UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Sx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, ~~2008~~2009

£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: 000-23576

STRASBAUGH

(Exact name of registrant as specified in its charter)

California	77-0057484
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

825 Buckley Road San Luis Obispo, CA	93401
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (805) 541-6424

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o £ No Sx

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o £ No Sx

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 Sx No £o

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~has ~~filers~~submitted inelectronically ~~response~~and toposted ~~Item 405 of~~on ~~Regulation~~its ~~S-K~~corporate isWeb ~~not~~site, ~~contained~~if ~~herein~~any, ~~and~~every ~~will~~Interactive ~~not~~Data beFile ~~contained,~~required to ~~the best~~be ofsubmitted ~~registrant’s~~and ~~knowledge,~~posted inpursuant ~~definitive~~to ~~proxy~~Rule or405 ~~information~~of ~~statements incorporated~~Regulation byS-T ~~reference~~during inthe ~~Part~~preceding 12 ~~III~~months of(or ~~this~~for ~~Form~~such ~~10-K~~shorter orperiod ~~any~~that ~~amendment~~the registrant was required to ~~this~~submit ~~Form~~and ~~10-K~~post such files). £ Yes o No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

The aggregate market value of the voting common equity held by nonaffiliates of the registrant, computed by reference to the closing sale price of such stock, was approximately $1,644,878 as of June 30, ~~2008~~2009, the last business day of the registrant’s most recently completed second fiscal quarter. The registrant has no non-voting common equity.

The registrant had 14,~~201~~705,587 shares of common stock, no par value, outstanding as as of ~~February 28~~March 15, ~~2009~~2010.

DOCUMENTS INCORPORATED BY REFERENCE: None.

		Page
PART I
Item 1.	Business.	1
Item 1.A.	Risk Factors.	16
Item 1B.	Unresolved Staff Comments.	25
Item 2.	Properties.	25
Item 3.	Legal Proceedings.	25
Item 4.	Submission of Matters to a Vote of Security Holders.	26
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	26
Item 6.	Selected Financial Data.	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	40
Item 8.	Financial Statements and Supplementary Data.	40
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	40
Item 9A.	Controls and Procedures.	41
Item 9A(T).	Controls and Procedures.	41
Item 9B.	Other Information.	42
PART III
Item 10.	Directors, Executive Officers and Corporate Governance.	43
Item 11.	Executive Compensation.	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	55
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	60
Item 14.	Principal Accounting Fees and Services.	63
PART IV
Item 15.	Exhibits and Financial Statement Schedules.	64
Index to Consolidated Financial Statements and Supplemental Information		F-1
Index To Exhibits
Signatures
Exhibits Filed with this Report

TABLE OF CONTENTS

		Page

	PART I

Item 1.	Business	1

Item 1A.	Risk Factors	13

Item 1B.	Unresolved Staff Comments	23

Item 2.	Properties	23

Item 3.	Legal Proceedings	24

Item 4.	(Removed and Reserved)	24

	PART II


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24

Item 6.	Selected Financial Data	25

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 8.	Financial Statements and Supplementary Data	35

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	35

Item 9A.	Controls and Procedures	36

Item 9A(T).	Controls and Procedures	36

Item 9B.	Other Information	37

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	38

Item 11.	Executive Compensation	45

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	52

Item 13.	Certain Relationships and Related Transactions, and Director Independence	56

Item 14.	Principal Accounting Fees and Services	58

	PART IV

Item 15.	Exhibits, Financial Statement Schedules	59

Index to Consolidated Financial Statements and Supplemental Information		F-1

Index To Exhibits

Signatures

Exhibits Filed with this Report

PART I

CAUTIONARY STATEMENT

All statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements or characterizations of historical fact, are “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements concerning projected net sales, costs and expenses and gross margins; our accounting estimates, assumptions and judgments; the demand for our products; the competitive nature of and anticipated growth in our industry; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by such words as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under “Risk Factors” in Item 1A of this ~~Report~~report. These forward-looking statements speak only as of the date of this ~~Report~~report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

Item 1. Business.

Company Overview

We develop, manufacture, market and sell an extensive line of precision surfacing products, including chemical-mechanical planarizing, or CMP, polishing, grinding and precision optics ~~tools and~~ systems, to customers in the semiconductor and semiconductor equipment, silicon wafer ~~fabrication~~and silicon wafer equipment, data storage, ~~LED~~ micro-electromechanical system, or MEMS, light emitting diode, or LED, and precision optics markets worldwide.

Many of our products are used by our customers in the fabrication of integrated circuits, commonly known as chips or semiconductors, and in the fabrication of silicon wafers. Most semiconductors are built on a silicon wafer base and include a variety of circuit components that are connected by multiple layers of wiring, or interconnects. To build a semiconductor, the components of the semiconductor are first created on the surface of a silicon wafer by performing a series of processes to deposit and selectively remove successive film layers. After a series of steps designed to build the wiring portion of the semiconductor through deposition and removal, a ~~chemical mechanical planarization, or~~ CMP, step polishes the silicon wafer to achieve a flat surface. Additional deposition, etch and CMP steps are then performed to build up the layers of wiring needed to complete the interconnection of the circuit elements to form ~~the~~ the semiconductor. Through the use of CMP polishing products, semiconductor manufacturers can increase the number of layers thereby reducing the overall size of the semiconductor.

Over time, semiconductor manufacturers have migrated toward utilizing increasingly larger wafers in chip production. While the predominate wafer size used for volume production today is 200mm, a substantial number of advanced fabs now use 300mm wafers, and the current trend continues toward the use of 300mm wafers.

Our business and technologies have grown with this changing market. Our equipment is configurable, and incorporates proprietary technology that we believe results in higher yields for our manufacturing customers. Our newest product, ~~nTrepid™~~introduced in July 2009, STB P300™ is a next generation 300mm wafer polisher and CMP system. ~~Other~~Our other new ~~products~~ ~~include the nOvation®~~product, ~~a 300mm hybrid grinding~~the ~~tool;~~ nVision II™, is an endpoint detection system for CMP wafer processes;. Our other legacy products include the nOvation®, a 300mm hybrid grinding tool, and CMP Enhancement™, an upgrade for older CMP systems.

We utilize our extensive patent portfolio and core technology platform in designing and manufacturing each of our products for multiple market applications, thereby expanding the market available for each product. Our customers include some of the most well-established market participants such as LG Electronics, Cree, Inc., and Western Digital Corporation. We have ~~developed~~ developed our client base through a direct sales force in the United States, distributors ~~and~~in ~~Japan,~~Europe and an international network of sales representatives ~~and distributors~~ in ~~Europe,~~ Japan, China, Taiwan, South Korea, Israel and the Philippines.

Company History

We are a California corporation that was incorporated on December 28, 1984 as AHJP Corporation. On January 8, 1985 we changed our name to Celeritek, Inc. and on July 22, 2005, in connection with the approval of a plan of dissolution described below, we changed our name to CTK Windup Corporation. On May 24, 2007, inwe ~~connection~~completed a transaction with the shareholders of a California corporation now known as R. H. Strasbaugh pursuant to which we issued an aggregate of 13,770,366 shares of our common stock to the shareholders of R. H. Strasbaugh and, in exchange, we acquired all of the issued and outstanding shares of capital stock of R. H. Strasbaugh. We refer to this transaction as the “Share Exchange Transaction” ~~described~~in ~~below~~this report. On May 24, 2007, in connection with the Share Exchange Transaction, we changed our name to Strasbaugh. Our wholly-owned operating subsidiary, R. H. Strasbaugh, ~~is a California corporation that~~ commenced operations in 1948 as a sole proprietorship prior to its incorporation in 1964. Our principal executive offices are located in San Luis Obispo, California and our main telephone number is (805) 541-6424.

On March 10, 2005, our prior board of directors approved a ~~Plan~~plan of dissolution, or Plan of Dissolution, of our company and approved the solicitation of shareholder approval of the Plan. Our shareholders approved the Plan of Dissolution on June 3, 2005. As a result of approval of the Plan of Dissolution and commencement of the wind up of our company, (i) effective as of June 3, 2005 we completed the sale of substantially all of our assets to Mimix Broadband, Inc., (ii) we voluntarily delisted our common stock from NASDAQ effective July 11, 2005, (iii) our common stock began trading on the Pink Sheets® on ~~July~~ July 11, 2005, and (iv) our transfer agent closed the transfer books for our ~~common~~ common stock on July 11, 2005. Because of our inability to ~~liquidate~~ liquidate our investment in NewGen Telcom Co., Ltd., our prior board of directors decided on August 25, 2005 to postpone our Plan of Dissolution. See “Risk Factors—Risks Relating to Ownership of Our Common Stock.”

During the fourth quarter of 2006, representatives of R. H. Strasbaugh proposed the Share Exchange Transaction to our prior board of directors and on December 5, 2006 the parties entered into a letter of intent regarding the Share Exchange Transaction. On January 17, 2007, our prior board of directors preliminarily authorized the Share Exchange Transaction and authorized our officers to solicit afrom ~~shareholder~~our shareholders their vote in favor of the Share ~~Exchange~~ Exchange Transaction. WeIn doing so, we prepared and distributed to all shareholders a proxy statement seeking proxies in connection with the special shareholders ~~shareholder~~ meeting that was to be held on March 14, 2007. On ~~Our~~that date, our shareholders approved the Share Exchange Transaction, thereby revoking our Plan of Dissolution. Thereafter, our prior board of ~~directors~~ directors approved and ratified entering into and closing the Share Exchange Transaction. After receiving both board and shareholder approval ofto enter into the Share Exchange Transaction, we formally revoked the Plan of Dissolution pursuant to Section 1904(a) of the California Corporations Code and consummated the Share Exchange Transaction. See “Risk Factors—Risks Relating to Ownership of our Common Stock.”

On May 24, 2007, we completed the Share Exchange Transaction. Upon completion of the Share Exchange Transaction, we acquired all of the issued and outstanding shares of capital stock of R. H. Strasbaugh. The Share Exchange Transaction has been accounted for as a recapitalization of R. H. Strasbaugh with R. H. Strasbaugh being the acquirer for accounting purposes. Immediately prior to the consummation of the Share Exchange Transaction, we amended and restated our articles of incorporation to effect a 1-for-31 reverse split of our common stock, to change our name from CTK Windup Corporation to Strasbaugh, to increase our authorized common stock from 50,000,000 shares to 100,000,000 shares, to increase our authorized preferred stock from 2,000,000 shares to 15,000,000 shares (of which 5,909,089 shares were designated Series A Cumulative Redeemable Convertible Preferred Stock) and to eliminate our Series A Participating Preferred Stock.

~~Prior~~On May 24, to2007, we completed the Share Exchange Transaction. Upon completion of the ~~sale~~Share Exchange Transaction, we acquired all of ~~our~~the ~~assets~~issued and outstanding shares of capital stock of R. H. Strasbaugh. The Share Exchange Transaction has been accounted for as a recapitalization of R. H. Strasbaugh with R. H. Strasbaugh being the acquiror for accounting purposes. Immediately prior to ~~Mimix~~the consummation of the Share Exchange Transaction, we ~~designed~~amended and ~~manufactured~~restated ~~GaAs~~our ~~semiconductor~~articles of ~~components~~incorporation ~~and~~to ~~GaAs~~effect a 1-~~based~~for-31 ~~subsystems~~reverse ~~used~~split inof ~~the~~our ~~transmission~~common stock, to change our name from CTK Windup Corporation to Strasbaugh, to increase our authorized common stock from 50,000,000 shares to 100,000,000 shares, to increase our authorized preferred stock from 2,000,000 shares to 15,000,000 shares (of ~~voice~~which 5,909,089 ~~video~~shares were designated Series A Cumulative Redeemable Convertible ~~and~~Preferred ~~data~~Stock, ~~over~~or ~~wireless~~Series A ~~communication~~Preferred ~~networks~~Stock) and ~~systems.~~to ~~Our~~eliminate ~~current~~our Series A ~~business~~Participating Preferred Stock. On May 17, 2007, isprior ~~comprised~~to ~~solely~~the filing of ~~the~~our ~~business~~amended and restated articles of incorporation, our subsidiary amended its articles of incorporation to change its name from Strasbaugh to R. H. Strasbaugh.

On May 24, 2007, immediately after the closing of the Share Exchange Transaction, we issued an aggregate of 5,909,089 shares of our Series A Preferred Stock at a purchase price of $2.20 per share and five-year investor warrants, or Investor Warrants, to purchase an aggregate of 886,363 shares of common stock at an exercise price of $2.42 per share. We refer to this offering of securities in this report as the “Series A Preferred Stock Financing.” We also issued five-year placement warrants, or Placement Warrants, to purchase 385,434 shares of common stock at an exercise price of $2.42 per share in connection with the offering to B. Riley and Co. LLC and its designees.

Prior to the sale of our assets to Mimix, we designed and manufactured GaAs semiconductor components and GaAs-based subsystems used in the transmission of voice, video and data over wireless communication networks and systems. Our current business is comprised solely of the business of our wholly-owned subsidiary, R. H. Strasbaugh.

Semiconductor and Semiconductor Equipment Industries

Over the past twenty years, the semiconductor industry has grown rapidly as a result of increasing demand for personal computers, the expansion of the Internet and the telecommunications industry, and the emergence of new applications in consumer electronics. Nonetheless, the semiconductor industry has historically been cyclical, with periods of rapid expansion followed by periods of over-capacity.

Several technological trends currently characterize the semiconductor industry, including the increasing density of the integrated circuit, transition from aluminum wiring to copper wiring as the primary conductive material in semiconductor devices, transition from traditional insulating films made of silicon oxide to insulators with a low dielectric constant, or “low-k,” and the move to larger 300mm wafer sizes due to the potential manufacturing cost advantages of these larger wafers.

The semiconductor equipment industry is highly competitive and characterized by rapid technological advancements. The pace of technological change in the semiconductor fabrication equipment industry is rapid, with customers continually moving to smaller critical dimensions and larger wafer sizes and adopting new materials for fabricating semiconductors. Existing technology can sometimes be adapted to the new requirements, but some of these requirements may create the need for an entirely different technical approach. The rapid pace of technological change has created opportunities for existing companies that can gain market acceptance of their next generation products.

AAn ~~company’s~~example ~~ability~~of tothis ~~compete~~is inthe ~~this~~emergence ~~industry~~of ~~primarily~~“Through ~~depends~~Silicon onVia” ~~its~~(“TSV”) ~~ability~~or 3D tointegration ~~market~~as ~~its~~a ~~technology,~~mainstream ~~continually~~manufacturing ~~improve~~method ~~its~~for ~~products,~~creating ~~processes~~chips ~~and~~with a ~~services,~~higher ~~and~~density ~~maintain~~of ~~its~~semiconductor ~~ability~~devices toon ~~develop~~the ~~new~~chips ~~products~~providing ~~that~~better performance, ~~meet~~at ~~constantly evolving~~a ~~customer~~lower ~~requirements~~cost. ~~The~~TSV ~~significant~~presents ~~indicators~~several ofmanufacturing ~~potential~~challenges ~~success~~requiring innew ~~this~~approaches ~~industry~~to ~~include~~polishing aand ~~product’s technical capability~~grinding, ~~productivity~~ and ~~cost-effectiveness,~~therefore ~~and~~an opportunity ~~the~~for ~~level~~equipment ofsuppliers ~~technical~~to ~~service~~develop ~~and~~solutions. The ~~support~~equipment supplier that ~~accompanies~~is ~~the~~first ~~product~~to market with a solution can gain significant market share.

An equipment supplier’s ability to compete in this industry is primarily dependent upon the supplier’s ability to market its technology, continually improve its products, processes and services, and maintain its ability to develop new products that meet constantly evolving customer requirements. The significant indicators of potential success in this industry include a product’s technical capability, productivity and cost-effectiveness, and the level of technical service and support that accompanies the product.

Semiconductor CMP

~~CMP~~A ~~systems~~semiconductor ~~are~~chip ~~designed~~is tobuilt ~~carry~~on ~~out~~a ansilicon ~~integral~~wafer ~~step~~by in the ~~semiconductor fabrication process. After~~ deposition ~~steps~~and ~~are~~etch ~~performed to deposit~~of ~~various~~successive layers of ~~film~~materials ~~onto~~to acreate ~~silicon~~the ~~wafer~~transistors, ~~and~~diodes, ~~etching~~capacitors ~~steps are utilized to~~and ~~selectively~~interconnect ~~remove~~circuitry ~~certain~~that ~~materials,~~make ~~CMP~~up ~~steps~~a ~~are~~micro-electronic ~~carried out~~circuit. CMP ~~tools~~is ~~polish~~a ~~the~~chemical-mechanical ~~surface~~polishing ofprocess ~~the~~used ~~silicon~~to ~~wafer~~make toeach ~~create~~successive alayer ~~planar~~of materials flat (ori.e., ~~flat~~planar) ~~surface~~ ~~before~~and ~~moving~~reduce onit to ~~subsequent~~the ~~manufacturing~~desired ~~steps. This~~thickness before the ~~process~~deposition of ~~creating~~the anext ~~flat~~layer ~~surface~~of material. This process is critical, asto ensure itaccurate ~~allows~~and ~~subsequent~~consistent ~~steps~~dimensions toin the circuitry being ~~occur~~created. It ~~with~~greatly ~~greater~~aids ~~accuracy~~performance and ~~enables~~reliability ~~film~~and ~~layers~~is a key enabling technology to ~~build~~allow upthe ~~with~~production ~~minimal height~~of ~~variation~~ever smaller chips.

CMP has evolved into the technology of choice for planarizing among semiconductor manufacturers since it was first developed in the mid-1980s. It is now a key enabling process for the manufacturing of semiconductor devices. We believe that demand for CMP equipment is driven by the overall growth in chip consumption, the transition to 300mm wafers, and the increasing number of CMP processing steps needed to produce ever smaller chip geometries.

We believe that another growth driver for the CMP market is the emergence of the People’s Republic of China as a major manufacturer and consumer of semiconductors. We believe that the People’s Republic of China currently consumes approximately 20% of the world’s semiconductor production and that this consumption will rise to more than 50% by 2015.

Semiconductor Niche Markets

Within the semiconductor industry, we focus on serving three small, ~~but~~although we believe growing, niche markets and applications: research and development, failure analysis and backgrinding.

Research and Development

The research and development market consists of customers who need CMP and grinding tools for the development of new semiconductor products. This market includes universities, research institutes, device manufacturers and early development technology companies that are working on the next generation products and technologies.

Failure Analysis

Failure analysis is a process that is integral to the success and profitability of any semiconductor manufacturing company. The number of “good” computer chips produced from a single wafer can be anywhere from 50% to over 90% of the total number of chips produced. Failure analysis equipment helps to determine what causes this yield loss, and is utilized to quickly find a solution. The ~~two~~ main ~~processes~~process in failure analysis for which we ~~provide~~ provide products ~~are~~ “wafer de-construction~~” and “wafer thinning~~.” The de-construction process utilizes a polishing process to remove the various conducting and insulating layers on the front side of a wafer to expose underlying faults. The second process, which we call “whole wafer super-thinning,” utilizes both polishing and grinding processes to thin wafers from the base side. The super-thinned and nearly transparent wafer is then mounted to a glass substrate for support. Selected circuits can be powered up from the front side of the wafer and their thermal (infrared) profile inspected by viewing through the back side of the wafer.

Backgrinding

Backgrinding is the ~~conventional~~accepted method for reducing wafers from their original thickness at ~~the~~ the end of chip fabrication to a ~~diminished~~ reduced thickness suitable for final packaging ofready ~~die~~for ~~after~~assembly ~~dicing. Packaging~~into isan ~~the~~electronic ~~final~~product ~~step~~such ofas ~~chip fabrication, during which the semiconductor devise is fully assembled. Dicing is~~ a ~~process~~television ~~of reducing a wafer containing~~or ~~multiple~~cell ~~identical integrated circuits into dice, with each die containing only one of those circuits~~phone. ~~These dice are the component parts of semiconductors.~~ Backgrinding is important not only because it ~~ultimately~~ ultimately allows for thinner chips, but also because it improves a chip’s ability to dissipate heat by shortening the heat transfer path, thereby allowing ~~the~~ the semiconductor devices to operate at high power levels. We believe that the needs of chip fabricators for backgrinding equipment will increase in the near future due to the move within the industry toward thinner chips, as well as the fact that backgrinding is now finding a new application in the manufacturing of 3-D stacked chips using TSV. These 3-D stacked ~~chips~~ chips increase the density and performance of semiconductor devices by extending ~~the~~ the area available for chip structure to more than one level of silicon. These new chips will require the development of advanced wafer grinding and polishing tools, which we are currently working to develop.

Silicon Wafer and Silicon Wafer Equipment Industry

Silicon wafers are the prime building blocks for almost all semiconductor integrated circuits. The quality of an integrated circuit is highly dependent upon the quality of the silicon prime wafer it is built on. All silicon wafers must meet stringent specifications, including purity grade, high dimensional accuracy and good surface integrity. Manufacturing wafers to conform to these high standards requires sophisticated equipment that is constantly evolving and being replaced to meet the demands of the next generation of wafers.

