” within 6 months shall be deemed to have waived its right to protest such payment.

44. Authority; Multiple Parties; Execution.

          (a) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

          (b) If this Lease is executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such

                                        
                                        
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document.

          (c) This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

45. Conflict. Any conflict between the printed provisions of this Lease and typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

46. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

48. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of disputes between the Parties and/or Brokers arising out of this Lease o is o is not attached to this Lease.

50. Americans with Disabilities Act. Since compliance with the Americans with Disabilities Act (ADA) is dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in ADA compliance, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

Executed at:		LOS ANGELES, CALIFORNIA	Executed at:		LOS ANGELES, CALIFORNIA
On:	OCTOBER, 2007		On:	OCTOBER, 2007
By LESSOR:			By LESSEE:
CHARMANT BELTS, INC.,			TRIO-TECH INTERNATIONAL, INC.,
A CALIFORNIA CORPORATION			A CALIFORNIA CORPORATION
By:			By:
Name Printed:		LLOYD ROSENWEIN	Name Printed:		SPRING LIU
Title:	PRESIDENT		Title:	CORPORATE SECRETARY
By:			By:
Name Printed:			Name Printed:		JON EASTERSON
Title:			Title:	OPERATIONS MANAGER
Address:		16200 VENTURA BLVD., SUITE 203-C	Address:
ENCINO, CA 91436
Telephone:		(818) 905-6241	Telephone:		(818)787-7000
Facsimile:		(818) 905-6891	Facsimile:		(818) 787-9130
Federal ID No.			Federal ID No.
BROKER:			BROKER:
THE CARDINAL COMPANY			CRESA PARNTERS
Att:	BRIAN COURTNEY		Att:	DAN GALLUP
Title:	INDUSTRIAL SPECIALIST		Title:
Address:		15260 VENTURA BLVD., SUITE 1120	Address:		11726 SAN VICENTE BLVD., SUITE 500
SHERMAN OAKS, CA 91403			LOS ANGELES, CA 90049
Telephone:		(818)599-7041	Telephone:		(310)207-1700
Facsimile:		(818)788-5973	Facsimile:		(310)207-0930
Federal ID No.			Federal ID No.

NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 800 W 6th Street, Suite 800, Los Angeles, CA 90017.

Telephone No. (213) 687-8777. Fax No.: (213) 687-8616.

^© Copyright 2001 — By AIR Commercial Real Estate Association. All rights reserved.
No part of these works may be reproduced in any form without permission in writing.

                                        
                                        
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ADDENDUM TO
STANDARD INDUSTRIAL/COMMERCIAL
SINGLE — TENANT LEASE — GROSS
DATED OCTOBER 10, 2007, 2007
BY AND BETWEEN,
CHARMANT BELTS, INC., A CALIFORNIA CORPORATION, AS LESSOR
AND
TRIO- TECH INTERNATIONAL, INC.,
A CALIFORNIA CORPORATION, AS LESSEE
FOR PREMISES LOCATED AT
16139 WYANDOTTE STREET
VAN NUYS, CA 91406

51. LESSOR IMPROVEMENTS: Lessor at Lessor’s sole cost and expense shall perform the following improvements:

1.	Paint office area and power/IT room in white or off-white color
2.	Remove linoleum tile in warehouse area but leave tile in the power/IT room
3.	Remove trees at entrance and weeds and debris from parking area
4.	Repair pot hole in parking lot
5.	Replace damaged and stained ceiling tiles within the premises

52. PHYSICAL INSPECTION: The Cardinal Company is not aware of any physical defects or deficiencies in the Premises, which have not already been disclosed to Lessee. Lessee should conduct an independent physical inspection of the Premises, at lessee’s sole cost and expense prior to Lease execution. The Cardinal Company is unable to confirm, guarantee or substantiate amperage or voltage of power service to or within, the Premises as stated on any marketing brochure or power panel, and Lessee is advised to conduct any, and all reasonable inspections of the electrical services and other building operating systems and components prior to execution of the Lease. If Lessee shall fail to conduct such inspections and/or notify Lessor and/or Broker of any defects or deficiencies prior to Lease execution, then Lessee shall hold Broker harmless for any defects, deficiencies, damage or costs to repair or replace such items. Lessee shall indemnify Broker from any liability in connection with lessee’s failure to physical inspect the Premises and/or notify Lessor and Broker and shall pay Lessor’s and Broker’s reasonable costs, including attorney fees from any resultant court action.