A typical and simplified process for manufacturing a semiconductor chip wafer involves generating a cylinder-shaped silicon ingot that is sliced into rough silicon wafers. The wafers undergo various process steps, including lapping, edge-grinding and polishing steps to create the desired wafer flatness, surface finish and edge profile characteristics. Our products perform the final polishing process step prior to the wafers being cleaned and packaged.

The silicon wafer equipment market is growing to keep pace with the increasing number of chips required by the world’s markets. We believe that growth is being driven by the transition to 300mm wafers and the new manufacturing methodologies needed to produce silicon wafers suitable for ever-shrinking chip geometries. AnSilicon ~~additional~~wafers ~~growth~~are ~~driver~~produced ~~for~~in the ~~silicon~~United ~~wafer~~States, equipment industry is the emergence of the People’s Republic of China as the most cost effective location for silicon wafer fabrication facilities. While some pre-existing equipment will be re-used as silicon wafer fabrication facilities are moved from Japan, Taiwan, ~~the United States~~ and Germany. toThe ~~the~~ People’s Republic of China, ~~the~~is ~~move will~~ also contributing ~~create~~to ~~an opportunity~~growth ~~for~~in ~~market~~the ~~participants~~industry toas ~~re-equip~~it ~~facilities~~equips initself ~~those~~to ~~countries~~meet domestic ~~with~~demands ~~new,~~for ~~state-of-the-art~~silicon ~~equipment~~wafers.

Silicon Wafer Niche Markets

In addition to the overall silicon wafer industry, we also serve several niche markets and applications, including silicon-on-insulator, (“or SOI”), within this broad industry. SOI wafers are used to produce the most sophisticated logic-integrated circuits, including microprocessors, high power devices and micro-electromechanical systems, or MEMS, components for sensors and actuators. SOI wafers are manufactured by bonding together two silicon wafers separated by an insulating layer, usually silicon dioxide. They are difficult to produce and require more processing steps than typical silicon wafers.

Another niche market for wafer fabrication equipment is in the production of compound semiconductor wafers and LEDs. Compound-semiconductor wafers are used in the manufacture of high performance chips for special applications and opto-electronic devices such as light sensors and light emitting devices such as LEDs. LEDs are also manufactured using other wafer-form substrates, such as sapphire and silicon carbide. These materials are difficult to process and require special grinding and polishing tools. We currently produce a range of products that can be utilized in the fabrication of both compound-semiconductor wafers and LEDs. We believe that these niche markets represent a very attractive target market for our product offerings.

Data Storage Industry

~~Management estimates the global data storage market, including the hardware market and companion services, to be in excess of $70 billion.~~ The demand for increased data storage capacity is driven by the increasing quantity and diversity of information that is created and managed digitally. As data storage hardware, software, and transmission networks continue to deliver ~~improved~~ improved cost/performance, new and expanded applications have emerged that more efficiently support critical business processes.

Within the data storage market, the growing demand for disc drives is focused on two areas:

●

Consumer Electronics. Increasingly, high-performance computing and communications functions and disc drives are being incorporated into consumer electronics devices. For example, many of today’s digital video recorders, digital music players, video game consoles and advanced television set-top boxes now incorporate high performance computing functions and disk drives. In addition, faster connections to the Internet and increased broadband capacity have led to consumers downloading greater amounts of data than ever before, expanding the market for disc drives for use in new consumer and entertainment appliances. The adoption and rapid growth of the use of disc drives in these applications will be facilitated by the development of low-cost disc drives that meet the pricing requirements of the consumer electronics market.

●

Mobile Computing. We believe that the mobile computing market will grow faster than any other personal computer segment, as price and performance continue to improve and notebook computers become an attractive alternative to desktop computers. Notebook systems are also becoming progressively more desirable to consumers as the need for mobility increases and wireless adoption continues to advance.

New applications for hard disk storage technology, ~~as well as market growth in the People’s Republic of China and other Asian markets, are factors that~~ have contributed to a strong growth spurt in this industry. These new applications require more sophisticated manufacturing processes and methods than ~~previously~~ previously existed. As a consequence of this growth and demand for ~~more~~ more sophisticated products, older manufacturing methods are being phased out in favor of more efficient and advanced technologies such as CMP. CMP polishing steps used in manufacturing of semiconductors are now used almost universally for the production of the read-write heads used in these drives. Our products are used to perform these CMP polishing steps.

LED Industry

An LED is a semiconductor device that emits incoherent narrow spectrum light and the effect is considered a form of electroluminescence. LEDs can emit light in the infrared, visible or ultraviolet spectrums and are rapidly replacing incandescent and fluorescent lamps in a multitude of applications. and as a result present a significant growth opportunity for sales of our grinding products LEDs are fabricated on ~~wafers~~wafer substrates utilizing process steps ~~similar~~ similar to semiconductor chip fabrication. Rather than using a silicon wafer as the substrate, harder wafer materials such as silicon carbide and sapphire are used in the fabrication of LEDs. Our products perform the grinding ~~backgrinding~~ step to reduce ~~wafer~~substrate thickness prior to the ~~wafers~~ substrates being diced into individual LED devices. We believe that the lower cost of manufacturing LEDs, their vastly extended life, and their energy efficiency will fuel this trend toward LEDs into the foreseeable future.

Precision Optics Industry

We believe that the demand for optical-based components is growing rapidly. These components are utilized in a wide variety of products, including DVD players, digital cameras, and night vision equipment. In addition, optical devices are currently being used in many applications in the telecommunications industry. We make a wide variety of tools which grind and polish materials such as glass, crystals, ceramics, compound semiconductor materials, metals, and plastics to make lenses, prisms, displays, mirrors and other products. Although it is difficult to quantify total market size, optics has become, and will continue to serve as, a source of stable and substantial revenue and growth for us. Growth drivers for the optics industry include the increased demand for consumer electronics, the need for more sophisticated tools, the introduction of semiconductor manufacturing technology to the field of optics, and opportunities in the People’s Republic of China.

Our Competitive Strengths

We believe the following strengths serve as a foundation for our strategy:

● Quality, Excellence and Reliability. Over the years, we have manufactured what we believe to be high quality products that are robust, reliable and long-lasting. For example, nTegrity™, our first generation CMP tool developed in 1991, is still being sold today and maintains a large installed base. ● Highly Configurable and Flexible Tools. We focus on developing tools that are flexible for our customers, rather than wafer size specific tools. All of our tools are capable of processing multiple wafer sizes, in multiple configurations. For example, our new STB P300™ CMP tool is unique in the semiconductor industry in its ability to convert from 200mm to 300mm wafer processing capability in a matter of hours. In addition, the STB P300™ offers unmatched process flexibility due to its independent turret design. This flexibility and configurability has enabled us to serve a wider variety of markets and product applications with just a single tool. ● Innovative Technology Applications and Product Options. With a focus on building cutting edge tools, we have developed a host of advanced technologies that have allowed us to differentiate our products from those of our competitors. These technologies include the nVision II™, an in-pad optical endpoint detection system for CMP, and advanced carrier technologies such as ViPRR™ wafer carrier. All of these technologies are protected by multiple patents, pending patents and trade secrets belonging to Strasbaugh. ● Next Generation Tools. We have developed next generation tools for over 50 years. By utilizing our proprietary technology and working closely with customers, we have developed several new next generation tools that are just now being introduced into the market. The STB P300™, our next generation 300mm automatic CMP tool and wafer polisher, incorporates a host of new technologies and features a highly configurable and efficient design. We believe that STB P300™ is a cost effective product given its low cost of ownership and a high throughput for its small footprint. Our other next-generation tools include nVision II™ and a prototype 300mm wafer grinder.

● Highly Configurable and Flexible Tools. We focus on developing tools that are flexible for our customers, rather than wafer size specific tools. All of our tools are capable of processing multiple wafer sizes, in multiple configurations. For example, our new nTrepid™ CMP tool is unique in the semiconductor industry in its ability to convert from 200mm to 300mm wafer processing capability in a matter of hours. This flexibility and configurability has enabled us to serve a wider variety of markets and product applications with just a single tool.

● Product Development in Partnership with Customers. To compete against much larger competitors, we have historically partnered with our customers to develop products that fit their needs. For example, we recently partnered with Cree, Inc. to develop a new grinding machine specifically focused on the emerging LED market, after larger industry players showed little interest in helping Cree develop a machine that would meet their requirements. Working with Cree, we developed a machine with what we believe to be significant technological advantages over other tools. We are now established as a preferred vendor for Cree, which in turn has provided us with additional opportunities with other customers.

● Innovative Technology Applications and Product Options. With a focus on building cutting edge tools, we have developed a host of advanced technologies that have allowed us to differentiate our products from those of our competitors. These technologies include the SmartPad® optical endpoint detection system for CMP, the nOvation® sub-aperture grinder/polisher, and variable input pneumatic retaining ring (ViPRR™) and membrane wafer carrier technologies. All of these technologies are protected by multiple patents, pending patents and trade secrets.

● Next Generation Tools. We have developed next generation tools for over 50 years. By utilizing our proprietary technology and working closely with customers, we have developed several new next generation tools that are just now being introduced into the market. The nTrepid™, our next generation 300mm automatic CMP tool and wafer polisher, incorporates a host of new technologies and features a highly configurable and efficient design. We believe that nTrepid™ is a cost effective product given its low cost of ownership and a high throughput for its small footprint. Our other next-generation tools include nOvation®, nVision™, CMP Enhancement™, and a prototype 300mm wafer grinder, which has been used for advanced product development by one of the world’s foremost chip manufacturers.

Our Strategy

The primary elements of our business strategy include:

Increase our current market presence and selectively pursue new opportunities in mainstream markets. We intend to use our newly-developed products to increase our current market share and selectively pursue new opportunities in the mainstream semiconductor CMP and silicon wafer markets. These products include ~~nTrepid~~STB P300™, our advanced next-generation 300mm wafer polisher, and nVision II™, our newly-developed endpoint detection system.

~~Continue~~While ~~to focus~~we onare ~~underserved~~targeting ~~semiconductor~~front-end-of-line, ~~niche~~or ~~markets~~FEOL, ~~and~~applications, ~~offer~~including ~~high value~~oxide, ~~products. With~~tungsten, aand shallow ~~comprehensive~~trench ~~product line~~isolation, weor ~~intend~~STI, ~~to continue~~a torecent ~~look~~shift ~~for~~in ~~semiconductor~~copper CMP ~~niche~~from ~~markets~~a ~~and~~3-step ~~new~~process ~~product~~to ~~applications where~~a we2-step ~~can~~CMP ~~quickly~~process ~~use~~may ~~our~~also ~~competencies~~give tothe ~~become~~STB P300™ a ~~market~~competitive ~~leader~~advantage for copper processing. We believe that ~~many~~the ofCMP ~~our~~systems ~~target~~made by ~~customers~~the ~~seek~~market ~~high~~leader, ~~value products~~Applied ~~that~~Materials, ~~combine quality~~Inc., ~~excellence~~are ~~and~~not ~~reliability~~well atsuited ~~prices~~to ~~competitive~~a 2-step ~~with~~copper ~~other~~process ~~leading~~and ~~products~~the ~~offered~~CMP insystems of the ~~marketplace. We~~other ~~intend~~current ~~to continue~~market toleader, ~~focus~~Ebara Corporation, onare ~~high~~costly ~~value~~and ~~product~~have ~~offerings~~a byvery ~~promoting~~large ~~and~~footprint. We ~~offering~~further believe that our STB ~~products~~P300™ ~~that~~may ~~are~~offer ~~affordable~~an ~~alternatives~~advantage towith ~~higher-priced~~its ~~products~~compact, ~~offered~~efficient bydesign and ~~some~~process flexibility that results in a lower cost of ~~our~~ownership ~~competitors~~and a better throughput/footprint.

~~Expand~~Continue ~~our~~to focus ~~presence~~on inunderserved ~~the~~semiconductor ~~People’s~~niche ~~Republic~~markets ~~of China. We intend to expand our marketing~~ and ~~sales~~offer ~~efforts~~high ~~in the People’s Republic of~~value ~~China~~products. ~~Our~~With ~~strategy~~a tocomprehensive ~~expand~~product ~~our presence in the People’s Republic of China is comprised of two main elements. First~~line, we intend to ~~leverage~~continue ~~our low price advantage~~ to ~~become~~look ~~the equipment supplier of choice~~ for ~~Chinese~~ ~~companies~~semiconductor ~~that~~niche ~~acquire~~markets ~~outdated~~and ~~chip~~new ~~production~~product ~~lines from the West,~~applications where ~~low capital equipment cost is a key to profitability. This strategy utilizes our existing product lines and sales representatives. Second,~~ we ~~intend~~can toquickly ~~leverage~~use our ~~technical capabilities,~~competencies ~~our new nTrepid™ CMP tool and our patent position~~ to ~~partner~~become ~~with~~ a ~~People’s Republic of~~market China-based semiconductor and silicon wafer manufacturer to assist them in their pursuit of more mainstream semiconductor CMP and silicon wafer fabrication applications in the People’s Republic of China and throughout the world using our technology and productsleader. We ~~Although~~believe ~~both~~that ~~elements~~many of our ~~expansion~~target ~~strategy~~customers ~~are~~seek inhigh ~~the initial~~value ~~stages,~~products ~~they~~that ~~are~~combine ~~beginning to show some success. For example~~quality, ~~our equipment~~excellence isand ~~currently~~reliability ~~used~~at byprices ~~several Chinese companies that have taken over~~competitive ~~outdated~~with ~~chip~~other ~~production~~leading ~~lines~~products ~~formerly~~offered ~~manufactured~~ in the ~~West~~marketplace. ~~In addition,~~We onintend ~~December 1, 2006, we entered into a non-binding Memorandum of~~to ~~Understanding~~continue ~~with~~to ~~the~~focus ~~45th Research~~on ~~Institute,~~high anvalue ~~agency~~product ~~funded~~offerings by ~~the~~promoting ~~government~~and ofoffering ~~the People’s Republic~~our ofproducts ~~China,~~that toare ~~enter~~affordable ~~into~~alternatives ~~a joint venture~~ to ~~research, develop, design, manufacture, sell and service within~~ the ~~People’s Republic of China advanced next~~higher-~~generation~~priced ~~CMP~~ products~~. The~~ ~~Memorandum of Understanding was~~offered ~~amended~~by ~~and~~some ~~restated on December 1, 2006 and expired in February 2008. However, we and the 45th Research Institute continue to negotiate the terms~~ of a joint venture agreement along the lines of the original Memorandum of Understanding. In addition, in March 2008, we entered into a sales representative agreement with the 45th Research Institute which allows the 45th Research Institute to sell our ~~existing product line on a non-exclusive basis in the People’s Republic of China~~competitors. Although we continue to have discussions with the 45th Research Institute with respect to a joint venture agreement, no assurance can be given that we will be successful in entering into such agreement upon any terms, including the terms set forth in the original Memorandum of Understanding.

Expand our presence in Taiwan. We intend to expand our marketing and sales efforts in Taiwan by setting up a direct sales and service office in this key growing market. Our strategy to expand our presence in Taiwan involves leveraging our technological advantage for TSV, LED, FEOL and 2-step copper CMP processes. All of these applications are expected to grow rapidly in Taiwan. For example, STB P300™ and our latest grinding product have been well received by major Taiwanese manufacturers to whom we have introduced these products.

Continue to develop next generation products. We believe that our future success is dependent on our ability to continue to develop next generation products and technologies. For example, we are in the process of designing a new optical end-point detection system for CMP products that will allow this key enabling technology to be implemented for the first time on the large installed base of our competitors’ CMP tools. Another example of our forward thinking is the patents and prototypes we have for an advanced wafer grinding tool.

Pursue strategic technology and/or product acquisitions. We intend to selectively pursue acquisitions of technology and/or products that enhance our position in the markets in which we compete. We believe that because of our distribution capabilities, strong sales organization and relationships with long-standing customers, we are well positioned to take advantage of acquiring, licensing or distributing other products or technology.

Products and Services

We have a comprehensive product line of polishing, grinding and optics tools that serve a wide range of markets and product applications. We have built a core competency designing innovative and quality manufacturing tools that provide high-yield cost-effective solutions to our customers. Our most recent product offerings include the STB P300™ and the nVision II™.

STB P300™

Introduced in July 2009, the STB P300™ is our newest product offering. The STB P300™ is the industry’s first CMP system to be designed to incorporate Next Generation Factory (“NGF”) principles. We believe that the STB P300™ combines the greatest production and process flexibility of any CMP machine on the market with the most advanced CMP technologies available. With industry-leading process performance, integrated state-of-the-art cleaning, low cost of ownership and at a lower capital cost than its competition, we believe the STB P300™ offers device makers a new and better choice in CMP. The STB P300™ is designed to meet the needs of customers in several market segments, including semiconductor chip manufacturing, silicon wafer fabrication, data storage and SOI. We believe this system has a much larger market potential than nTegrity™, our previous generation product.

~~nTrepid~~STB P300™ takes elements from our previous generation 300mm research and development CMP system and earlier 300mm production technologies, and is the culmination of CMP technologies developed at Strasbaugh over the past 15 years. We shipped our first STB P300™ to a major Japanese manufacturer in January 2010. This sale represents a strategic win for us and demonstrates the competitiveness of our next generation CMP system internationally.

~~Our~~Another ~~newest~~strategic ~~product~~win ~~offering, nTrepid™,~~ is ~~a next generation 300mm wafer polisher. nTrepid™ is designed to meet~~ the ~~needs~~booking of ~~customers~~our infirst ~~several~~STB ~~market~~P300™ ~~segments,~~order ~~including~~to ~~semiconductor~~a ~~CMP~~major ~~and silicon wafer fabrication,~~ data storage manufacturer, ~~and~~our ~~SOI. We~~primary ~~believe~~target ~~this system has a much larger~~ market ~~potential~~for ~~than~~the ~~nTegrity™,~~introduction ~~our~~of ~~previous~~the ~~generation~~STB ~~product~~P300™.

~~nTrepid™ is a highly~~nVision configurable polishing system that combines a proven rotary polishing platform and advanced carrier technology in a low-cost, compact footprint. We believe that it is a highly reliable system with the potential to provide customers with higher yields. nTrepidII™ takes elements from our nHance® 300mm research and development CMP system and earlier 300mm production technologies. It is the culmination of CMP technologies developed at Strasbaugh over the past 15 years. The tool is available in several configurations to best suit the needs of semiconductor and silicon wafer fabrication. In addition, nTrepid™ supports a range of wafer sizes up to 300mm and easily converts from 200mm to 300mm in four hours. It supports serial or parallel processing for one, two or three table polishing processes. nTrepid™ also utilizes our ViPRR™ carrier technology, which will keep this tool competitive through the 90nm and 65nm technology nodes to 45nm and beyond.

~~After~~nVision II™ is a newly ~~successful~~developed ~~beta~~endpoint ~~introduction,~~detection system designed to control semiconductor and SOI CMP wafer processes for the ~~first~~newest ~~production~~generation ~~version~~integrated ofcircuits. ~~nTrepid~~nVision II™ ~~was~~combines ~~shipped~~multiple endpoint ~~during~~capabilities, optical signal, spindle motor current, table motor ~~the~~current ~~first~~and ~~quarter~~pad oftemperature, ~~2007~~into one system. WeUsing ~~also~~our ~~plan~~proprietary SmartPad® technology, towe ~~demonstrate~~believe nVision II™ is a ~~number~~key ~~of nTrepid™~~technological ~~tools~~breakthrough for ~~strategic~~ ~~customers~~endpoint ~~throughout~~detection systems with the ~~world~~potential for use on most major brand CMP tools.

nOvation®

We believe that nOvation® is the only system capable of performing the whole wafer super-thinning process, a new means of thinning and polishing the backside silicon of a semiconductor wafer. Instead of isolating and preparing an individual die, nOvation® prepares the entire surface of the wafer at once, which reduces sample preparation time from weeks to days. After successful beta testing at two locations, the world’s largest semiconductor company recently adopted nOvation® as its preferred wafer polisher for this application.

nVision™

nVision™ is a newly developed endpoint detection system designed to control semiconductor and SOI CMP wafer processes for the newest generation integrated circuits. nVision™ combines multiple endpoint capabilities, optical signal, spindle motor current, table motor current and pad temperature, into one system. Using our proprietary SmartPad® technology, we believe nVision™ is a key technological breakthrough for endpoint detection systems with the potential for use on most major brand CMP tools. Our first order for the production version nVision™ system was shipped in the first quarter of 2007. We have not made any sales of this product since 2004.

CMP Enhancement™

CMP Enhancement™ uses our ViPRR™ wafer carrier technology that has applications on the approximately 1,000-tool installed base of Integrated Process Equipment Corporation, or IPEC, and Speedfam CMP tools. Wafer carriers are a key enabling technology in CMP machines and account for a large portion of what differentiates one CMP tool from another. We believe that CMP Enhancement™ significantly improves process performance, increases yields through reduced edge exclusion and greater uniformity control, and extends the useful life of a customer’s tools. CMP Enhancement™ offers the additional benefit of demonstrating our advanced CMP technology, positioning our new nTrepid™ system as a possible successor to these older tools. After extensive evaluation by a customer, we received our first large multi-quantity IPEC version CMP Enhancement™ order in 2005. We introduced and received our first Speedfam version order in early 2006.

nTegrity™

With over 300 tools in use by high-production semiconductor fabrication facilities throughout the world, our nTegrity™ 200mm CMP system has a proven record of adaptability and reliability. We believe that nTegrity™ is the leading choice for the demanding data storage industry and for emerging applications such as SOI, LED and MEMS. For applications not requiring an integrated cleaner, we believe that nTegrity™ provides the highest throughput per dollar of capital cost and the highest throughput per square foot of clean room space of any CMP tool currently available. nTegrity™ was introduced in 1991.

nFinity®

nFinity® is a high yield, 200mm wax mount silicon wafer polisher. With over 180 tools installed worldwide, nFinity® continues to be one of our top sellers due to its ability to produce superior wafer flatness, low cost of ownership, consistent wafer-to-wafer process performance and reliability. This product was introduced in 1997.

nGenuity™

nGenuity™ is a wafer grinder used for the precision grinding of smaller substrates used in most emerging wafer-based applications, including semiconductor, photonics, compound semiconductor, MEMS, optics, and other applications. With advanced technical features, such as cassette to cassette wafer handling, force adaptive grinding, closed loop thickness control, and automatic spindle height setup, nGenuity™ delivers advanced process control to emerging industries at what we believe to be highly competitive prices. This product was introduced in 1987.

nTellect®

nTellect® is a high volume production wafer grinding tool combining process precision with a robust design. Introduced in 1994, nTellect® is used for demanding applications, such as SOI and the grinding of hard substrates that cannot be efficiently processed by other designs. Among the hard materials this tool can process is silicon carbide, the emerging substrate for production of the latest generation of LEDs. nTellect® is also used for grinding extremely brittle compound semiconductor materials used in the photonics market.

nSpire™

nSpire™ is an economical CMP tool for 75mm to 200mm research and development, failure analysis, and low volume production. Introduced in 1995, this tool is used in universities, research institutes, and early development technology companies. nSpire™ provides wafer carrier technology and process control in laboratory size packages. We believe that nSpire™ sales will increase as more photonic, telecom, MEMS and other advanced products move to wafer-based production.

nHance®

We believe that nHance® is one of the most sophisticated 300mm-capable research and development and low volume production CMP system in the world. Unlike some of its competitors, this tool is capable of matching or exceeding the process precision of full 300mm production CMP tools costing $4 million or more. nHance® is used by consumables manufacturers developing the slurries and pads used in today’s most advanced silicon wafer facilities. It is also being used for sample preparation for failure analysis. This product was introduced in 2000.

nCompass®

nCompass® is a robust wafer edge profiling tool that has established a position in the rapidly growing application of SOI and other types of bonded wafer production. It is a simple wafer processing platform, with high throughput and a flexible control system, which can be readily adapted to new applications. nCompass® recently beat all competitors for a high precision edge profiling application on a new generation of glass-based bonded wafers. nCompass® was introduced in 1986 and completely updated in 2002. We have not made any sales of this product since 2006.

Optics Products

We offer a full line of optical polishing (nFocus™), ring lapping (nGauge™), continuous pitch polishing (nSpec™) and curve generator (nLighten™) tools. We have sold over 12,000 optical tools and we believe that we have the world’s most comprehensive product line. We ~~also~~Our ~~believe that our~~ optical ~~tools~~products ~~provide~~offer greater ~~more sophisticated and full-featured controls~~precision, ~~precise~~ ~~and~~more reliable performance and long tool life than ~~those~~similar products offrom our competitors.

Service, Parts and Consumables

Our large installed equipment base provides us with a source of recurring service, parts and consumables revenues. We have an international network of field service engineers and we provide a variety of different service options, and tailor service requirements to meet the needs of each customer. A one-year warranty covering parts and labor is included with each new tool. When designing custom service plans, we can provide as much or as little as the customer requires. For example, service plans range from on-site field service engineers to regularly scheduled maintenance with technical support available 24 hours per day, 7 days a week. Many customers contract for regularly scheduled maintenance programs in which our service engineers calibrate, adjust and clean their tools at regular intervals. Typically running between $20,000 and $100,000 per year, service plans are negotiated with the customer depending upon the type of machine and the level of service requested. We also have a 24-hour service line to field any emergency calls.

With a large installed base of tools, we also enjoy a sizable parts and consumables business. Service, parts and consumables accounted for approximately $65.5 million and $76.85 million in revenues for ~~2008~~2009 and ~~2007~~2008, respectively, or 6842% and 4068% of net revenues, respectively. Parts include valves, pulleys, belts, motors, joints, carriers and any of the thousands of parts used in our tools. Parts are purchased in three different ways: spare parts kits that include the most commonly needed parts for each machine; single parts as needed; and by consignment at customer facilities. Consumables include wafer retaining rings, wafer films, shims, conditioning discs and other parts of the system that typically wear out in conjunction with wafer processing. Consumables sales are made on a recurring basis and are generally more predictable than spare parts sales.

Customers

We have a large, active and diverse customer base and we maintain long-standing relationships with our core customers. Our main customers include leading semiconductor device manufacturers, silicon wafer manufacturers, data storage companies, and a multitude of smaller customers in multiple niche markets. ~~With~~ Our ~~over~~top ~~850~~five ~~distinct~~ customers inaccounted ~~the~~for ~~last five~~72% ~~years~~ and ~~over~~43% ~~700~~of ~~tools~~net ~~installed,~~revenues during we2009 ~~have~~and ~~a large~~2008, ~~active and diverse customer base~~respectively. ~~Our~~ ~~top~~Three ~~five~~ customers each accounted for ~~43%~~more ~~and 50~~than 10% of net revenues during ~~2008~~2009 and ~~2007,~~two ~~respectively. Two~~ customers each accounted for more than 10% of net revenues during 2008 ~~and 2007~~. Our customers purchase our products by issuing purchase orders from time to time. We do not have long-term purchase orders or commitments with our customers. As a result, our customers may terminate their relationship with us at any time.

11Within the semiconductor industry, we have a large installed base of tools at companies representing the leaders in the industry, including Fortune 500 and Global 1000 companies. In addition to these market leaders, we have a large number of second and third-tier specialty customers that prefer lower prices, better service and more customized solutions. We also sell tools to testing laboratories and research and development facilities at large device manufacturers, as well as university research laboratories.

Within the ~~semiconductor~~silicon industry, we ~~have~~sell ato ~~large~~silicon ~~installed~~wafer ~~base~~manufacturers ofthat ~~tools~~perform ~~at companies~~the ~~such~~front-end aspolishing ~~Western~~of ~~Digital~~the ~~Corporation,~~wafer ~~NEC~~before ~~Corporation,~~selling ~~Altis-IBM~~it ~~and~~to ~~United~~device ~~Microelectronics Corporation~~manufacturers. In ~~addition~~the LED industry, we sell to ~~these~~the market leaders, weof ~~have~~high-end adevices who ~~large~~manufacture ~~number~~disk ofdrives ~~second-~~ and ~~third-tier~~memory ~~specialty~~applications. ~~customers, including~~In ~~Freescale~~the ~~and~~optics ~~On Semiconductor~~industry, ~~that~~we ~~prefer~~have ~~lower~~been ~~prices,~~manufacturing ~~better~~and ~~service~~selling ~~and~~machines to ~~more~~thousands ~~customized~~of ~~solutions. We~~customers ~~also~~since ~~sell~~1948. Optics atools ~~significant~~are ~~number~~sold ~~of tools~~ to ~~testing~~a ~~laboratories~~wide ~~and~~variety of ~~research~~customers and ~~development~~industries, ~~facilities~~including ataerospace, ~~large device manufacturers~~defense, asoptical ~~well~~labs, research asinstitutions ~~university~~and ~~research~~medical ~~laboratories~~applications.

In the silicon wafer industry, we sell to silicon wafer manufacturers that perform the front-end polishing of the wafer before selling it to device manufactures. In this industry, our largest customers include LG International and MEMC Electronic Materials, Inc. In the LED industry, we sell to the market leaders of high-end devices, including Cree, Inc. In the data storage industry, some of our customers, Seagate, Hitachi and Headway, are market leaders in manufacturing disk drives and memory applications. In the optics industry, we have been manufacturing and selling machines to thousands of customers since 1948. Optics tools are sold to a wide variety of customers and industries, including aerospace, defense, optical labs, research institutions and medical applications. Additionally, our two distributors, Euris (Europe) and Yokogawa (Japan), are also significant customers.

Sales and Marketing

Our sales and marketing strategy focuses on establishing Strasbaugh as the premier provider of polishing and grinding equipment by developing long-term relationships with our active customer base. A key competitive advantage of our sales process lies within our customer-focused approach. We frequently collaborate with our leading customers to refine existing product lines and design new innovations to meet their specific requirements.

With a wide variety of markets served and product applications, we target markets where we can be a market leader, such as data storage, LED and precision optics. In mainstream markets, such as semiconductor CMP and silicon wafer, we target applications where we can be the more customer-focused, low-cost alternative to larger competitors with more expensive tools.

We are ~~utilize~~currently are-developing ~~direct~~our sales ~~force~~channels ~~for sales in the United States~~ and ~~Japan who~~ are ~~employees~~ ofestablishing ~~Strasbaugh and who are paid~~ a ~~base~~direct ~~salary plus commission. In the United States, our~~ sales ~~professionals sell~~ ~~equipment~~and byservice ~~geographic~~office ~~region~~in ~~– Eastern~~Taiwan, ~~Northern,~~based ~~Southern~~on ~~and~~feedback ~~Western~~from ~~United States. Another~~customers ~~sales~~who ~~professional~~have ~~focuses~~stated ~~exclusively on optics~~a ~~worldwide. With~~preference anworking ~~average~~directly ofwith ~~eight~~Strasbaugh ~~years’~~rather ~~tenure~~than atthrough ~~Strasbaugh, our~~a ~~four~~distributor. We ~~sales~~believe ~~professionals~~that ~~are~~establishing ~~extremely~~a ~~knowledgeable~~direct ~~about~~sales ~~our products~~ and ~~the~~service ~~markets~~office inwill ~~which~~improve wethe ~~sell. Our~~communication ~~Vice~~and ~~President~~support ofavailable ~~Worldwide~~to ~~Sales~~our ~~and~~customers, ~~Marketing~~reduce iscosts, ~~responsible~~and ~~for~~result ~~managing~~in ~~our~~greater ~~direct~~savings ~~sales~~to ~~professionals~~our customers and greater ~~international~~profitability ~~network~~for ~~of representatives and distributors~~Strasbaugh.

Outside of the United States and Japan, we rely on a highly technical and sophisticated network of sales representatives and distributors. Sales in Europe are handled by a distributor that has worked with us for ten years. Sales in China, Taiwan, South Korea and the rest of Asia are handled by representatives who have also worked with us for many years. Both distributors and sales representatives offer our full line of products. Distributors purchase products directly from us at our domestic retail price and then mark up their prices for sales in Europe. Our sales representatives are paid a commission of 12% – 15% of the total amount of sales made by each such sales representative. Neither our distributors, sales representatives nor the ultimate end users of our products have return or exchange rights with respect to our products. Also, we do not offer any further sales incentives such as advertising or exclusivity charges or a right of return. Our distributors and sales representatives may enter into maintenance contracts with their customers and the particular distributor or sales representative will pay us directly for time and material should our employees be used to provide maintenance services.10

12We use a direct sales force in the United States who are all employees of Strasbaugh and are paid a base salary plus commission. In the United States, our sales professionals sell equipment by geographic region. We also have a sales professional who focuses exclusively on the sale of our optics products worldwide. With an average of eight years tenure at Strasbaugh, our sales professionals are extremely knowledgeable about our products and the markets in which we sell. Our Vice President of Worldwide Sales is responsible for managing our direct sales professionals and international network of representatives. Outside of the United States, and soon in Taiwan, we rely on a sophisticated network of sales representatives to sell and service our products. Sales in Europe are handled by distributors, one of whom has worked with us for ten years. Sales in China, South Korea and the rest of Asia are handled by representatives who have also worked with us for many years. Both distributors and sales representatives offer our full line of products. Distributors purchase products directly from us at our domestic retail price and then mark up their prices for sales in Europe. Our sales representatives are paid a commission of 10% – 15% of the total amount of sales made by each such sales representative. Neither our sales representatives, distributors nor the ultimate end users of our products have return or exchange rights with respect to our products. Also, we do not offer any further sales incentives such as advertising or exclusivity charges or a right of return. Our sales representatives and distributors may enter into maintenance contracts with their customers and the particular distributor or sales representative will pay us directly for time and material should our employees be used to provide maintenance services.

Our sales professionals, sales representatives and distributors strive to develop close relationships with current and prospective customers. We maintain constant contact with customers to assess their needs and to update them on the latest product developments. In addition, our sales professionals regularly attend national and international trade and technical shows to stay abreast of industry trends and foster deeper relationships with customers. After contact has been initiated with a potential client, we conduct a variety of meetings and presentations to introduce our products and services. Typically, customers will be provided with price quotations, tool and process specifications, and product demonstrations before an order is produced.

Competition

Substantial competition exists for our products. Competitors range from small companies that compete with us with a single product and/or in a single region to global companies with multiple product lines. We believe that our strong competitive position is based on our ability to successfully provide products and services that address customer requirements.

Semiconductor CMP

The number of CMP tool manufacturers has decreased in recent years leaving Applied Materials and Ebara ~~are~~as ~~the~~our ~~market~~only ~~leaders~~competitors in ~~mainstream~~the market for mainstream semiconductor CMP products. ~~The~~Within ~~remaining~~the ~~market~~mainstream issemiconductor ~~divided among several smaller~~CMP ~~companies. We~~market we have traditionally focused on ~~CMP~~ niche and specialty applications inthat are ~~which~~not ~~Applied~~the ~~Materials~~main ~~does~~focus ~~not~~of ~~concentrate~~Applied ~~or materially participate~~Materials. However, ~~the~~we ~~launch~~believe ofthat our ~~nTrepid™~~most recent product offering, the STB P300™, provides us with the opportunity to compete on a technical basis in the significantly larger portion of the mainstream semiconductor CMP market. ~~In this market, we plan to focus on non-copper CMP applications where Ebara has a leading market share and avoid competing directly with Applied Materials, which focuses on copper applications.~~

Semiconductor Niche Market and Applications

Within our small niche markets and applications, we face competition from a variety of companies. In failure analysis, we face competition from other manufacturers of semi-automated CMP tools, including Logitech and MAT, Inc. Logitech and MAT, Inc. tools are designed to compete against ~~nSpire™~~some ~~and~~of ~~nHance®, which~~our ~~are~~legacy CMP tools adapted to this application. InOur competitors ~~response~~offer toless ~~our competition,~~expensive weproducts ~~developed~~than aus, ~~next~~but ~~generation~~our ~~tool~~products ~~specifically~~offer greater ~~for~~precision ~~failure analysis~~and, ~~nOvation®. Currently,~~ we ~~are~~believe, ~~not aware of any competition for nOvation®~~performance.

Our main competition in backgrinding is Disco Corporation, which we believe has the largest market share, followed by ~~two other Japanese companies,~~ Okamoto ~~and Accretech~~Industries. Although, we have sold both nTellect® and nGenuity™ grinders for this application, we avoid these older mainstream applications and focus our efforts on growth markets where we can have a leading position or a differentiated technology.

Silicon Wafer Fabrication and Niche Markets

In silicon wafer fabrication and niche markets, our primary competition is from Lapmaster and Peter Wolters (now owned by Novellus). We believe that our ~~nTrepid~~STB P300™ polisher is a generation ahead of the tools offered by these competitors in terms of polishing performance and that this enhanced level of performance may be required by the industry as it migrates towards the sub-22nm technology node.

SOI/MEMS

We have been successful in marketing our nTegrity™ product to smaller customers in the SOI market, but have not been able to gain wide acceptance with the larger companies that require newer technologies unavailable on nTegrity™, such as integrated cleaning, 300mm-capable wafer grinding and optical endpoint detection. The first installation of our new nVision II™ optical endpoint tool was to a major SOI producer and the launch of ~~nTrepid~~STB P300™ will provide the other technical innovations we believe required to compete in this market.

MEMS are mostly ~~low~~large ~~volume~~feature size applications where there is noless need for sophisticated high volume production tools. We face competition in this market primarily from de-commissioned Integrated Process Equipment Corp. CMP tools.

LED

In the LED market, our main competition comes from Disco Corporation for the sale of grinders. We have developed a market-leading position with respect to Disco Corporation and others by anticipating a shift to silicon carbide as a substrate for the production of LED devices. Cree, Disco Corporation, Okamoto and Accretech are attempting to enter this market with adaptations of the same grinders they use for semiconductor backgrinding.

Data Storage

Our main competitors in the data storage market are Applied Materials and Ebara. However, these companies have not adapted their products to the particularly demanding polishing requirements of this market. We believe that lower-tiered CMP equipment companies do not have the technology to compete effectively in this market.

Optics

Our optics products face competition from ~~lower~~more ~~quality~~sophisticated ~~and~~automated ~~cheaper~~machines ~~tools~~in the ~~from~~more ~~Asia~~sophisticated markets of the United States, Europe and asJapan. In ~~well~~Asia aswe face competition from ~~products~~lower ~~offered~~quality byand ~~small~~lower priced ~~family-owned~~Asian ~~businesses~~made equipment.

Manufacturing

Our headquarters are located approximately 185 miles south of San Jose in San Luis Obispo, California. We lease a 135,000 square foot building ~~partially~~ owned by ~~Alan~~ Alan Strasbaugh, our Chairman of the Board and major shareholder. The facility is comprised of approximately 106,000 square feet of manufacturing space, including 11,600 square feet of clean assembly space and 1,200 square feet of clean rooms (60% Class 100, 40% Class 10). All of our manufacturing is completed at these facilities with full ability for design, fabrication, assembly and distribution requiring a minimal amount of outsourcing. As a result of excess capacity, we are currently subleasing approximately 40,000 square feet of the facility to third parties on a short term basis. We estimate that current manufacturing capacity provides us us with the ability to substantially increase sales with only the addition of personnel and relatively little capital equipment expenditures. We estimate that the facilities, machinery and equipment will support annual net revenues of approximately $100 million. ~~As a result of excess capacity, we are currently subleasing approximately 40,000 square feet of the facility on a short term basis.~~

Product Development

Product development is spearheaded by our senior management and our intellectual property committee, which evaluates the development of new products and new market applications for existing products. For example, the nSpire™ and nHance® were first introduced into the market as high performance CMP tools for research and development applications. To widen the application of these tools, we developed a new process called “whole wafer deconstruct” and launched these tools into the failure analysis market reusing existing technology for a completely new application.

Between 2002 and 2005, we increased our research and development budget to continue the development of leading next generation tools and technologies. We spent over $10 million in product development and research and development during this period. The result was the development of three new major tools (nTrepid™, nOvation®, and nVision™) and one system upgrade (CMP Enhancement™). We believe that these products will be fully accepted into the market. These products are now beginning to generate revenue, and we believe that they will comprise a significant portion of our future revenue.

In addition, our engineering team is currently developing the 7AG, a new modular 300mm-capable wafer grinder that has the capability to bring grinding into front-end-of-line semiconductor manufacturing for the first time. The prototype of this tool has been used for several months by the world’s foremost chip manufacturer to demonstrate a new chip manufacturing methodology that has the potential to expand the market for wafer grinding tools. The 7AG was also designed to be highly competitive for next generation industry requirements in other industries, such as silicon wafer, solar cell, LED and advanced chip packaging.

Intellectual Property

We believe that we have a broad intellectual property portfolio. We primarily own intellectual property protecting the design features or operating methods for tools manufactured by us for polishing or grinding semiconductor and silicon wafers. Our portfolio consists of ~~147~~150 trade secrets and processes, 8489 issued patents, 12 licensed patents, and 5031 patents pending. Our ten most important patents were issued between June 1995 and July 2007. The duration of these patents runs until between June 2012 and August ~~2024~~2025. The patents in our entire portfolio expire between June 2012 and August 2024. With customers worldwide, we have received international patents covering Japan, China, Taiwan, Europe, Korea and Singapore.