53. ZONING AND USE: The Cardinal Company and its representative agents make no representation or guarantee that the property is zoned correctly for Lessee’s use or that the certificate of occupancy permit for the property is appropriate for Lessee’s use. LESSEE SHOULD VERIFY WITH THE APPROPRIATE CITY ZONING AND OCCUPANYC PERMIT DIVISIONS THAT LESSEE’S USE IS ALLOWABLE FOR THE PROPERTY PRIOR TO LEASE EXECTUION. If Lessee shall fail to conduct such verification, then Lessee shall hold Broker harmless for any deficiencies, damage or costs associated with complying with City requirements or the potential requirement to cease unallowable operations.

54. PROPOSITION 13 PROTECTION. Lessee shall be exempted from any increases in Real Estate Taxes which the Building may incur as a result of a sale, refinance, transfer of ownership or any other “triggering” event during the Lease term or any extensions thereof.

55. REASONABILITY. Any consent requested from Lessor, throughout the Lease term or any extensions thereof, shall not be unreasonably withheld or delayed.

OPTION(S) TO EXTEND
STANDARD LEASE ADDENDUM

Dated OCTOBER 10, 2007  

By and Between (Lessor)	CHARMANT BELTS, INC., A CALIFORNIA CORPORATION
By and Between (Lessee)	TRIO TECH INTERNATIONAL, A CALIFORNIA
	CORPORATION

Address of Premises:	16139 WYANDOTTE STREET, VAN NUYS
	CALIFORNIA, 91436

Paragraph 57          

A. OPTION(S) TO EXTEND:

Lessor hereby grants to Lessee the option to extend the term of this Lease for ONE                additional 36              month period(s) commencing when the prior term expires upon each and all of the following terms and conditions:

          (i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least    6    but not more than    9    months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively.

          (ii) The provisions of paragraph 39, including those relating to Lessee’s Default set forth in paragraph 39.4 of this Lease, are conditions of this Option.

          (iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply.

          (iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting.

          (v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately)

þ   I. Cost of Living Adjustment(s)(COLA)

     a. On (Fill in COLA Dates): JANUARY 1, 2011

the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): þCPI W (Urban Wage Earners and Clerical Workers) or oCPI U (All Urban Consumers), for (Fill in Urban Area):

LOS ANGELES

All Items (1982-1984 = 100), herein referred to as “CPI”.

     b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): o the first month of the term of this Lease as set forth in paragraph 1.3 (“Base Month”) or þ(Fill in Other “Base Month”):

JULY 2009

The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment.

     c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau oragency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

o   II. Market Rental Value Adjustment(s) (MRV)

     a. On (Fill in MRV Adjustment Date(s)) N/A

the Base Rent shall be adjusted to the “Market Rental Value” of the property as follows:

          1) Four months prior to each MarketRental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then:

               (a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next30 days. Any associated costs will be split equally between the Parties, or

               (b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in

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writing, to arbitration in accordance with the following provisions:

               (i) Within 15 days thereafter, Lessor and Lessee shall each select an o appraiser or o broker (“Consultant” - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

               (ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor’s or Lessee’s submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

               (iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

               (iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV.

          2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment.

     b. Upon the establishment of each New Market Rental Value:

          1) the new MRV will become the new “Base Rent” for the purpose of calculating any further Adjustments, and

          2) the first month of each Market Rental Value term shall become the new “Base Month” for the purpose of calculating any further Adjustments.

o III. Fixed Rental Adjustment(s) (FRA)

The Base Rent shall be increased to the following amounts on the dates set forth below:

On (Fill in FRA Adjustment Date(s)):	The New Base Rent shall be:
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A
N/A	N/A

B. NOTICE:

          Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease.