In 2000, as part of a capital infusion by Lam Research Corporation, or Lam, into R. H. Strasbaugh, we sold certain intellectual property to Lam, or Lam Intellectual Property, for $4 million and concurrently entered into a License Agreement with Lam. Pursuant to the terms of the License Agreement, for the duration of the License Agreement, which is perpetual unless terminated as described below, Lam granted us a non-exclusive, royalty-free worldwide license to use, upgrade, or modify the Lam Intellectual Property in industries that develop, design, make, use, sell, repair or service semiconductor processing equipment used in the fabrication of integrated circuits. These industries are collectively referred to in this Report as the Semiconductor Processing Equipment Industry. Additionally, pursuant to the License Agreement, Lam granted to us an irrevocable, perpetual, exclusive, royalty-free worldwide license to use the Lam Intellectual Property in any industry except the Semiconductor Processing Equipment Industry. The License Agreement may be terminated upon either party breaching a material provision of the License Agreement, ceasing to do business, ceasing to carry on as a going concern or becoming insolvent. The licensed intellectual property originally consisted of 6 issued patents, 9 patent applications and 19 internal disclosures related to CMP. At this time, 12 ~~patents have been issued and licensed back to us.~~

In 2000, as part of a capital infusion by Lam Research Corporation, or Lam, into R. H. Strasbaugh, we sold certain intellectual property to Lam, or Lam Intellectual Property, for $4 million and concurrently entered into a License Agreement with Lam. Pursuant to the terms of the License Agreement, for the duration of the License Agreement, which is perpetual unless terminated as described below, Lam granted us a non-exclusive, royalty-free worldwide license to use, upgrade, or modify the Lam Intellectual Property in industries that develop, design, make, use, sell, repair or service semiconductor processing equipment used in the fabrication of integrated circuits. These industries are collectively referred to in this report as the Semiconductor Processing Equipment Industry. Additionally, pursuant to the License Agreement, Lam granted to us an irrevocable, perpetual, exclusive, royalty-free worldwide license to use the Lam Intellectual Property in any industry except the Semiconductor Processing Equipment Industry. The License Agreement may be terminated upon either party breaching a material provision of the License Agreement, ceasing to do business, ceasing to carry on as a going concern or becoming insolvent. The licensed intellectual property originally consisted of 6 issued patents, 9 patent applications and 19 internal disclosures related to CMP. At this time, 12 patents have been issued and licensed back to us.

Trademarks

Our trademarks are filed and/or registered for a series of product names, all beginning with the letter “n.” We currently have six registered trademarks, five trademarks and one trademark with a filed application for registration.

Employees

As of ~~February 9~~March 26, ~~2009~~2010, we employed 7382 full and part-time employees. None of our employees are represented by labor unions, and there have not been any unplanned work stoppages at our facilities. We generally consider our relationships with our employees to be satisfactory.

Internet Website

Our Internet website is www.strasbaugh.com. The content of our Internet website does not constitute a part of this ~~Report~~report.

Item 1A. Risk Factors.

An investment in our common stock involves a high degree of risk. In addition to the other information in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission, or SEC, including our ~~subsequent~~ subsequent reports on Forms 10-Q and 8-K, you should carefully consider the following risk factors before deciding to invest in shares of our common stock or to maintain or increase your investment in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, financial condition and operating results. If any of the following risks, or any other risks not described below, actually occur, it is likely that our business, financial condition and operating results could be seriously harmed. As a result, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating to Our Business

The industries within which we compete are cyclical and may experience periodic downturns that may reduce customer demand for our products which, in turn, may have an adverse impact on our results of operations, cash flows and financial condition.

We operate and compete within the semiconductor and semiconductor equipment, silicon wafer and silicon wafer equipment, data storage, MEMS, LED and precision optics industries. These industries are cyclical and have historically experienced periodic downturns, which have often resulted in a decrease in demand for capital equipment. Commencing in the third quarter of 2007, we have seen a marked downturn in many of the industries within which we operate and compete. This current downturn has resulted in a reduction in demand for our products which, in turn, has had an adverse impact on our results of operations for 2008 and 2009. A prolonged continuation of the current downturn in these industries or any future downturn may have an adverse impact on our future results of operations, cash flows and ~~financial~~ financial condition.

We have incurred losses in the past and we may incur losses in the future. If we incur losses in the future, we ~~will~~may experience negative cash flow, which may hamper our operations, may prevent us from expanding our business and may cause our stock price to decline.

We incurred net losses of $680,000 and $4.5 million ~~and $777,000~~ for the years ended December 31, ~~2008~~2009 and ~~2007~~2008, respectively~~, and we recorded net income of $1~~.~~2 million for the year ended December 31, 2006.~~ We also incurred net losses in each of the years ended December 31, 2002 through 2005 and in 2007. We may incur losses in future years due to, among other factors, instability in the industries within which we operate, uncertain economic conditions worldwide or lack of acceptance of our products in the marketplace. If we incur losses in the future, it may make it difficult for us to raise additional capital to the extent needed for our continued operations, particularly if we are unable to maintain profitable operations in the future. Consequently, future losses ~~will~~may result in negative cash flow, which may hamper current operations and may prevent us from expanding our business. We may be unable to attain, sustain or increase profitability on a quarterly or annual basis in the future. If we do not attain, sustain or increase profitability, our stock price may decline.

16The current global financial crisis and uncertainty in global economic conditions may have significant negative effects on our customers and our suppliers and may therefore affect our business, results of operations, and financial condition.

The current global financial crisis—which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period—may have a significant negative effect on our business and operating results. The potential effects of the current global financial crisis are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods.

The current economic crisis may affect our current and potential, direct and indirect, customers’ access to capital or willingness to spend capital on our products, and/or their levels of cash liquidity with which or willingness to pay for products that they will order or have already ordered from us. The effect of the current economic conditions on our customers may therefore lead to decreased demand, including order delays or cancellations, which in turn may result in lower revenue and adversely affect our business, results of operations and financial condition.

Likewise, the current global financial crisis may negatively affect our suppliers’ access to capital and liquidity with which to maintain their inventories, production levels, and/or product quality, and could cause them to raise prices or lower production levels, or result in their ceasing operations. The challenges that our suppliers’ may face in selling their products or otherwise in operating their businesses may lead to our inability to obtain the materials we use to manufacture our products. These actions could cause reductions in our revenue, increased price competition and increased operating costs, which could adversely affect our business, results of operations and financial condition.

The industries within which we compete are extremely competitive. Many of our competitors have greater financial and other resources and greater name recognition than we do and one or more of these competitors could use their greater financial and other resources or greater name recognition to gain market share at our expense.

We believe that to remain competitive, we will require significant financial resources in order to offer a broad range of products, to maintain customer service and support centers worldwide and to invest in research and development. Many of our existing and potential competitors, including Applied Materials~~, Inc.,~~ ~~Novellus Systems, Inc.~~ and Ebara ~~Corporation~~, have substantially greater financial resources, more extensive engineering, manufacturing, marketing and customer service and support capabilities, larger installed bases of current generation products, as well as greater name recognition than we do. As a result, our competitors may be able to compete more aggressively and sustain that competition over a larger period of time than we could. Our lack of resources relative to many of our significant competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and cause a decline in our market share, sales and profitability.

We depend on a small number of customers for a significant portion of our total sales. A reduction in business from any of these customers could cause a significant decline in our net revenues and profitability.

A significant portion of our total net revenues are generated from a small number of customers. Our top five customers accounted for approximately 4372% and 5043% of our net revenues during ~~2008~~2009 and ~~2007~~2008, respectively. ~~Two~~Three customers each accounted for more than 10% of net revenues during ~~2008~~2009 and two ~~2007~~customers each accounted for more than 10% of net revenues during 2008. ~~Although~~ Although the composition of the group comprising our largest customers may vary from year to year, the loss of a significant customer or any reduction in orders by any significant customer, including reductions due to market, economic or competitive conditions in the industries in which we operate could cause a significant decline in our net revenues and profitability. Our ability to increase our net revenues in the future will depend, in part, upon our ability to obtain orders from new customers, as well as the financial condition and success of our existing customers and the general economy, which are largely beyond our ability to control.

Our potential customers may not purchase our products because of their significant cost or because our potential customers are already using a competitor’s product which, in turn, could cause a decline in our sales and profitability.

A substantial investment is required to install and integrate capital equipment into a semiconductor or silicon wafer production line. We believe that once a manufacturer has selected a particular vendor’s capital equipment, that manufacturer generally relies upon that vendor’s equipment for that specific production line application and, to the extent possible, subsequent generations of that vendor’s systems. Accordingly, it may be extremely difficult to achieve significant sales to a particular customer once that customer has selected another vendor’s capital equipment unless there are compelling reasons to do so, such as significant performance or cost advantages. Any failure to gain access and achieve sales to new customers will adversely affect the successful commercial adoption of our products and could cause a decline in our sales and profitability. Any significant order cancellations or order deferrals could adversely affect our operating results.

1715

Our lack of long-term purchase orders and commitments could lead to a rapid decline in our sales and profitability.

Our customers issue purchase orders requesting products they desire to purchase from us, and if we are able and willing to fill those orders, then we fill them under the terms of the purchase orders. Accordingly, we cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of reduced demand for our products that could result from a general economic downturn, from changes in the industries within which we operate, including the entry of new competitors into the market, from the introduction by others of new or improved technology, from an unanticipated shift in the needs of our customers, or from other causes.

Some of our product sales cycles are lengthy, exposing us to the risks of inventory obsolescence and fluctuations in operating results.

Sales of our products depend, in significant part, upon the decision of a prospective customer to add new manufacturing capacity or to expand existing manufacturing capacity, both of which typically involve a significant capital commitment. Our products typically have a lengthy sales cycle, often six to twelve months, during which time we may expend substantial funds and management effort. Lengthy sales cycles subject us to risks of inventory obsolescence and fluctuations in operating results over which we have little or no control. Because technology changes rapidly, we may not be able to introduce our products in a timely fashion.

Products within the industries in which we operate are subject to rapid technological changes. If we fail to accurately anticipate and adapt to these changes, the products we sell will become obsolete, causing a decline in our sales and profitability.

The industries within which we compete are subject to rapid technological change and frequent new product introductions and enhancements which often cause product obsolescence. We believe that our future success depends on our ability to continue to enhance our existing products and their process capabilities, and to develop and manufacture in a timely manner new products with improved process capabilities. We may incur substantial unanticipated costs to ensure product functionality and reliability early in its products’ life cycles. If we are not successful in the introduction and manufacture of new products or in the development and introduction, in a timely manner, of new products or enhancements to our existing products and processes that satisfy customer needs and achieve market acceptance, our sales and profitability will decline.

We obtain some of the components and subassemblies included in our products from a single source or limited group of suppliers, the partial or complete loss of which could have an adverse effect on our sales and profitability.

We obtain some of the components and subassemblies for our products from a single source or a limited group of suppliers. From time to time, we have experienced temporary difficulties in receiving our orders from some of these suppliers. Although we seek to reduce dependence on these sole and limited source suppliers, the partial or complete loss of these sources could adversely affect our sales and profitability and damage customer relationships by impeding our ability to fulfill our customers’ orders. Further, a significant increase in the price of one or more of these components or subassemblies could adversely affect our profit margins and profitability if no lower-priced alternative source is available.

1816

We manufacture all of our products at a single facility. Any prolonged disruption in the operations of that facility would result in a decline in our sales and profitability.

We manufacture all of our products in a facility located in San Luis Obispo, California. Our manufacturing processes are highly complex, require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, termination of our month-to-month lease of this facility, destruction of or damage to this facility as a result of an earthquake, fire or any other reason, would result in a decline in our sales and profitability.

We rely upon sales representatives and distributors for a significant portion of our sales. A disruption in our relationship with any sales representative or distributor could cause our sales and profitability to decline.

A significant portion of our sales outside of the United States are made through sales representatives and distributors. The activities of these sales representatives and distributors are not within our control, and they may sell products manufactured by other manufacturers. In addition, in some locations our sales representatives and distributors also provide field service and support to our customers. A reduction in the sales efforts or financial viability of these sales representatives and distributors, or a termination of our relationship with these sales representatives and distributors, could cause our sales and profitability to decline.

We may not be able to protect our intellectual property or obtain licenses for third parties’ intellectual property and, therefore, we may be subject to one or more intellectual property infringement claims which may adversely affect our sales, earnings and financial resources.

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we may not be able to protect our technology adequately, and competitors may be able to develop similar technology independently. This may be especially true if we are successful in entering into a joint venture relationship with the 45th Research Institute or another joint venture partner located in the People’s Republic of China. Additionally, patent applications that we may file ~~may~~ may not be issued and foreign intellectual property laws, ~~including those of the People’s Republic of China,~~ may not protect our intellectual property rights. There is also a risk that patents licensed by or issued to us will be challenged, invalidated or circumvented and that the rights granted thereunder will not provide competitive advantages to us. Furthermore, others may independently develop similar products, duplicate our products or design around the patents licensed by or issued to us.

Litigation could result in substantial cost and diversion of effort by us, which by itself could adversely affect our sales, earnings and financial resources. Further, adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products. In addition, licenses under third parties’ intellectual property rights may not be available on reasonable terms, if at all.

We depend on the services of Alan Strasbaugh and Chuck Schillings, and the loss of either of them could adversely affect our ability to achieve our business objectives.

Our continued success depends in part upon the continued service of Alan Strasbaugh, who is our Chairman of the Board, and Chuck Schillings, who is our President and Chief Executive Officer. Each is critical to the overall management of Strasbaugh as well as to the development of our technologies, our culture and our strategic direction. For example, Alan Strasbaugh is a member of our technology committee and provides expertise on the development of our products, and Chuck Schillings is instrumental in developing and maintaining close ties with our customer base. Although we have entered into employment agreements with Messrs. Strasbaugh and Schillings, neither of these agreements guarantees the service of the individual for a specified period of time. In addition, we do not maintain “key-person” life insurance policies on Messrs. Strasbaugh or Schillings. The loss of either Alan Strasbaugh or Chuck Schillings could significantly delay or prevent the achievement of our business objectives.

1917

Our failure to manage our growth effectively could prevent us from achieving our goals.

Our strategy envisions a period of growth that may impose a significant burden on our administrative and operational resources. The growth of our business will require significant investments of capital and management’s close attention. Our ability to effectively manage our growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, engineers and other personnel. We may be unable to do so. In addition, our failure to successfully manage our growth could result in our sales not increasing commensurately with our capital investments. If we are unable to successfully manage our growth, we may be unable to achieve our goals.

We are exposed to additional risks associated with international sales and operations.

International sales accounted for approximately 2917% and 4229% of our net revenues during ~~2008~~2009 and ~~2007~~2008, respectively. Although we experienced a decline in international sales during 2009 as compared to 2008, we expect that these sales will increase in 2010. Our international sales are subject to certain risks, including the following:

● tariffs and other trade barriers; ● challenges in staffing and managing foreign operations and providing prompt and effective support to our customers outside the United States; ● difficulties in managing foreign distributors; ● governmental controls, either by the United States or other countries, that restrict our business overseas or the import or export of our products, or increase the cost of our operations; ● longer payment cycles and difficulties in collecting amounts receivable outside of the United States; ● inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions; ● global or regional economic downturns; and ● geo-political instability, natural disasters, acts of war or terrorism.

● challenges in staffing and managing foreign operations and providing prompt and effective support to our customers outside the United States;

● difficulties in managing foreign distributors;

● governmental controls, either by the United States or other countries, that restrict our business overseas or the import or export of our products, or increase the cost of our operations;

● longer payment cycles and difficulties in collecting amounts receivable outside of the United States;

● inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions;

● global or regional economic downturns; and

● geopolitical instability, natural disasters, acts of war or terrorism.

There can be no assurance that any of these factors will not have a material adverse effect on our business, financial condition or results of operations. In addition, each region in the global markets within which we operate exhibits unique market characteristics that can cause capital equipment investment patterns to vary significantly from period to period.

Risks Relating to Ownership of our Common Stock

Because certain actions taken by our prior board of directors may have been inconsistent with the Plan of Dissolution approved by our shareholders and applicable provisions of California law, we could be subject to significant liabilities which would adversely affect our financial condition.

On June 3, 2005, our shareholders approved the Plan of Dissolution and thereby voluntarily elected to wind-up and dissolve Strasbaugh (formerly, CTK Windup Corporation). Under the terms of the Plan of Dissolution and California law, after our shareholders approved the Plan of Dissolution and thereby voluntarily elected to wind-up and dissolve Strasbaugh, our activities were to be limited to conducting our business only insofar as necessary for the winding up of our company. Consequently, seeking shareholder approval of, and entering into, the Share Exchange Transaction, may be viewed and ultimately determined to be in conflict with the Plan of Dissolution and the disclosures we made in our Proxy Statement filed with the SEC on May 5, 2005 relating to the special meeting of our shareholders at which we sought approval of the Plan of Dissolution. Additionally, the actions we took in connection with declaring and paying certain dividends after our shareholders approved the Plan of Dissolution may be viewed and ultimately determined to be in violation of California law. Although we believe that the activities we conducted after our shareholders approved the Plan of Dissolution were consistent with (i) the Plan of Dissolution, (ii) the disclosures we made in our proxy statement, (iii) applicable provisions of California law and (iv) our former board’s fiduciary duties to our shareholders, it is possible that our shareholders, the SEC, the California Commissioner of Corporations and/or the California Secretary of State may disagree with us. If that were to happen, we may be subject to an action by our shareholders or by a regulatory agency for acting in a manner inconsistent with the Plan of Dissolution and/or an action by the SEC and/or the California Commissioner of Corporations for acting in a manner inconsistent with California law and/or disseminating a proxy statement that contained material misstatements. If it is determined that disclosures contained in our proxy statement seeking approval of the Plan of Dissolution were misleading and, as a result, violated federal or state proxy rules, we may also be subject to fines and other unspecified relief imposed by the SEC and/or the California Commissioner of Corporations. The dollar amount of any damages and/or fines and the costs associated with any potential shareholder lawsuit or action by the SEC, the California Commissioner of Corporations and/or the California Secretary of State is difficult for us to quantify, yet it could be significant. If it is significant, our financial condition would be materially and adversely affected.

After our shareholders approved the Plan of Dissolution and before we obtained shareholder approval for the Share Exchange Transaction, our former board of directors declared and paid “extraordinary dividends” to our shareholders. Under California law, a corporation cannot revoke its election to wind up and dissolve after distributing assets pursuant to the corporation’s election to wind up and dissolve. We believe that the dividends that were declared and paid were “extraordinary dividends” and not dividends made in connection with the distribution of assets pursuant to our election to wind up and dissolve. We also believe that the actions taken by our former board of directors with respect to the declaration of “extraordinary dividends” were consistent with California law. However, a contrary finding – namely, that the dividends were made pursuant to our election to wind up and dissolve and/or our board of directors did not have the power to declare any dividend, other than a dividend in connection with our election to windup and dissolve – could mean that we did not have the power to revoke our election to windup and dissolve, and consequently that we did not have the power to enter into the Share Exchange Transaction or the Series A Preferred Stock Financing or to grant options under our 2007 Share Incentive Plan, or 2007 Plan. If this were the case, we could potentially have violated the laws of the State of California and misrepresented to our shareholders (including the former shareholders of R. H. Strasbaugh) and holders of our issued and outstanding options and warrants that we had the power to enter into the Share Exchange Transaction and the Series A Preferred Stock Financing, to grant options under our 2007 Plan and to issue warrants, as the case may be. As a result, we could be subject to actions by the California Secretary of State, the California Commissioner of Corporations, our shareholders (including the former shareholders of R. H. Strasbaugh) and/or holders of our issued and outstanding options and warrants. The dollar amount of any damages and costs associated with any of these potential actions is difficult for us to quantify, yet it could be significant. If it is significant, our financial condition would be materially and adversely affected.18

21After our shareholders approved the Plan of Dissolution and before we obtained shareholder approval for the Share Exchange Transaction, our former board of directors declared and paid “extraordinary dividends” to our shareholders. Under California law, a corporation cannot revoke its election to wind up and dissolve after distributing assets pursuant to the corporation’s election to wind up and dissolve. We believe that the dividends that were declared and paid were “extraordinary dividends” and not dividends made in connection with the distribution of assets pursuant to our election to wind up and dissolve. We also believe that the actions taken by our former board of directors with respect to the declaration of “extraordinary dividends” were consistent with California law. However, a contrary finding – namely, that the dividends were made pursuant to our election to wind up and dissolve and/or our board of directors did not have the power to declare any dividend, other than a dividend in connection with our election to windup and dissolve – could mean that we did not have the power to revoke our election to windup and dissolve, and consequently that we did not have the power to enter into the Share Exchange Transaction or to issue shares of our Series A Preferred Stock, or enter into the Series A Preferred Stock Financing or to grant options under our 2007 Share Incentive Plan. If this were the case, we could potentially have violated the laws of the State of California and misrepresented to our shareholders (including the former shareholders of R. H. Strasbaugh) and holders of our issued and outstanding options and warrants that we had the power to enter into the Share Exchange Transaction and the Series A Preferred Stock Financing, to grant options under our 2007 Share Incentive Plan and to issue warrants, as the case may be. As a result, we could be subject to actions by the California Secretary of State, the California Commissioner of Corporations, our shareholders (including the former shareholders of R. H. Strasbaugh) and/or holders of our issued and outstanding options and warrants. One possible outcome of such action or actions could be a declaration that the securities we issued or may issue after our shareholders approved the Plan of Dissolution, including the shares of common we may issue upon conversion of our Series A Preferred Stock and exercise of warrants we issued in connection with the Series A Preferred Stock Financing, a portion of which shares of common stock are being offered and sold under this prospectus, are void. Additionally, the Share Exchange Transaction, the Series A Preferred Stock Financing (including the issuance of the Series A Preferred Stock and warrants to purchase common stock) and any option grants could be rescinded and we may be required to pay significant damages to those who received these securities. The dollar amount of any damages and costs associated with any of these potential actions is difficult for us to quantify, yet it could be significant. If it is significant, our financial condition would be materially and adversely affected.

Because of inaccuracies contained in a press release we issued in December 2005, certain of our shareholders may have inaccurately reported certain tax benefits on their federal income tax returns which could result in claims against us.

On December 14, 2005, we issued a press release that contained an inaccurate representation of the extraordinary cash dividend issued on December 22, 2005. Contrary to our intention that both the dividends be treated as extraordinary cash dividends, the press release stated that the dividend issued on December 22, 2005 “will be treated for federal income tax purposes as a stock redemption in partial liquidation” of our business. As a result of our inaccurate and contradictory disclosures, some or all of our shareholders may have reported one or both of the distributions we made in 2005 to the Internal Revenue Service, or IRS, as liquidating dividends rather than as ~~extraordinary~~ extraordinary dividends. Although, in either case, the applicable tax rate would have been the same, if a shareholder characterized the dividend payment as a liquidating dividend rather than as an extraordinary dividend, the ~~shareholder~~ shareholder would have received an unintended benefit of being able to deduct the cost basis of the shares in determining the total amount of taxable gain or loss as a result of such distribution. If such a shareholder’s tax return were audited by the IRS, the IRS may conclude that the shareholder should not have been able to utilize such benefit. This conclusion by the IRS could possibly result in an action by the shareholder against us to recover the amount of the lost benefit and any potential penalties imposed on the shareholder by the IRS as a result of the improper characterization.

~~Our~~We ~~common~~have ~~stock~~not ~~price~~held ~~has~~an ~~been~~annual ~~volatile~~meeting of shareholders in several years, which could result in ~~substantial~~a ~~losses for~~legal ~~investors~~action ~~purchasing~~being ~~shares~~brought ofagainst ~~our~~us ~~common~~to ~~stock~~compel an annual meeting.

~~The~~We have ~~market~~not ~~prices~~held ofan ~~securities~~annual meeting of ~~technology-based~~shareholders ~~companies~~since ~~currently~~October ~~are highly~~21, ~~volatile~~2004. ~~The~~Under ~~market~~California ~~price~~law, ofif ~~our~~a ~~common~~we ~~stock~~do ~~has~~not ~~fluctuated~~hold an annual meeting to ~~significantly~~elect indirectors ~~the~~of ~~past. During~~Strasbaugh ~~2008,~~within ~~the~~fifteen ~~high~~months ~~and~~after ~~low~~the ~~closing~~last ~~bid~~annual ~~prices~~meeting of shareholders, a ~~share~~shareholder of ~~our~~Strasbaugh ~~common~~can ~~stock~~apply ~~were~~to ~~$2.30~~a ~~and~~court ~~$0.50,~~for an ~~respectively. On~~order ~~April~~compelling 6,us ~~2009,~~to ~~the~~hold ~~last~~a ~~reported~~meeting ~~sale~~of ~~price~~shareholders ofto aelect ~~share~~directors. Because ofit ~~our~~has ~~common~~been ~~stock~~more ~~was~~than ~~$0.40. The~~fifteen ~~market~~months ~~price~~since of our ~~common~~ ~~stock~~last ~~may~~annual ~~continue~~meeting towhere ~~fluctuate~~directors inwere ~~response~~elected, toan ~~the~~action ~~following~~could ~~factors,~~be inbrought, ~~addition~~pursuant to ~~others~~California law, ~~many~~against Strasbaugh to compel us to hold an annual meeting of ~~which~~shareholder ~~are~~and ~~beyond~~elect ~~our~~directors ~~control:~~of Strasbaugh.

●Our common ~~changes~~stock inprice ~~market~~has ~~valuations~~been ofvolatile, ~~similar~~which ~~companies~~could ~~and~~result ~~stock~~in ~~market~~substantial ~~price~~losses for ~~and~~investors ~~volume~~purchasing ~~fluctuations~~shares ~~generally;~~of our common stock.

●The market ~~economic~~prices ~~conditions~~of ~~specific~~securities of technology-based companies currently are highly volatile. The market price of our common stock has fluctuated significantly in the past. During 2009, the high and low closing bid prices of a share of our common stock were $1.19 and $0.21, respectively. On March 11, 2010, the last reported sale price of a share of our common stock was $0.50. The market price of our common stock may continue to fluctuate in response to the ~~industries~~following ~~within~~factors, in addition to others, many of which weare ~~operate;~~beyond our control:

● conversion of our Series A Preferred Stock and exercise of our warrants and the sale of their underlying common stock; ● changes in market valuations of similar companies and stock market price and volume fluctuations generally; ● economic conditions specific to the industries within which we operate; ● the timing of introduction of new systems and technology announcements and releases and ability to transition between product versions;

● changes in the timing of product orders due to unexpected delays in the introduction of our products due to lifecycles of our products ending earlier than expected or due to declines in market acceptance of our products; ● delays in our introduction of new products or technological innovations or problems in the functioning of our current or new products or innovations; ● third parties’ infringement of our intellectual property rights; ● changes in our pricing policies or the pricing policies of our competitors; ● regulatory developments; ● fluctuations in our quarterly or annual operating results; ● additions or departures of key personnel; and ● future sales of our common stock or other securities.

●Voting power ~~third~~of ~~parties’~~a ~~infringement~~significant portion of our ~~intellectual~~common ~~property~~stock ~~rights;~~is held by two of our shareholders, the Chairman of our board of directors, Alan Strasbaugh, and his brother Larry Strasbaugh, who, as a result, are able to control or exercise significant influence over the outcome of matters to be voted on by our shareholders.

22Alan Strasbaugh, our Chairman of the Board, and Larry Strasbaugh, the brother of Alan Strasbaugh, have voting power equal to approximately 49.6% of all votes eligible to be cast at a meeting of our shareholders. As a result of their significant ownership interest, these two shareholders will be able to control or exercise significant influence with respect to the election of directors, offers to acquire Strasbaugh and other matters submitted to a vote of all of our shareholders.

● changes in our pricing policies or the pricing policies of our competitors;

● regulatory developments;

● fluctuations in our quarterly or annual operating results;

● additions or departures of key personnel; and

● future sales of our common stock or other securities.

Voting power of a majority of our common stock is held by three shareholders who, as a result, are able to control or exercise significant influence over the outcome of matters to be voted on by our shareholders.

Alan Strasbaugh, our Chairman of the Board, Larry Strasbaugh, the brother of Alan Strasbaugh, and Lloyd I. Miller III, have voting power equal to approximately 60% of all votes eligible to be cast at a meeting of our shareholders. As a result of their significant ownership interest, these shareholders will be able to control or exercise significant influence with respect to the election of directors, offers to acquire Strasbaugh and other matters submitted to a vote of all of our shareholders.

Shares of our common stock eligible, or to become eligible, for public sale could adversely affect our stock price and make it difficult for us to raise additional capital through sales of equity securities.

We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. As of March 3119, ~~2009~~2010, we had outstanding 14,~~201~~705,587 shares of common stock, a substantial number of which were restricted under the Securities Act of 1933, as amended, or Securities Act. As of March 3119, ~~2009~~2010, we also had outstanding options, warrants, and Series A Preferred Stock that were exercisable for or convertible into approximately 87,~~508~~334,~~302~~ 325 shares of common stock. Sales of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price of our common stock. Any adverse effect on the market price of our common stock could make it difficult for us to raise additional capital through sales of equity securities at a time and at a price that we deem appropriate.

The conversion of our Series A Preferred Stock and the exercise of outstanding options and warrants to purchase our common stock could substantially dilute your investment, impede our ability to obtain additional financing, and cause us to incur additional expenses.

Under the terms of our Series A Preferred Stock and existing warrants to purchase our common stock, and outstanding options to acquire our common stock issued to employees and others, the holders of these instruments are given an opportunity to profit from a rise in the market price of our common stock that, upon the conversion of our Series A Preferred Stock and the exercise of the warrants and/or options, could result in dilution in the interests of our other shareholders. The terms on which we may obtain additional financing may be adversely affected by the existence and potentially dilutive impact of our Series A Preferred Stock, options and warrants. In addition, holders of the Series A Preferred Stock and warrants have registration rights with respect to the common stock underlying such Series A Preferred Stock and warrants, the registration of which will cause us to incur a substantial expense.

2321

The voting power and value of outstanding shares of ~~Common~~our ~~Stock~~common stock could decline if if our Series A Preferred Stock and warrants issued to our investors are converted or exercised at a reduced price due to our issuance of lower-priced shares which trigger rights of the holders of our Series A Preferred Stock and warrants to receive additional shares of our stock.

As part of our Series A Preferred Stock Financing, we issued a significant amount of ~~common~~Series A ~~stock~~Preferred ~~warrants~~Stock toand ~~our~~Investor ~~investors~~Warrants, the conversion or exercise of which could have a substantial negative impact on the price of our ~~common~~ common stock The initial conversion price of our Series A ~~Preferred~~ Preferred Stock and the initial exercise price of our ~~investor~~Investor ~~warrants~~Warrants will be subject to downward anti-dilution adjustments in most cases, from time to time, where we issue securities at a purchase, exercise or conversion price that is less than the then-applicable conversion price of our Series A Preferred Stock or exercise price of our ~~investor~~Investor ~~warrants~~Warrants. Consequently, the ~~voting~~ voting power and value of ~~the~~our ~~Common~~common ~~Stock~~ stock in each such event would decline if our Series A Preferred Stock or ~~investor~~the ~~warrants~~Investor ~~are~~Warrants are converted or exercised for shares of our common stock at the new lower price as a result of sales of our securities made below the then applicable conversion price of the Series A Preferred Stock and/or the exercise price of the ~~investor warrants~~Investor Warrants.

The market price of our common stock ~~could~~and the value of your investment could substantially decline if our Series A Preferred Stock, warrants or options are converted or exercised into shares of our common stock and resold into the market, or if a perception exists that a substantial number of shares will be issued upon conversion or exercise of our Series A Preferred Stock, warrants or options and then resold into the market.

~~Sales~~If the conversion or exercise prices at which our Series A Preferred Stock, warrants and options are converted or exercised are lower than the price at which you made your investment, immediate dilution of the value of your investment will occur. In addition, sales of a substantial number of shares of common stock issued upon conversion or exercise of our Series A Preferred Stock, warrants and options, or even the perception that such sales could occur, could adversely affect the market price of our common stock. You could, therefore, experience a substantial decline in the value of your investment as a result of both the actual and potential conversion or exercise of our Series A Preferred Stock, warrants or options.

Because we are subject to the “Penny Stock” rules, the level of trading activity in our common stock may be reduced.

Our stock constitutes “Penny Stock.” Under applicable SEC rules, Penny Stocks are generally equity securities with a price per share of less than $5.00 (other than securities registered on certain national exchanges). Broker-dealer practices in connection with transactions in Penny Stocks are regulated by rules adopted by the SEC. The Penny Stock rules require a broker-dealer, prior to a transaction in Penny Stocks not exempt from the rules, to deliver a standardized risk disclosure document that provides information about Penny Stocks and the nature and level of risks in the Penny Stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the Penny Stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly accounting statements showing the market value of each Penny Stock held in the customer’s account. In addition, the broker-dealer must make a special written determination that the Penny Stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity in a Penny Stock, such as our common stock, and investors in our common stock may find it difficult to sell their shares.

Because our common stock is not listed on a national securities exchange, you may find it difficult to dispose of or obtain quotations for our common stock.

Our common stock ~~was~~is ~~quoted~~traded on the ~~Pink Sheets® under the symbol “STRB.PK” until January 5, 2009, when it began trading on the~~ OTC Bulletin Board under the symbol “STRB.OB”.” Because our stock is quoted on other than a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could result in a restatement of our financial statements, cause investors to lose confidence in our financial statements and our company and have a material adverse effect on our business and stock price.

We produce our financial statements in accordance with accounting principles generally accepted in the United States. Effective internal controls are necessary for us to provide reliable financial reports to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public company, we are required to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and in future years will require a report by our independent registered public accounting firm that addresses our internal controls.

Testing and maintaining internal controls can divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, or our independent registered public accounting firm may not be able or willing, toif required, to issue a favorable assessment if we conclude that our internal controls over financial reporting are effective. If in the future, either we are unable to conclude that we have effective internal controls over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report as required by Section 404, investors could lose confidence in our reported financial information and our company, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise additional financing if needed in the future.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters is located approximately 185 miles south of San Jose in San Luis Obispo, California. We operate out of a 135,000 square foot building located in a small industrial park. The facility is made up of approximately 106,000 square feet of manufacturing space, including 11,600 square feet of clean assembly space and 1,200 square feet of cleanroom space (60% Class 100, 40% Class 10). The building is ~~jointly~~ owned by Alan Strasbaugh and ~~his~~is ~~former~~currently ~~wife,~~leased ~~April~~to ~~Paletsas,~~our ~~with each owning an undivided one~~wholly-~~half~~owned ~~interest in the property~~subsidiary, ~~and leased to~~ R. H. Strasbaugh, onfor a ~~month-to-month~~ ~~basis~~term of one year expiring January 4, 2011, at $84,000 per month. During each of the years ended December 31, ~~2007~~2009 and 2008, our facility lease costs were approximately $1,000,000. In addition, as a result of excess capacity, we are currently subleasing approximately 40,000 square feet of the facility onto third parties under short term agreements. We believe that our existing facilities are sufficient to meet our present needs and anticipated needs for the foreseeable future.

Item 3. Legal Proceedings.

WeOn December 1, ~~are~~2006, a ~~party~~ tocomplaint anon ~~action~~joinder ~~filed~~for declaratory relief was filed by April Paletsas requesting that our wholly-owned subsidiary, R. H. Strasbaugh, be joined to a matter in the San Luis Obispo Superior Court involving Alan Strasbaugh, and his former wife, ofApril ~~Alan~~Paletsas ~~Strasbaugh~~with regards to the San Luis Obispo facilities we occupy. Until January 8, 2010, Mr. Strasbaugh and Ms. Paletsas were co-landlords under the lease covering our corporate facilities. Ms. Paletsas is requesting a declaration by the ~~Court~~court that ~~our subsidiary,~~ R. H. Strasbaugh, is required to install a new roof on the leased facilities in San Luis Obispo and make certain other capital repairs under the repair and maintenance covenants of the lease covering our corporate ~~facilities,~~ ~~between~~facilities ~~Alan~~at ~~Strasbaugh~~the ~~and~~time Msshe filed the complaint. The ~~Paletsas,~~total ascosts ~~co-landlords,~~of such ~~and~~installation R.repairs H.are ~~Strasbaugh, as~~estimated ~~lessee.~~to be $750,000. The ~~Court~~ court issued an order ~~appointing~~allowing aR. H. ~~receiver~~Strasbaugh to ~~sell~~be ~~the property; thereafter~~joined, but stayed the ~~receiver~~case against ~~received~~R. H. anStrasbaugh ~~offer~~pending toresolution ~~purchase~~of ~~the~~ownership ~~premises~~issues ~~from~~between ~~Alan~~the ~~Strasbaugh~~co-landlords. The ~~offer~~issues ~~was~~between ~~accepted~~Mr. Strasbaugh and Ms. Paletsas ~~confirmed~~have bybeen resolved and the ~~San~~premises ~~Luis~~now ~~Obispo~~belong ~~County~~solely to Alan ~~Superior~~Strasbaugh ~~Court~~as ina ~~March~~result of ~~2009.~~ Mr. Strasbaugh’s ~~has~~purchase ~~until~~of ~~May~~Ms. 5,Paletsas’ ~~2009~~interest in ~~which~~ ~~to complete his purchase of~~ the property. ~~The~~on ~~Company~~January 8, ~~does~~2010. With ~~not~~regard ~~have~~to athe ~~lease for~~claims ~~its~~asserted ~~premises,~~against ~~except~~R. H. ~~for~~Strasbaugh aby ~~holdover~~Ms. ~~month-to-month~~Paletsas, ~~tenancy~~we atcontinue ~~this~~to ~~time.~~monitor ~~Although,~~the ~~management~~case ~~believes~~and ~~that~~intend ~~purchase~~to ofvigorously defend the ~~property~~case byon ~~Mr.~~the ~~Strasbaugh~~merits, if ~~consummated,~~should ~~may~~the court ~~resolve~~reactivate the ~~claim~~case. We ~~relating~~believe tothat ~~roof~~all ~~maintenance,~~of ~~that~~our ~~claim~~defenses are ~~remains~~meritorious, ~~pending. Management~~ and aconsider ~~committee~~it ~~consisting~~unlikely ~~of disinterested~~that ~~members~~we ofwill ~~the~~suffer ~~Company's~~an ~~board~~adverse ~~of directors is exploring~~result ~~opportunities~~should tothe ~~secure~~court areactivate ~~long~~the ~~term~~case ~~lease~~against ~~for~~R. ~~the~~H. ~~property~~Strasbaugh.

25Item 4. (Removed and Reserved).

On or about August 15, 2006, John Rzezuski filed a complaint in the Commonwealth of Massachusetts Superior Court against R. H. Strasbaugh alleging negligence and breach of implied warranty. Mr. Rzezuski alleges that he was injured while using a product we designed, manufactured and sold to Mr. Rzezuski’s employer. Mr. Rzezuski demands a judgment in an amount sufficient to compensate him for his losses and damages but does not allege with specificity his injuries or the relief sought. Our insurance carrier assumed the defense of this action, and settled it within the policy limits.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock has ~~was~~ been quoted on the ~~Pink~~OTC ~~Sheets®~~Bulletin Board under ~~the~~ the symbol “STRB.OTCBB” ~~from~~since ~~May 25, 2007 until~~ January 5, 2009~~, when it began trading on the OTC Bulletin Board under the symbol “STRB~~.~~OTCBB”.~~ Prior to ~~May 25~~ January 5, ~~2007~~2009 and since July 11, 2005, our common stock was quoted on the Pink ~~Sheets®~~OTC ~~under the symbol “CLTK~~Markets.” ~~Prior to that date, our common stock traded on NASDAQ.~~ The table below sets forth for the quarters indicated, the reported high and low bid prices of our common stock as reported on the OTC Bulletin Board and the Pink ~~Sheets®~~ OTC Markets. The prices shown reflect inter-dealer quotations without retail markups, markdowns or commissions, and may not necessarily represent actual transactions. The prices below also reflect the 1-for-31 reverse split of our common stock effected on May 24, 2007. As a result of the Share Exchange Transaction, we changed our fiscal year end from March 31 to December 31.

	High		Low
Year Ended December 31, 2007
First Quarter	$	2.48	$	1.86
Second Quarter	$	2.52	$	1.86
Third Quarter	$	2.35	$	2.00
Fourth Quarter	$	2.35	$	1.50
Year Ended December 31, 2008
First Quarter	$2.25	~~2.30~~	$1.55	~~1.55~~
Second Quarter	$2.00	~~2.00~~	$1.10	~~1.10~~
Third Quarter	$1.38	~~1.38~~	$1.20	~~1.20~~
Fourth Quarter	$1.20	~~1.38~~	$0.50	~~0.50~~
Year Ending December 31, 2009
Year Ended December 31, 2009
First Quarter	$0.70	~~1.19~~	$0.20	~~0.21~~
Second Quarter	$0.60		$0.18
Third Quarter	$1.10		$0.25
Fourth Quarter	$0.65		$0.25

~~Various~~As of ~~factors~~February ~~materially~~28, ~~affect~~2010, ~~the~~we ~~comparability~~had 14,705,587 shares of ~~the~~common stock ~~price~~outstanding ~~information~~held of ~~presented~~record inby ~~the~~approximately ~~above table~~154 shareholders. These holders ~~factors~~of ~~relate~~record ~~primarily~~include todepositories ~~the announcement~~that ofhold ~~and~~shares ~~the~~of ~~consummation~~stock offor ~~the~~brokerage firms ~~Share~~which, ~~Exchange~~in ~~Transaction~~turn, ~~and~~hold ~~the closing~~shares of ~~the~~stock ~~Series A~~for ~~Preferred~~numerous ~~Stock~~beneficial owners. On ~~Financing~~March 8, ~~both~~2010, the closing sale price of ~~which~~our ~~occurred~~common stock ~~during~~on the ~~second~~OTC ~~quarter~~Bulletin ofBoard ~~2007~~was $0. ~~See~~50 ~~“Business—Company History~~per share.”

2624

As of February 28, 2009, we had 14,201,587 shares of common stock outstanding held of record by approximately 154 shareholders. These holders of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous beneficial owners. On April 6, 2009, the closing sale price of our common stock on the OTC Bulletin Board was $0.40 per share.

Dividends

Although we have declared cash dividends on our common stock in the past, we currently anticipate that we will not declare or pay cash dividends on our common stock in the foreseeable future. We will pay dividends on our common stock only if and when declared by our board of directors. Our board of directors’ ability to declare a dividend is subject to restrictions imposed by California law. In determining whether to declare dividends, the board of directors will consider these restrictions as well as our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant. In addition, the terms of our Series A Preferred Stock restrict our ability to pay dividends to holders of our common stock. Under the terms of our Series A Preferred Stock, we cannot pay dividends on shares of our common stock until all dividends that have accrued on our Series A Preferred Stock have been paid. As of March 15, 2010, $2,288,000 in dividends have accrued on the outstanding shares of our Series A Preferred Stock and remain unpaid.