C. BROKER’S FEE:

     The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease.

NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 800 W 6th Street, Suite 800, Los Angeles, CA 90017. Telephone No. (213) 687-8777. Fax No.: (213) 687-8616.

PAGE 2 OF 2

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RENT ADJUSTMENT(S)

STANDARD LEASE ADDENDUM

Dated OCTOBER 10, 2007  

By and Between (Lessor)	CHARMANT BELTS, INC., A CALIFORNIA CORPORATION
(Lessee)	TRIO TECH INTERNATIONAL, A CALIFORNIA
	CORPORATION

Address of Premises:	16139 WYANDOTTE STREET, VAN NUYS
	CALIFORNIA, 91436

Paragraph      56     

A.     RENT ADJUSTMENTS:

        The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately)

o  I. Cost ofLiving Adjustment(s) (COLA)

        a. On (Fill in COLA Dates): N/A

the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): o CPI W (Urban Wage Earners and Clerical Workers) or oCPI U (All Urban Consumers), for (Fill in Urban Area):

N/A

, All Items

(1982-1984 = 100), herein referred to as “CPI”.

         b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): the o first month of the term of this Lease as set forth in paragraph 1.3 (“Base Month”) or o(Fill in Other “Base Month”): N/A             . The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment.

         c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

oII. Market Rental Value Adjustment(s) (MRV)

          a. On (Fill in MRV Adjustment Date(s): N/A

the Base Rent shall be adjusted to the “Market Rental Value” of the property as follows:

                 1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached within thirty days, then:

                         (a)   Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or

                         (b)   Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions:

                                      (i) Within 15 days thereafter, Lessor and Lessee shall each select an o appraiser or obroker (“Consultant” -check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

                                    (ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor’s or Lessee’s submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

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                                    (iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

                                    (iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, i.e., the one that is NOT the closest to the actual MRV.

                 2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment.

        b. Upon the establishment of each New Market Rental Value:

                 1) the new MRV will become the new “Base Rent” for the purpose of calculating any further Adjustments, and –

                 2) the first month of each Market Rental Value term shall become the new ‘Base Month’ for the purpose of calculating any further Adjustments.

þIII. Fixed Rental Adjustment(s) (FRA)

The Base Rent shall be increased to the following amounts on the dates set forth below:

On (Fill in FRA Adjustment Date(s)):	The New Base Rent shall be:
JULY 1, 2009	$5,700.00

B.     NOTICE:

        Unless specified otherwise herein, notice of any such adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease.

C.     BROKER’S FEE:

        The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease.

NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 800 W 6th Street, Suite 800, Los Angeles, CA 90017. Telephone No. (213) 687-8777. Fax No.: (213) 687-8616.

	PAGE 2 OF 2
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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, S. W. Yong, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Trio-Tech International, a California corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 12, 2008

/s/ S. W. YONG  

S. W. Yong, Chief Executive Officer 

and President (Principal Executive Officer) 

EX-31.2

Exhibit 31.2

I, Victor H.M. Ting, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Trio-Tech International, a California corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 12, 2008

/s/ VICTOR H.M. TING  

Victor H.M. Ting, Chief Financial Officer 

and Vice President (Principal Financial Officer) 

EX-32

Exhibit 32

SECTION 1350 CERTIFICATION

Each of the undersigned, S.W. Yong, President and Chief Executive Officer of Trio-Tech International, a California corporation (the “Company”), and Victor H.M. Ting, Vice President and Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge (1) the quarterly report on Form 10-Q of the Company for the three months and six months ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ S. W. YONG
Name:	S. W. Yong
Title:	President and Chief Executive Officer
Dated:	February 12, 2008
/s/ VICTOR H. M. TING
Name:	Victor H.M. Ting
Title:	Vice President and Chief Financial Officer
Dated:	February 12, 2008

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.