~~Recent~~Equity ~~Sales~~Compensation ~~of Unregistered Securities~~Plan

OnThe ~~May 24,~~information ~~2007,~~provided wein ~~completed~~Part aIII-Item ~~Share~~12 ~~Exchange Transaction, with the shareholders~~ of ~~R. H.~~this ~~Strasbaugh~~Annual ~~pursuant~~Report tounder ~~which we issued an aggregate of 13,770,366 shares of our common stock to~~ the ~~shareholders of R. H.~~heading ~~Strasbaugh~~“Equity ~~and,~~Compensation inPlan ~~exchange,~~Information” weis ~~acquired~~incorporated ~~all~~herein ~~of the issued and outstanding~~by ~~shares of capital stock of R~~reference. ~~H. Strasbaugh.~~

On May 24, 2007, immediately after the closing of the Share Exchange Transaction, we entered into an agreement with 21 accredited investors for the sale by us of 5,909,089 shares of our Series A Preferred Stock at a purchase price of $2.20 per share for total aggregate proceeds of $13 million. Additionally, in connection with the Series A Preferred Stock Financing, we issued to the investors five-year warrants to purchase an aggregate of 886,363 shares of common stock and we issued to our placement agent, B. Riley and Co. Inc. and its assignees, five-year warrants to purchase an aggregate of 385,434 shares of common stock.

The issuances of our securities described above were made in reliance upon the exemption from registration available under Section 4(2) of the Securities Act, among others, as transactions not involving a public offering.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this ~~Report~~report. This ~~Report~~report and our financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation:

27● the projected growth or contraction in the industries within which we operate; ● our business strategy for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguish ourselves from our current and future competitors.

● the projected growth or contraction in the industries within which we operate;

● our business strategy for expanding, maintaining or contracting our presence in these markets;

● anticipated trends in our financial condition and results of operations, including the recent decline in sales which resulted in lower net revenues for 2008 as compared to 2007 and an overall net loss for 2008 and 2007; and

● our ability to distinguish ourselves from our current and future competitors.

We do not undertake to update, revise or correct any forward-looking statements.

Any of the factors described above or in ~~Item~~the ~~1A,~~ “Risk Factors,” section could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

Overview

We develop, manufacture, market and sell an extensive line of precision surfacing products, including polishing, grinding and precision optics tools and systems, to customers in the semiconductor and semiconductor equipment, silicon wafer ~~fabrication~~and silicon wafer equipment, data storage, MEMS, LED and precision optics markets worldwide. Many of our products are used by our customers in the fabrication of semiconductors and silicon wafers.

For the year ended December 31, ~~2008~~2009, we reported revenues of $912,~~554~~873,000 as compared to $199,~~518~~554,000 for the year ended December 31, ~~2007~~2008, or aan ~~decline~~increase of 5135%. We reported a net loss ~~for the year ended December 31, 2008~~ of $4680,~~508,~~000 in 2009 as compared to a net loss of $~~777~~4,508,000 ~~for~~in ~~the year ended December 31, 2007~~2008. The ~~decline~~improved inperformance ~~our~~for ~~financial performance~~2009 ~~during~~over 2008 is a ~~direct~~ result of aimprovement ~~slowdown~~within in the semiconductor industry, ~~worldwide. The~~stabilizing ~~decline~~global ineconomies ~~revenues~~as ~~commenced~~well ~~during~~as ~~the~~cost-cutting ~~third~~efforts ~~quarter of~~launched ~~2007,~~by ~~continued~~our management ~~throughout~~in ~~2008~~2007 and weextended ~~expect that it will continue well~~ into 2009. ~~Semiconductor~~We ~~industry~~recognized ~~trade~~an ~~sources~~upturn ~~are~~in our ~~estimating~~business aby ~~decline of~~the ~~approximately~~fourth ~~29%~~quarter inof 2009, ~~compared~~and topresently ~~2008. As~~anticipate asome ~~result, we~~level ~~expect~~of tocontinued ~~report~~growth ~~losses from operations at least~~ into ~~the first two quarters of 2009~~ and potentially beyond 2010. ~~Our~~The ~~priority~~growth ~~over the next several months is to find ways to strengthen our balance sheet~~ and ~~conserve~~ ~~cash. With~~percentage ~~that~~increases in ~~mind,~~revenues ~~our~~in ~~total headcount has been further reduced to 73 full and part-time employees at February 9,~~ 2009, ~~down~~over ~~from~~2008 ~~approximately 100~~are ~~employees~~also ata ~~the~~result ~~beginning~~ of ~~2007. While additional headcount~~the ~~reductions~~inordinately ~~are~~poor ~~not~~performance ~~planned~~in at2008 ~~this~~which ~~time,~~ we ~~may~~believe ~~need~~resulted tofrom ~~further reduce our headcount and/or initiate work-stoppages in~~ the ~~form of unpaid time off in order~~impact toon ~~reduce~~our ~~expenses~~industry iffrom the ~~decline~~economic ~~in our business continues for a prolonged length of time~~downturn.

Share Exchange Transaction

On May 24, 2007, we completed the Share Exchange Transaction with the shareholders of R. H. Strasbaugh. Upon completion of the Share Exchange Transaction, we acquired all of the issued and outstanding shares of capital stock of R. H. Strasbaugh which resulted in a change in control of our company. In connection with the Share Exchange Transaction, we issued an aggregate of 13,770,366 shares of our common stock to the shareholders of R. H. Strasbaugh. The Share Exchange Transaction has been accounted for as a recapitalization of R. H. Strasbaugh with R. H. Strasbaugh being the acquirer for accounting purposes. As a result, the historical financial statements of R. H. Strasbaugh are now the historical financial statements of the legal acquiror, Strasbaugh.

At the time of the closing of the Share Exchange Transaction, we were not engaged in any active business operations. Our current business is comprised solely of the business of our wholly-owned operating subsidiary, R. H. Strasbaugh.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements:

Revenue Recognition. We derive revenues principally from the sale of tools, parts and services. We recognize revenue pursuant to ~~Staff~~SEC staff ~~Accounting~~guidance ~~Bulletin~~covering ~~No.~~revenue ~~104, “Revenue Recognition~~recognition.” Revenue is recognized when there is persuasive evidence an arrangement exists, delivery has occurred or services have been rendered, our price to the customer is fixed or determinable, and collection of the related receivable is reasonably assured. Selling arrangements may include contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. We recognize revenue upon shipment of products or performance of services and defer recognition of revenue for any amounts subject to acceptance until such acceptance occurs. Provisions for the estimated future cost of warranty are recorded at the time the products are shipped.

Generally, we obtain a non-refundable down-payment from the customer. These fees are deferred and recognized as the tool is shipped. All sales contract fees are payable no later than 60 days after delivery and payment is not contingent upon installation. In addition, our tool sales have no right of return, or cancellation rights. Tools are typically modified to some degree to fit the needs of the customer and, therefore, once a purchase order has been accepted by us and the manufacturing process has begun, there is no right to cancel, return or refuse the order.

We have evaluated our arrangements with customers and revenue recognition policies under ~~Emerging~~the ~~Issues~~Financial ~~Task~~Accounting ~~Force~~Standards Board (“~~EITF~~FASB”) ~~Issue~~Accounting ~~No.~~Standards Codification 00(“ASC”) 605-2125, “~~Accounting for~~ Revenue ~~Arrangements~~ ~~with~~ Recognition-Multiple ~~Deliverables~~-Element Arrangements,” and determined that ~~our~~its components of revenue are separate units of accounting. Each unit has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of each unit, and there is no right to cancel, return or refuse an order. Our revenue recognition policies for our specific units of accounting are as follows:

~~● Tools – We recognize revenue once a customer has visited the plant and signed off on the tool or it has met the required specifications and the tool is completed and shipped.~~26

● Tools – We recognize revenue once a customer has visited the plant and signed off on the tool or it has met the required specifications and the tool is completed and shipped. ● Parts – We recognize revenue when the parts are shipped. ● Service – Revenue from maintenance contracts is deferred and recognized over the life of the contract, which is generally one to three years. Maintenance contracts are separate components of revenue and not bundled with our tools. If a customer does not have a maintenance contract, then the customer is billed for time and material and we recognize the revenue after the service has been completed. ● Upgrades – We offer a suite of products known as “enhancements” which are generally comprised of one-time parts and/or software upgrades to existing Strasbaugh and non-Strasbaugh tools. These enhancements are not required for the tools to function, are not part of the original contract and do not include any obligation to provide any future upgrades. We recognize revenue once these upgrades and enhancements are complete. Revenue is recognized on equipment upgrades when we complete the installation of the upgrade parts and/or software on the customer’s equipment and the equipment is accepted by the customer. The upgrade contracts cover a one-time upgrade of a customer’s equipment with new or modified parts and/or software. After installation of the upgrade, we have no further obligation on the contracts, other than standard warranty provisions.

●We include ~~Service~~software –in ~~Revenue~~our ~~from~~tools. Software ~~maintenance~~is considered an incidental element of the tooling contracts and only minor modifications which are incidental to the production effort may be necessary to meet customer requirements. The software is ~~deferred~~used ~~and~~solely ~~recognized~~in ~~over~~connection with operating the ~~life~~tools and ofis not sold, licensed or marketed separately. The tools and software are fully functional when the ~~contract~~tool is completed, ~~which~~and after shipment, the software is ~~generally~~not ~~one~~updated tofor ~~three~~new ~~years~~versions that may be subsequently developed and, we have no additional obligations relative to the software. However, ~~Maintenance~~software modifications may be included in tool upgrade contracts. ~~are~~Our ~~separate~~software ~~components~~is ofincidental ~~revenue~~to the tool contracts as a whole. The software and ~~not~~physical ~~bundled~~tool ~~with~~modifications ~~our~~occur ~~tools~~and are completed concurrently. The Ifcompleted atool is tested by either the customer ~~does~~or ~~not~~us ~~have~~to aensure ~~maintenance~~it ~~contract,~~has met all required specifications and then accepted by the customer prior to shipment, at which point revenue is recognized. The ~~billed~~revenue ~~for~~recognition ~~time~~requirements ~~and~~of ~~material~~FASB ~~and~~ASC we985-605, “Software-Revenue ~~recognize~~Recognition,” are met when there is persuasive evidence an arrangement exists, the ~~revenue~~fee ~~after~~is fixed or determinable, collection is probable and delivery and acceptance of the ~~service~~equipment has ~~been~~occurred, ~~completed~~including upgrade contracts for parts and/or software, to the customer.

● Upgrades – We offer a suite of products known as “enhancements” which are generally comprised of one-time parts and/or software upgrades to existing Strasbaugh and non-Strasbaugh tools. These enhancements are not required for the tools to function, are not part of the original contract and do not include any obligation to provide any future upgrades. We recognize revenue once these upgrades and enhancements are complete. Revenue is recognized on equipment upgrades when we complete the installation of the upgrade parts and/or software on the customer’s equipment and the equipment is accepted by the customer. The upgrade contracts cover a one-time upgrade of a customer’s equipment with new or modified parts and/or software. After installation of the upgrade, we have no further obligation on the contracts, other than standard warranty provisions.

We include software in our tools. Software is considered an incidental element of the tooling contracts and only minor modifications which are incidental to the production effort may be necessary to meet customer requirements. The software is used solely in connection with operating the tools and is not sold, licensed or marketed separately. The tools and software are fully functional when the tool is completed, and after shipment, the software is not updated for new versions that may be subsequently developed and, we have no additional obligations relative to the software. However, software modifications may be included in tool upgrade contracts. Our software is incidental to the tool contracts as a whole. The software and physical tool modifications occur and are completed concurrently. The completed tool is tested by either the customer or us to ensure it has met all required specifications and then accepted by the customer prior to shipment, at which point revenue is recognized. The revenue recognition requirements of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” are met when there is persuasive evidence an arrangement exists, the fee is fixed or determinable, collectibility is probable and delivery and acceptance of the equipment has occurred, including upgrade contracts for parts and/or software, to the customer.

Installation of a tool occurs after the tool is completed, tested, formally accepted by the customer and shipped. We do not charge the customer for installation nor recognize revenue for installation as it is an inconsequential or perfunctory obligation and it is not considered a separate element of the sales contract or unit of accounting. If we do not perform the installation service there is no effect on the price or payment terms, there are no refunds, and the tool may not be rejected by the customer. In addition, installation is not essential to the functionality of the equipment because the equipment is a standard product, installation does not significantly alter the equipment’s capabilities, and other companies are available to perform the installation. Also, the fair value of the installation service has historically been insignificant relative to our tools.

Derivative Income. In accordance with FASB ASC 815-40-15 “Derivatives and Hedging-Contracts in Entity’s Own Equity-Scope and Scope Exceptions,” we are required to account for the preferred stock related embedded derivative and investor warrants as derivative liabilities (see Implementation of FASB ASC 815-40-15 “Derivatives and Hedging-Contracts in Entity’s Own Equity-Scope and Scope Exceptions”). We are required to mark to market in each reporting quarter the value of the embedded derivative and investor warrants. We revalue these derivative liabilities at the end of each reporting period. The periodic change in value of the derivative liabilities is recorded as either non-cash derivative income (if the value of the embedded derivative and investor warrants decrease) or as non-cash derivative expense (if the value of the embedded derivative and investor warrants increase). Although the values of the embedded derivative and warrants are affected by interest rates, the remaining contractual conversion period and the volatility of our common stock, the primary cause of the change in the values will be the value of our common stock. If the stock price goes up, the value of these derivatives will generally increase and if the stock price goes down the value of these derivatives will generally decrease.

Stock-Based Compensation. We account for share-based payments in accordance with FASB ASC 718-10, “Compensation-Stock Compensation.” As such, all share-based payments to employees, including grants of employee stock options and restricted shares, are recognized based on their fair values at the date of grant. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results. See Note 7 in our consolidated financial statements for the significant estimates used to calculate our stock-based compensation expense.

Warranty Costs. Warranty reserves are provided by management based on historical experience and expected future claims. Management believes that the current reserves are adequate to meet any foreseeable contingencies with respect to warranty claims.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. We evaluate the ~~collectibility~~collectability of our receivables at least quarterly. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management believes that our current allowances for doubtful accounts are adequate to meet any foreseeable contingencies.

Inventory. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value-based upon assumptions about future demand, future pricing and market conditions. If actual future -demand, future pricing or market conditions are less favorable than those projected by management, additional inventory write-downs may be required and the differences could be material. Once established, write-downs are considered permanent adjustments to the cost basis of the obsolete or unmarketable inventories.

30Valuation of Intangibles. From time to time, we acquire intangible assets that are beneficial to our product development processes. We use our best judgment based on the current facts and circumstances relating to our business when determining whether any significant impairment factors exist.

Valuation of Intangibles. >From time to time, we acquire intangible assets that are beneficial to our product development processes. We use our best judgment based on the current facts and circumstances relating to our business when determining whether any significant impairment factors exist.

Deferred Taxes. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. Based on these estimates, all of our deferred tax assets have been reserved. If actual results differ favorably from those estimates used, we may be able to realize all or part of our net deferred tax assets.

Litigation. We account for litigation losses in accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies.” Under SFAS No. 5, loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period, as additional information is known. Accordingly, we are often initially unable to develop a best estimate of loss; therefore, the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased or a best estimate can be made, resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. Due to the nature of current litigation matters, the factors that could lead to changes in loss reserves might change quickly and the range of actual losses could be significant, which could adversely affect our results of operations and cash flows from operating activities.28

~~Series~~Litigation. We account Afor ~~Preferred~~litigation ~~Stock~~losses ~~and Warrants.~~in Weaccordance ~~evaluate~~with ~~our~~FASB ~~Series~~ASC A450-20, “Contingencies-Loss ~~Preferred~~Contingencies,” ~~Stock~~loss ~~and~~contingency ~~warrants~~provisions onare anrecorded for ~~ongoing~~probable ~~basis~~losses ~~considering~~at ~~the~~management’s ~~provisions~~best estimate of ~~SFAS~~a ~~No.~~loss, ~~150~~or when a best estimate cannot be made, ~~“Accounting~~a ~~for~~minimum loss contingency amount is recorded. These estimates ~~Certain~~are ~~Financial~~often ~~Instruments~~initially ~~with~~developed ~~Characteristics~~substantially ofearlier ~~Both~~than ~~Liabilities~~the ~~and~~ultimate loss is ~~Equity~~known,” ~~which~~and ~~establishes~~the ~~standards~~estimates ~~for~~are ~~issuers~~refined ofeach ~~financial~~accounting ~~instruments~~period, ~~with~~as additional ~~characteristics~~information ofis ~~both~~known. ~~liabilities~~Accordingly, ~~and~~we ~~equity~~are ~~related~~often toinitially ~~the~~unable ~~classification~~to ~~and~~develop a ~~measurement~~best estimate of ~~those~~loss; ~~instruments~~therefore, the minimum amount, which could be zero, is recorded. ~~The~~ ~~Series~~As Ainformation ~~Preferred~~becomes ~~Stock~~known, either the minimum loss amount is ~~conversion~~increased ~~feature~~or ~~and~~a ~~warrants~~best ~~are~~estimate ~~evaluated~~can ~~considering~~be ~~the~~made, ~~provisions~~resulting ofin ~~SFAS~~additional loss Noprovisions. ~~133~~Occasionally, ~~“Accounting~~a ~~for~~best ~~Derivative~~estimate ~~Instruments~~amount ~~and~~is ~~Hedging~~changed ~~Activities,”~~to ~~which~~a lower amount ~~establishes~~when ~~accounting~~events ~~and~~result ~~reporting~~in ~~standards~~an ~~for~~expectation ~~derivative~~of ~~instruments,~~a more favorable outcome than previously ~~including~~expected. ~~certain~~Due ~~derivative~~to ~~instruments~~the ~~embedded~~nature inof ~~other~~current ~~contracts~~litigation matters, ~~and~~the ~~for~~factors that ~~hedging~~could ~~activities,~~lead ~~and~~to ~~EITF~~changes ~~Issue~~in ~~No.~~loss ~~00-19,~~reserves ~~“Accounting~~might ~~for~~change ~~Derivative~~quickly and the range of ~~Financial~~actual ~~Instruments~~losses ~~Indexed~~could tobe significant, ~~and~~which ~~Potentially~~could ~~Settled~~adversely ~~in,~~affect aour ~~Company’s~~results ~~Own~~of ~~Stock~~operations and cash flows from operating activities.”

Series A Preferred Stock and Warrants. We evaluate our Series A Preferred Stock and warrants on an ongoing basis considering the provisions of FASB ASC Topic 480, “Distinguishing Liabilities from Equity” which establishes standards for issuers of financial instruments with characteristics of both liabilities and equity related to the classification and measurement of those instruments. The Series A Preferred Stock conversion feature and Warrants are evaluated considering the provisions of FASB ASC Topic 815, “Derivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities, considering FASB ASC 815-40, “Derivatives and Hedging-Contracts in Entity’s Own Equity.”

Results of Operations

The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net revenues. The columns present the following:

● The first two data columns in each table show the absolute results for each period presented. ● The columns entitled “Dollar Variance” and “Percentage Variance” show the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as a negative. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns. ● The last two columns in each table show the results for each period as a percentage of net revenues.

● The columns entitled “Dollar Variance” and “Percentage Variance” show the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as a negative. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.29

●Year Ended ~~The~~December ~~last~~31, ~~two~~2009 ~~columns~~Compared into ~~each table show~~ the ~~results~~Year ~~for~~Ended ~~each~~December ~~period as a percentage of net revenues.~~31, 2008

													Results as a Percentage
							Dollar			Percentage			of Net Revenues for the
	Year Ended						Variance			Variance			Year Ended
	December 31,						Favorable			Favorable			December 31,
	2009			2008			(Unfavorable)			(Unfavorable)			2009			2008
	(In thousands)
Net revenues	$	12,873		$	9,554		$	3,319			35	%		100	%		100	%
Cost of sales		8,450			7,108			(1,342	)		(19	)%		66	%		74	%
Gross profit		4,423			2,446			1,977			81	%		34	%		26	%
Selling, general and administrative expenses		3,855			4,429			574			13	%		29	%		46	%
Research and development expenses		3,593			2,954			(639	)		(22	)%		28	%		31	%
Loss from operations		(3,025	)		(4,937	)		1,912			39	%		(23	)%		(51	)%
Total other income		2,333			429			1,904			444	%		18	%		4	%
Loss from operations before income taxes		(692	)		(4,508	)		3,816			85	%		(5	)%		(47	)%
Benefit from income taxes		12			-			12			100	%		0	%		0	%
Net loss	$	(680	)	$	(4,508	)	$	3,828			85	%		(5	)%		(47	)%

~~Year~~Net revenues. The ~~Ended~~increase ~~December~~in 31net revenues for 2009 was primarily due to an increase in tool system shipments partially offset by lower parts and service revenue as compared to 2008. Sales of tool systems increased by $4,369,000 to $7,410,000 in 2009, compared to $3,041,000 in 2008. Revenue ~~Compared~~from parts sales and services declined by $1,050,000 to $5,463,000 in 2009, compared to $6,513,000 in 2008. Management believes the ~~Year~~decline ~~Ended~~in ~~December~~parts 31sales and services is attributable to the poor economic conditions affecting the periods, during which ~~2007~~customers simply did not run their equipment in full production in an effort to cut their own costs and overhead during these times.

					Results as a Percentage
					of Net Revenues for the
	Year Ended		Dollar	Percentage	Year Ended
	December 31,		Variance	Variance	December 31,
	2008	2007	Favorable	Favorable
	(In thousands)		(Unfavorable)	(Unfavorable)	2008	2007
Net revenues	$9,554	$19,518	($9,964)	(51%)	100%	100%
Cost of sales	7,108	11,397	$4,289	38%	74%	58%
Gross profit	2,446	8,121	($5,675)	(70%)	26%	42%
Selling, general and administrative expenses	4,429	5,961	$1,532	26%	46%	31%
Research and development expenses	2,954	2,580	($374)	(14%)	31%	13%
Loss from operations	(4,937)	(420)	($4,517)	(1,075%)	(51%)	(2%)
Total other income (expense)	429	(347)	$776	224%	4%	(2%)
Loss from operations before income taxes	(4,508)	(767)	($3,741)	(488%)	(47%)	(4%)
Provision for income taxes	-	10	$10	100%	0%	0%
Net loss	($4,508)	($777)	($3,731)	(480%)	(47%)	(4%)

Gross Profit. The increase in gross profit, both in terms of dollar amount and as a percentage of net revenues, was primarily due to the higher sales volume for 2009 coupled with better utilization of our factory capacity. We believe that while the gross margin percentage of 34% was a marked improvement over the gross margin we reported for 2008, it does not reflect the gross margin attainable or sought by us. We offered a number of discounted sales in 2009 which eroded the margin from what we believe a more normal level of slightly more than 40%. Management does not anticipate offering such discounts in 2010 and beyond.

~~Net~~Selling, ~~revenues~~General and Administrative Expenses. The ~~$9,964,000~~ decrease in ~~net~~selling, ~~revenues~~general and administrative expenses for 2009 as compared to 2008 ~~was~~is primarily ~~due~~a toresult aof ~~slowdown~~lower inrequired ~~the~~provisions ~~semiconductor~~for ~~industry~~bad ~~which~~debts, ~~commenced~~lower ~~during~~professional ~~the~~fees ~~third~~and ~~quarter~~continued ofcost-cutting ~~2007~~measures.

~~Gross~~Research and Development ~~Profit~~Expenses. ~~Gross~~ ~~profit~~The ~~decreased~~increase byin ~~$5,675,000~~research ~~for 2008,~~ and ~~gross~~ ~~profit~~development asexpenses ain ~~percentage~~2009 ofover 2008 ~~net~~was ~~revenues~~primarily ~~decreased~~due to ~~26%~~the ~~for~~development ~~2008~~of ~~as compared~~new totechnology ~~42% for 2007. The decrease in gross profit margin was~~ (primarily ~~due to~~ the ~~lower~~STB P300™) ~~sales~~which ~~volume~~we released ~~for~~in ~~2008~~late ~~coupled~~2009 ~~with~~and ~~excess~~continue ~~capacity~~to sell in ~~the~~ ~~Company’s factory~~2010.

~~Selling,~~Other ~~General and Administrative~~Income ~~Expenses~~(Expense). The ~~$1,532,000~~increase ~~decrease~~ in ~~selling,~~other ~~general~~income ~~and administrative~~in ~~expenses~~2009 ~~for 2008 as~~ compared to ~~2007 is a result of a lower~~ ~~headcount~~2008 ~~which~~ was ~~initiated~~primarily indue ~~2007~~to ~~and~~non-cash ~~carried~~gains ~~into~~totaling ~~2008. In addition~~$1,688,000 ~~the~~resulting ~~Company’s~~from ~~management~~the decrease ~~has~~in ~~initiated~~the ~~various~~fair ~~cost-cutting~~value ~~measures, including~~of ~~requiring~~our ~~workers~~preferred tostock ~~take~~related ~~one~~embedded ~~week~~derivative and ~~unpaid~~warrant ~~time~~liabilities ~~off several times~~ during ~~the~~2009, ~~year~~and asa ~~needed. Management~~$260,000 ~~expects~~increase ~~these~~in ~~unpaid~~income ~~days off~~from ~~will~~subleasing ~~continue~~part ~~into~~of ~~2009~~our ~~depending~~corporate onheadquarters ~~business~~facility ~~and~~to ~~economic~~unaffiliated third ~~conditions~~parties.

Research and Development Expenses. The $374,000 increase in research and development expenses in 2008 over 2007 was primarily due to ongoing and recurring engineering of existing products as well as the development of new technology which the company is expected to release in late 2009 or early 2010.30

Other Expense. The $776,000 improvement in other income and expense in 2008 compared to 2007 was primarily due to lower interest expenses and the benefits of having subleased part of the corporate headquarters facility to unaffiliated third parties in 2008.

Liquidity and Capital Resources

During ~~the year ended December 31~~2009, ~~2008,~~ we funded our operations primarily from ~~available~~ cash ~~reserves~~from ~~and liquidating investments in securities~~operating activities. As of December 31, ~~2008~~2009, we had working capital of $42,~~009~~334,000 as compared to $84,~~271~~009,000 at December 31, ~~2007~~2008. At December 31, ~~2008~~2009 and ~~2007~~ 2008 we had an accumulated deficit of $3230,~~186~~229,000 and $2732,~~678~~186,000, respectively, and cash and cash equivalents of $491,240,000 and $149,~~864,~~000, respectively, as well as ~~investments~~ inaccounts ~~securities~~receivable of $~~239~~3,298,000 and $1,~~129~~309,000, respectively.

Our available capital resources at December 31, ~~2008~~2009 consist primarily of approximately $491,240,000 in cash, ~~$239,000 of investments in securities,~~ and $13,~~309~~298,000 in accounts receivable. We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, and future debt and/or equity financings, if any. ~~In addition, we have a credit facility with Silicon Valley Bank, as discussed below.~~

Cash ~~used~~ ingenerated from operating activities for ~~the~~2009 ~~years~~was ~~ended December 31~~$1,149,000 ~~2008~~ and ~~2007~~cash ~~were~~used by operating activities in 2008 was $1,207,000 ~~and $951~~,~~000,~~ ~~respectively,~~ including net losses of $680,000 and $4,508,000 for 2009 and 2008, respectively. Non-cash gains totaling $~~777~~1,688,000 ~~for~~resulting from the ~~years~~decrease ~~ended~~in ~~December~~the ~~31,~~fair ~~2008~~value of our Series A Preferred Stock related embedded derivative and ~~2007,~~warrant ~~respectively. Non-cash~~liabilities ~~charges~~during the year are included in the ~~2008~~2009 net loss ~~for~~as well as non-cash expenses for costs such as depreciation and amortization, stock-based compensation expense, and reserve provisions for inventory ~~and receivables totaled~~totaling $21,~~629~~003,000. Material changes in ~~asset~~assets and liabilities at December 31, ~~2008~~ 2009 as compared to December 31, ~~2007~~2008 that affected these results include:

● Anan increase in ~~inventory~~accounts receivable (before reserves) of $1,~~037~~778,000; ● an increase in customer deposits of $3,850,000; and ● a net increase in accounts payable and accrued expenses of $486,000.

●Cash provided aby ~~net~~investing ~~decrease~~activities infor ~~accrued~~2009 ~~expenses~~and of2008 was $~~657~~42,000 ~~which~~and ~~includes~~$546,000, respectively. For ~~commissions~~2009 ~~payable~~ and ~~vacation~~2008, the primary activity related to the sale and ~~sick~~maturity ~~pay~~of ~~accruals~~investments in securities totaling $294,000 and $823,000, respectively.

~~Cash~~There ~~provided~~were byno ~~investing~~cash ~~activities~~flows ~~for~~from ~~the~~financing ~~year~~activities ~~ended~~in ~~December~~2009. Cash ~~31, 2008 was $546,000 while cash~~ used in financing ~~investing~~ activities for 2008 was $1,~~331~~154,000 ~~for 2007. For~~as ~~the~~a ~~year~~result ~~ended~~of ~~December~~dividends ~~31,~~and ~~2008, the primary activity~~costs ~~related~~associated towith the ~~sale~~Series ~~and~~A ~~maturity~~Preferred ofStock ~~investments in securities totaling $823,000~~Financing.

Cash used in financing activities for the year ended December 31, 2008 was $1,154,000 as a result of dividends and costs associated with the Series A Preferred Stock Financing. For the year ended December 31, 2007, cash provided by financing activities totaled $2,941,000 primarily as a result of consummating the Series A Preferred Stock Financing.

Prior to May 22, 2007, our Silicon Valley Bank credit facility provided for a $3.5 million revolving line of credit secured by substantially all of our assets. The amount of available borrowings under the facility was based upon 85% of eligible accounts receivable. Interest was payable monthly. The interest rate was variable and is adjusted monthly based on the prime rate plus 3.5% as to $3.0 million of the facility (based on domestic accounts receivable) and the prime rate plus 4% as to $500,000 of the facility (based on foreign accounts receivable). On May 22, 2007, we entered into an Amendment to Loan and Security Agreement with Silicon Valley Bank to increase the amount of our credit facility to $7.5 million and to extend the term of the facility to August 18, 2007. On September 6, 2007, we entered into another Amendment to Loan and Security Agreement with Silicon Valley Bank to extend the term of the facility to October 16, 2007.

On December 4, 2007, we entered into two Loan and Security Agreements with Silicon Valley Bank providing for a credit facility in the aggregate amount of $7.5 million, or SVB Credit Facilities. The first component, or EXIM Facility, provides for a two-year $2.5 million revolving line of credit, secured by substantially all of our assets, that requires us to obtain a guarantee from the Export Import Bank of the United States of the credit extensions under the agreement before a credit extension will be made. The second component of the SVB Credit Facility, or Non-EXIM Facility, is a two-year, revolving line of credit secured by substantially all of our assets pursuant to which we can borrow up to $7.5 million dollars less the principal balance borrowed under the EXIM Facility. The guarantee from Export Import Bank of the United States must be in full force and effect throughout the term of the EXIM Facility and so long as any credit extensions under the EXIM Facility are outstanding. We will be in default under the EXIM Facility if the EXIM guaranty ceases to be in full force and effect as required by the Loan and Security Agreement applicable to the EXIM Facility. Events of default under either of the SVB Credit Facilities will constitute an event of default on the other SVB Credit Facility.

The SVB Credit Facilities are subject to various financial covenants, applicable to us and our subsidiary, R. H. Strasbaugh, on a consolidated basis, including the following: the ratio of certain liquid assets to current liabilities (the “Quick Ratio”), measured on a monthly basis, must not be less than 1.0:1.0; and the ratio of total liabilities less subordinated debt to tangible net worth plus subordinated debt, measured on a monthly basis, must be not more than 0.60:1.0. At December 31, 2008, the Company was not in compliance with the Quick Ratio covenant. However, there are no amounts outstanding on the facilities. The Non-EXIM Facility is formula-based which generally provides that the outstanding borrowings under the line of credit may not exceed an aggregate of 85% of eligible accounts receivable and 30% of eligible inventory. The EXIM Facility is also formula-based and provides that the outstanding borrowings under the line of credit may not exceed an aggregate of 90% of eligible accounts receivable and 50% of eligible inventory.

Interest on the SVB Credit Facilities is payable monthly. The interest rate applicable to the SVB Credit Facilities is a variable per annum rate equal to 0.75 percentage points above the prime rate as published by Silicon Valley Bank. Upon the occurrence and during the continuation of an event of default, the interest rate applicable to the outstanding balance under the SVB Credit Facilities will increase by five percentage points above the per annum interest rate that would otherwise be applicable.

Terms of the SVB Credit Facilities include commitment fees of $56,250 on the Non-EXIM Facility and $37,500 on the EXIM Facility. Both the EXIM Facility and the Non-EXIM Facility are subject to an unused line fee of 0.25% per annum, payable monthly, on any unused portion of the respective revolving credit facility.

We have been in negotiations with SVB as to extension of the SVB Credit Facilities, but we do not anticipate that we will agree on an extension. If no such extension is agreed, we will attempt to secure an alternative credit facility. However, because of the condition of the credit markets, we cannot be sure that an alternative credit facility will be available to us.

On May 24, 2007, our indebtedness to Agility in the amount of approximately $761,799 was repaid in full. Additionally, on May 24, 2007, R. H. Strasbaugh repurchased from Agility 771,327 shares of its common stock and a warrant to purchase shares of its common stock for $750,000 and $450,000, respectively.

On May 24, 2007, immediately after the closing of the Share Exchange Transaction, we issued to 21 accredited investors in the Series A Preferred Stock Financing an aggregate of 5,909,089 shares of our Series A Preferred Stock at a purchase price of $2.20 per share and five-year investor warrants, or Investor Warrants, to purchase an aggregate of 886,363 shares of common stock at an exercise price of $2.42 per share, for total gross proceeds of $13,000,000. The Investor Warrants are initially exercisable 180 days after May 24, 2007. We paid cash placement agent fees and expenses of approximately $1.1 million and issued five-year placement warrants, or Placement Warrants, to purchase 385,434 shares of common stock at an exercise price of $2.42 per share in connection with the offering. Additional costs related to the financing including placement agent, legal, accounting and consulting fees that totaled approximately $2,482,000 through December 31, 2008.

We are obligated under a registration rights agreement related to the Series A Preferred Stock Financing to file a registration statement with the SEC, registering for resale shares of common stock underlying the Series A Preferred Stock and shares of common stock underlying Investor Warrants, issued in connection with the Series A Preferred Stock Financing. The registration obligations require, among other things, that a registration statement be declared effective by the SEC on or before October 6, 2007. Because we were unable to have the initial registration statement declared effective by the SEC by October 6, 2007, we are generally required to pay to each investor liquidated damages equal to 1% of the amount paid by the investor for the underlying shares of commons stock still owned by the investor on the date of the default and 1% of the amount paid by the investor for the underlying shares of common stock still owned by the investor on each monthly anniversary of the date of the default that occurs prior to the cure of the default. However, we will not be obligated to pay any liquidated damages with respect to any shares of common stock not included on the registration statement as a result of limitations imposed by the SEC relating to Rule 415 under the Securities Act. The maximum aggregate liquidated damages payable to any investor will be equal to 10% of the aggregate amount paid by the investor for the shares of our Series A Preferred Stock. Accordingly, the maximum aggregate liquidation damages that we would be required to pay under this provision is $1.3 million. The registration statement was declared effective on November 6, 2008 and the Company has accrued approximately $223,000 as liquidated damages and is accruing 10% interest per annum on that amount until such time as the payment is made to the preferred shareholders.

We believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections or if unforeseen circumstances occur, we may require additional financing. Our failure to raise capital, if needed, could restrict our growth, limit our development of new products or hinder our ability to compete.

Backlog

As of March 19 12, ~~2009~~2010, we had a backlog of approximately $45.3 2 million. Our backlog includes firm non-cancelable customer commitments for 87 tools and approximately $~~546~~670,000 in parts and upgrades. Management believes that products in our backlog will be shipped by the end of ~~July 2009~~May 2010.

Effects of Inflation

The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either our company or our operating subsidiary.

Impacts of New Accounting Pronouncements

In October ~~2008~~2009, the FASB issued ~~FSP~~ASU ~~FAS No. 157~~2009-313, ~~"Determining~~“Multiple-Deliverable ~~the Fair Value of~~Revenue aArrangements, ~~Financial~~(amendments ~~Asset~~to ~~When~~FASB ~~the~~ASC ~~Market~~Topic ~~for~~605, ~~That~~Revenue ~~Asset~~Recognition)” Isand ~~Not Active." This FASB Staff~~ASU ~~Position~~2009-14, ~~("FSP")~~“Certain ~~clarifies~~Arrangements ~~the~~That ~~application~~Include ofSoftware ~~SFAS~~Elements ~~No.~~(amendments ~~157, "Fair Value~~to ~~Measurements,"~~FASB inASC aTopic ~~market~~985, ~~that~~Software).” ASU is2009-13 ~~not~~requires ~~active~~entities ~~and provides an example~~ to ~~illustrate~~allocate ~~key~~revenue ~~considerations~~ in ~~determining~~an ~~the~~arrangement ~~fair~~using ~~value~~estimated ofselling aprices ~~financial~~of ~~asset~~the ~~when~~delivered ~~the~~goods ~~market~~and ~~for~~services ~~that~~based ~~financial~~on ~~asset~~a isselling ~~not~~price ~~active~~hierarchy. ~~This~~The ~~FSP applies to~~amendments ~~financial~~eliminate ~~assets within~~ the ~~scope~~residual method of ~~accounting~~revenue ~~pronouncements~~allocation ~~that~~and require ~~or permit~~revenue ~~fair~~to ~~value~~be allocated ~~measurements~~using inthe ~~accordance~~relative ~~with~~selling ~~SFAS~~price Nomethod. ASU ~~157.~~2009-14 ~~This FSP was~~removes ~~effective~~tangible ~~upon~~products ~~issuance,~~from ~~including~~the ~~prior~~scope ~~periods~~of ~~for~~software ~~which~~revenue ~~financial~~guidance ~~statements~~and provides ~~have~~guidance ~~not~~on ~~been~~determining ~~issued.~~whether ~~Revisions~~software ~~resulting~~deliverables ~~from a change~~ in ~~the~~an ~~valuation~~arrangement that ~~technique~~includes ora ~~its~~tangible ~~application~~product ~~shall~~are becovered ~~accounted~~by ~~for~~the asscope aof ~~change~~the insoftware ~~accounting~~revenue ~~estimate (SFAS No~~guidance. ASU ~~154,~~2009-13 ~~"Accounting~~and ~~Changes~~ASU ~~and~~2009-14 ~~Error~~should ~~Corrections,"~~be ~~paragraph 19).~~applied ~~The~~on ~~disclosure~~a ~~provisions~~prospective basis offor ~~SFAS~~revenue ~~No.~~arrangements ~~154~~entered ~~for~~into aor ~~change~~materially modified in ~~accounting~~fiscal ~~estimate~~years ~~are~~beginning ~~not~~on ~~required~~or ~~for~~after ~~revisions~~June 15, ~~resulting~~2010, ~~from~~with aearly ~~change~~adoption ~~in valuation~~permitted. ~~technique~~We ordo ~~its~~not ~~application.~~expect ~~The~~ adoption of ~~this~~ASU ~~statement~~2009-13 ~~has~~or ~~not~~ASU ~~had~~2009-14 to have a ~~significant~~ material impact on ~~the~~our ~~Company's~~consolidated ~~financial~~results ~~condition,~~of ~~cash~~operations ~~flows~~ or ~~results~~financial ~~of operations~~condition.

35In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which was primarily codified into Topic 105 “Generally Accepted Accounting Standards” in the ASC. This standard will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. This standard reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant SEC guidance organized using the same topical structure in separate sections. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or EITF Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. This guidance is effective for financial statements issued for reporting periods that end after September 15, 2009. This guidance was adopted in the third quarter of 2009 and impacts our financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.

In June ~~2008~~2009, the FASB issued ~~FSP~~SFAS ~~EITF Issue~~ No. ~~03-6-1~~167, ~~"Determining~~“Amendments ~~Whether~~to FASB Interpretation No. ~~Instruments~~46(R),” ~~Granted~~which has not yet been codified in ~~Share-based~~the ~~Payment~~ASC. ~~Transactions~~This ~~are~~guidance ~~Participating~~is a revision ~~Securities."~~to ~~FSP~~pre-existing ~~EITF~~guidance ~~Issue~~pertaining Noto the consolidation and disclosures of variable interest entities. ~~03-6-1~~Specifically, ~~addresses~~it changes ~~whether~~how ~~instruments~~a ~~granted~~reporting inentity ~~share-based~~determines ~~payment~~when ~~transactions~~an ~~are~~entity ~~participating~~that ~~securities~~is ~~prior~~insufficiently tocapitalized ~~vesting,~~or is not ~~and~~controlled ~~therefore~~through ~~need~~voting to(or similar rights) should be ~~included~~consolidated. inThe determination ~~the~~of ~~earnings~~whether ~~allocation~~a inreporting ~~computing~~entity is required to consolidate another ~~earnings~~entity ~~per~~is ~~share~~based ~~under~~on, ~~the~~among ~~two-class~~other ~~method~~things, asthe ~~described~~other inentity’s ~~SFAS~~purpose ~~No.~~and ~~128,~~design ~~"Earnings~~and ~~Per~~the ~~Share."~~reporting ~~Under~~entity’s ability to direct the ~~guidance~~activities of ~~FSP~~the ~~EITF~~other ~~Issue~~entity that ~~No.~~most ~~03-6-1,~~significantly ~~unvested~~impact the other entity’s economic ~~share-based~~performance. This ~~payment~~guidance ~~awards~~will ~~that~~require ~~contain~~a ~~nonforfeitable~~reporting ~~rights~~entity to ~~dividends or~~provide ~~dividend~~additional ~~equivalents~~disclosures ~~(whether~~about ~~paid~~its orinvolvement ~~unpaid)~~with ~~are~~variable ~~participating~~interest ~~securities~~entities and ~~shall~~any besignificant ~~included~~changes in ~~the~~risk ~~computation~~exposure ofdue ~~earnings-per-share~~to ~~pursuant~~that toinvolvement. ~~the~~A reporting ~~two-class~~entity ~~method.~~will ~~FSP~~be ~~EITF~~required ~~Issue~~to ~~No.~~disclose ~~03-6-1~~how isits ~~effective~~involvement ~~for~~with ~~financial statements~~a ~~issued~~variable ~~for~~interest entity ~~fiscal~~affects ~~years~~the ~~beginning~~reporting ~~after~~entity’s ~~December~~financial ~~15,~~statements. ~~2008~~This ~~and~~guidance ~~all~~will ~~prior-period~~be ~~earnings~~effective ~~per~~at ~~share~~the ~~data~~start ~~presented~~of ~~shall~~a bereporting ~~adjusted~~entity’s first fiscal year beginning ~~retrospectively~~after November 15, 2009. Early application is not permitted. We ~~The~~do ~~Company is assessing~~not expect the ~~potential~~adoption ~~impact~~ of this ~~FSP~~guidance onto ~~its~~have ~~earnings~~a ~~per~~material ~~share~~impact on our ~~calculation~~consolidated results of operations or financial condition.

In June 2008, the FASB ratified EITF Issue No. 08-4, "Transition Guidance for Conforming Changes" to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios." This issue applies to the conforming changes made to EITF Issue No. 98-5 that resulted from EITF Issue No. 00-27 and SFAS No. 150. Conforming changes made to EITF Issue No. 98-5 that resulted from EITF Issue No. 00-27 and SFAS No. 150 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Earlier application is permitted. The impact, if any, of applying the conforming changes, if any, shall be presented retrospectively with the cumulative-effect of the change being reported in retained earnings in the statement of financial position as of the beginning of the first period presented. The Company is assessing the potential impact of this EITF on its financial condition and results of operations.32

In May ~~2008~~2009, the FASB issued SFAS No. ~~162~~165, ~~"The~~“Subsequent ~~Hierarchy~~Events,” ofwhich ~~Generally~~was ~~Accepted~~primarily ~~Accounting~~codified ~~Principles."~~into ~~SFAS~~Topic ~~No.~~855 ~~162~~“Subsequent ~~identifies~~Events” in the ~~sources~~ASC. This guidance establishes general standards of accounting ~~principles~~ for and ~~the~~disclosure ~~framework~~of ~~for~~events ~~selecting~~that occur after the ~~principles~~balance tosheet bedate ~~used~~but inbefore the ~~preparation~~ of financial statements ofare issued ~~nongovernmental~~or ~~entities that~~ are ~~presented~~ inavailable ~~conformity~~to ~~with~~be ~~GAAP~~issued. ~~The~~We ~~Company~~adopted ~~expects~~this noguidance ~~impact~~in onthe ~~its~~third ~~financial~~quarter ~~condition,~~of ~~cash~~2009 ~~flows~~and orit had no impact on our consolidated results of operations or ~~resulting~~financial ~~from this statement~~position.

In ~~April~~ ~~2008~~April 2009, the FASB issued ~~FSP~~Staff ~~FAS~~Position ~~No.~~(“FSP”) ~~142-3~~Financial ~~"Determination~~Accounting Standard of(“FAS”) ~~the~~157-4 ~~Useful~~“Determining ~~Life~~Fair ~~of Intangible~~Value ~~Assets." This~~When ~~FSP amends~~ the ~~factors~~Volume ~~that~~and ~~should~~Level beof ~~considered~~Activity infor ~~developing~~the ~~renewal~~Asset or ~~extension~~Liability ~~assumptions~~Have ~~used~~Significantly toDecreased ~~determine~~and ~~the~~Identifying ~~useful~~Transactions ~~life~~That ofAre aNot ~~recognized~~Orderly” ~~intangible~~which ~~asset~~was ~~under~~primarily ~~SFAS~~codified ~~No.~~into ~~142,~~Topic ~~"Goodwill and~~820 ~~Other~~“Fair ~~Intangible~~Value ~~Assets." The~~Measurements ~~intent~~and ofDisclosures” ~~this~~in ~~FSP~~the isASC. toBased ~~improve~~on the guidance, if ~~consistency~~an ~~between~~entity ~~the~~determines ~~useful~~that ~~life~~the level of aactivity ~~recognized~~for ~~intangible~~an asset ~~under~~or ~~SFAS~~liability has ~~No.~~significantly ~~142~~decreased and ~~the~~that ~~period~~a transaction is not orderly, further analysis of ~~expected~~transactions ~~cash~~or ~~flows~~quoted ~~used~~prices tois ~~measure~~needed, ~~the~~and ~~fair~~a ~~value~~significant of adjustment to the transaction ~~asset~~or ~~under~~quoted ~~SFAS~~prices ~~No.~~may ~~141~~be ~~(revised~~necessary ~~2007),~~to ~~"Business~~estimate ~~Combinations,"~~fair ~~and~~value ~~other~~in ~~GAAP. FSP~~accordance ~~FAS~~with Nothis guidance. ~~142-3~~This guidance is ~~effective~~to ~~for~~be ~~financial~~applied ~~statements~~prospectively ~~issued~~and is effective for ~~fiscal~~interim ~~years~~and ~~beginning~~annual ~~after~~periods ~~December~~ending after June 15, ~~2008. Management~~2009 iswith ~~currently~~early ~~assessing~~adoption ~~the~~permitted ~~impact,~~for ifperiods ~~any~~ending after March 15, 2009. Implementation of ~~adopting~~ this ~~statement~~standard on ~~the Company's~~April ~~financial condition~~1, ~~cash~~2009 ~~flows~~had ~~and~~no impact on our financial condition or results of operations.

In ~~March~~ ~~2008~~April 2009, the FASB issued ~~SFAS~~FSP ~~No. 161,~~FAS ~~“Disclosures~~115-2 ~~about~~and ~~Derivative Instruments~~FAS 124-2 “Recognition and Presentation ~~Hedging~~of ~~Activities~~Other-Than-Temporary Impairments,” anwhich ~~amendment~~was ofprimarily ~~FASB Statement~~codified ~~No. 133~~into Topic 320, ~~which~~“Investments ~~requires~~— ~~additional~~Debt ~~disclosures~~and ~~about~~Equity ~~the~~Securities” ~~objectives~~and ofTopic ~~the~~325 ~~derivative~~“Investments ~~instruments~~— ~~and~~Other” ~~hedging~~in ~~activities,~~ the ~~method~~ASC. ofThe ~~accounting~~guidance ~~for~~applies ~~such~~to investments in debt ~~instruments~~securities ~~under~~for ~~SFAS~~which Noother-than-temporary impairments may be recorded. ~~133~~ ~~and~~If ~~its~~an entity’s ~~related~~management ~~interpretations,~~asserts ~~and~~that it does not have the intent to sell a debt ~~tabular~~security ~~disclosure~~and ofit is more likely than not that it will not have to sell the security ~~effects~~before recovery of ~~such~~its ~~instruments~~cost ~~and~~basis, ~~related~~then ~~hedged~~an ~~items~~entity may separate onother-than-temporary impairments into two components: (i) the ~~Company’s~~amount ~~financial~~related ~~position,~~to credit ~~financial~~losses ~~performance~~(recorded in earnings), and ~~cash~~(ii) ~~flows.~~all ~~SFAS~~other amounts (recorded in Noother comprehensive income). ~~161~~ This guidance is to be applied prospectively and is effective for ~~the~~interim ~~Company~~and ~~beginning~~annual ~~January~~periods ending after June 115, 2009. ~~The~~ ~~Company~~Implementation isof ~~currently~~this ~~assessing~~guidance ~~the~~on ~~potential~~April ~~impact~~1, ~~that~~2009 ~~adoption~~had ofno ~~SFAS No. 161~~impact ~~may~~on ~~have~~our onfinancial condition ~~the~~or ~~Company’s~~results ~~financial~~of ~~statements~~operations.

36In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments,” which was primarily codified into Topic 825 “Financial Instruments” in the ASC. This standard extends the disclosure requirements concerning the fair value of financial instruments to interim financial statements of publicly traded companies. This standard is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. We have included the required disclosures in these consolidated financial statements.

In ~~December~~ ~~2007~~June 2008, the FASB ~~issued~~ratified ~~SFAS~~EITF Issue No. ~~160~~07-5, “~~Noncontrolling~~Determining ~~Interests~~Whether inan Instrument ~~Consolidated~~(Or ~~Financial~~an ~~Statements~~Embedded –Feature) anis ~~amendment~~Indexed ofto ~~Accounting~~an ~~Research~~Entity’s ~~Bulletin No.~~Own 51Stock,” ~~(“SFAS~~which ~~160”),~~was primarily ~~which~~codified ~~establishes~~into ~~accounting~~FASB ~~and~~ASC ~~reporting~~815-40, ~~standards~~“Derivatives ~~for ownership~~and ~~interests~~Hedging-Contracts in Entity’s ~~subsidiaries~~Own ~~held~~Equity.” The byguidance ~~parties~~provides ~~other~~that ~~than~~an ~~the~~entity ~~parent,~~should ~~the~~use ~~amount~~a oftwo-step ~~consolidated~~approach ~~net~~to ~~income~~evaluate ~~attributable~~whether toan ~~the~~equity-linked ~~parent~~financial ~~and~~instrument (or toembedded ~~the noncontrolling~~feature) ~~interest,~~is ~~changes~~indexed into aits ~~parent’s~~own ~~ownership~~stock, ~~interest~~including ~~and~~evaluating the ~~valuation~~instrument’s ofcontingent ~~retained~~exercise ~~non-controlling~~and ~~equity~~settlement ~~investments when a subsidiary is deconsolidated~~provisions. ~~The~~This ~~Statement~~guidance ~~also establishes reporting requirements that~~was ~~provide~~effective ~~sufficient~~for ~~disclosures~~financial ~~that~~statements ~~clearly~~issued ~~identify~~for ~~and~~fiscal ~~distinguish~~years ~~between~~beginning ~~the~~after ~~interests~~December of15, ~~the~~2008. ~~parent~~Early ~~and~~application ~~the~~was ~~interests~~not ofpermitted. ~~the~~Implementation ~~non-controlling~~of ~~owners. SFAS~~this ~~160~~guidance ishas ~~effective~~had ~~for~~a ~~fiscal~~significant ~~years~~impact ~~beginning~~on ~~after~~our ~~December 15,~~financial ~~2008.~~condition ~~The Company~~and isresults ~~currently~~of operations ~~assessing~~(See ~~the~~Implementation ~~potential~~of ~~impact~~FASB ASC ~~that adoption of~~815-40-15 ~~SFAS 160~~“Derivatives ~~may~~and ~~have~~Hedging-Contracts onin ~~the Company~~Entity’s ~~financial~~Own ~~statements~~Equity-Scope and Scope Exceptions,” below).

In ~~December~~ ~~2007~~April 2008, the FASB issued ~~SFAS~~FSP FAS No. 142-3 ~~141(R),~~ “~~Business~~Determination ~~Combinations”~~of ~~(“SFAS~~the Useful Life ~~141(R)”)~~of Intangible Assets,” which ~~replaces~~was ~~SFAS~~primarily ~~No.~~codified ~~141.~~into ~~SFAS~~Topic ~~No.~~350 ~~141(R)~~“Intangibles – ~~establishes~~Goodwill ~~principles~~ and ~~requirements~~Other” ~~for~~in ~~how~~the anASC. This ~~acquirer~~guidance ~~recognizes~~amends the ~~and~~factors ~~measures~~that should be considered in ~~its~~developing ~~financial statements~~renewal ~~the~~or ~~identifiable~~extension assumptions ~~assets~~used ~~acquired,~~to determine the ~~liabilities~~useful ~~assumed,~~life ~~any non-controlling~~of ~~interest~~a inrecognized ~~the~~intangible ~~acquiree~~ asset and ~~the~~requires ~~goodwill~~enhanced ~~acquired~~related disclosures. This ~~The Statement~~guidance ~~also~~must ~~establishes~~be ~~disclosure~~applied prospectively ~~requirements~~to ~~which~~all ~~will~~intangible ~~enable~~assets ~~users~~acquired ~~to evaluate~~as ~~the~~of ~~nature~~ and ~~financial~~subsequent ~~effects~~to offiscal years ~~the~~beginning ~~business~~after ~~combination~~December 15, 2008. This ~~SFAS 141(R)~~guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. Although ~~The~~future transactions involving intangible ~~adoption~~assets ofmay ~~SFAS~~be ~~141(R)~~impacted ~~will~~by ~~have~~this anguidance, ~~impact~~it ondid ~~accounting~~not ~~for~~impact ~~business~~our financial ~~combinations~~statements ~~once~~as ~~adopted,~~we ~~but~~did ~~the~~not ~~effect~~acquire isany ~~dependent~~intangible ~~upon~~assets ~~acquisitions~~during atthe ~~that~~year ended ~~time~~December 31, 2009.

In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities,” (“EITF 07-3”) which is effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts will be recognized as an expense as the goods are delivered or the related services are performed. The adoption of EITF 07-3 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.33

~~In February~~Implementation ~~2007,~~of ~~the~~ FASB ASC ~~issued~~815-40-15 ~~SFAS No. 159,~~ “~~The~~Derivatives ~~Fair Value Option for Financial Assets~~ and ~~Financial~~Hedging-Contracts ~~Liabilities”~~in which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 will be effective for the Company on January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on the CompanyEntity’s ~~financial~~Own ~~position,~~Equity-Scope ~~cash~~and ~~flows,~~Scope ~~or results of operations.~~Exceptions”

In ~~December~~ ~~2006~~June 2008, the FASB ~~issued~~ratified ~~FASB~~guidance ~~Staff~~included ~~Position~~in ~~(“FSP”)~~ASC ~~EITF Issue No. 00~~815-1940-2,15 “~~Accounting~~Derivatives ~~for Registration Payment Arrangements.” This FSP~~and ~~specifies~~Hedging-Contracts ~~that~~in ~~the~~Entity’s ~~contingent~~Own ~~obligation~~Equity-Scope toand ~~make~~Scope ~~future~~Exceptions,” ~~payments~~which provides orthat ~~otherwise transfer~~an ~~consideration~~entity ~~under~~should use a ~~registration~~two-step ~~payment~~approach ~~arrangement,~~to evaluate whether ~~issued~~an asequity-linked afinancial ~~separate~~instrument ~~agreement~~ (or ~~included~~embedded asfeature) ais ~~provision~~indexed ofto aits ~~financial instrument or~~own ~~other agreement~~stock, ~~should~~including beevaluating ~~separately~~the ~~recognized~~instrument’s ~~and~~contingent ~~measured~~exercise inand ~~accordance with~~settlement ~~FASB Statement No~~provisions. ASC 5,815-40-15 ~~“Accounting~~contains ~~for~~provisions ~~Contingencies.” The~~describing ~~adoption of~~conditions ~~FSP~~when ~~EITF~~an ~~Issue~~instrument ~~No.~~or ~~00-19-2~~embedded ~~had~~feature awould ~~material~~be ~~effect~~considered onindexed ~~the~~to ~~Company~~an entity’s ~~financial position,~~own ~~cash~~stock ~~flows,~~for ~~and~~purposes ~~results~~ of ~~operations~~evaluating as the ~~Company~~instrument ~~accrued~~or ~~costs~~embedded feature ~~totaling~~under ~~$223,000~~FASB ASC Topic 815 “Derivatives and ~~$208~~Hedging,~~000~~” ~~towards~~which ~~this~~establishes ~~expense~~accounting and asreporting ofstandards ~~December~~for 31derivative instruments, ~~2008~~including ~~and~~certain derivative ~~2007,~~instruments ~~respectively~~embedded in other contracts.

InPrior to ~~September~~the ~~2006~~implementation of ASC 815-40-15, our Series A Preferred Stock was classified as “temporary equity,” or outside of permanent equity and liabilities, and the Investor Warrants were classified as permanent equity because they met the criteria in the FASB ~~issued~~guidance ~~SFAS~~covering ~~No.~~the ~~157~~accounting for derivative financial instruments indexed to, ~~“Fair~~and ~~Value~~potentially settled in, a company’s own ~~Measurements~~stock.” ~~SFAS~~However, ~~No.~~both ~~157~~the ~~establishes~~Series A Preferred Stock conversion feature and Investor Warrants contain settlement provisions such that if we undertake certain equity offerings in the future at a ~~common~~price ~~definition~~lower ~~for~~than ~~fair~~the conversion or ~~value~~exercise toprices beof ~~applied~~the toinstruments, Uthe conversion ratio and exercise price would be adjusted.S. As ~~GAAP~~such, ~~guidance~~under ~~requiring~~the ~~use~~provisions of ~~fair~~ASC ~~value,~~815-40-15 the ~~establishes~~embedded aconversion ~~framework~~feature ~~for~~in ~~measuring~~our ~~fair~~Series ~~value~~A Preferred Stock, or Series A Conversion Feature, and ~~expands~~the ~~disclosure~~Investor ~~about such~~Warrants ~~fair~~are ~~value~~not ~~measurements. SFAS~~considered Noindexed to our stock. ~~157~~As isa ~~effective~~result ~~for~~of ~~fiscal~~the settlement provisions in our Series A Conversion ~~years~~Feature ~~beginning~~and ~~after~~the ~~November~~application of ASC 815-40-15, ~~2007~~effective January 1, 2009, the Series A Conversion Feature was required to be bifurcated from its host and accounted for as a derivative instrument. ~~The~~Also, ~~adoption~~as ofa ~~SFAS~~result ~~No.~~of ~~157~~the ~~did~~settlement ~~not~~provision ~~have~~in athe ~~material~~Investor ~~impact~~Warrants onand the ~~Company’s~~application ~~financial~~of ~~position~~ASC 815-40-15, ~~cash~~effective ~~flows~~January 1, 2009, the Investor Warrants were required to be oraccounted ~~results~~for ofas ~~operations~~derivative instruments. Accordingly, effective January 1, 2009, our Series A Conversion Feature and Investor Warrants are recognized as liabilities in our consolidated balance sheet.

37As described more fully in Note 2 to our consolidated financial statements, the cumulative effect of this change in accounting principle is recognized as an adjustment to the opening balance of our equity on January 1, 2009. The Series A Preferred Stock host will remain classified in temporary equity and stated at its fair value and the fair value of the Series A Conversion Feature is bifurcated from the host instrument and recognized as a liability on our consolidated balance sheet. In addition, the Investor Warrants are recognized at fair value as a liability on our consolidated balance sheet. The fair value of the conversion feature, the warrants and other issuance costs of the Series A Preferred Stock financing transaction, are recognized as a discount to the Series A Preferred Stock host. The discount will be accreted to the Series A Preferred Stock host from our paid in capital, over the period from the issuance date through the earliest redemption date of the Series A Preferred Stock.

In February 2008, the FASB issued FSP No. 157-2 which delays the effective date of SFAS No. 157 one year for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 is effective for the Company beginning January 1, 2009. The Company is currently assessing the potential impact that adoption of FSP No. 157-2 may have on the Company’s financial statements.34

~~In July~~The ~~2006,~~following ~~the~~table ~~FASB~~illustrates released FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes.” FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the ~~financial~~changes ~~statements. FIN 48 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns~~ to ~~determine~~ ~~whether~~our ~~the~~consolidated ~~tax~~balance ~~positions are “more-likely-than-not” of being~~sheet ~~sustained~~resulting byfrom the ~~applicable~~implementation ~~tax authority. Tax benefits~~ of ~~positions not~~ASC ~~deemed to meet the “more~~815-~~likely~~40-than-not” threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof. Adoption of FIN 48 is required for fiscal years beginning after December 15, ~~2006. The~~effective ~~adoption~~January ~~of FIN 48 has had no material impact on the Company’s consolidated financial position~~1, ~~results of~~ ~~operations or cash flows.~~2009:

In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument (Or an Embedded Feature) is Indexed to an Entity's Own Stock." EITF Issue No. 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF Issue No. 07-5 contains provisions describing conditions when an instrument or embedded feature would be considered indexed to an entity’s own stock for purposes of evaluating the instrument or embedded feature under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133) which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. Paragraph 11(a) of SFAS No. 133 indicates that "contracts issued or held by that reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders' equity in its statement of financial position" should not be considered derivative instruments.

	Balance December 31, 2008			Cumulative Effect Adjustment			Balance January 1, 2009

Preferred stock related embedded derivative	$	—		$	1,493,000		$	1,493,000
Warrants	$	—		$	199,000		$	199,000
Series A preferred stock	$	11,964,000		$	(3,191,000	)	$	8,733,000
Additional paid-in capital	$	26,803,000		$	(1,138,000	)	$	25,665,000
Accumulated deficit	$	(32,186,000	)	$	2,637,000		$	(29,549,000	)

The ~~Company’s~~ ~~convertible Series A Preferred Stock (Note 10) has been recognized as~~fair ~~“temporary~~values ~~equity,” or outside~~ of ~~permanent equity and liabilities, in~~ the ~~Company’s~~ ~~statement of financial position. The~~ Series A ~~Preferred Stock~~Conversion ~~does~~Feature, ~~not~~included ~~meet~~in the ~~definition of mandatorily redeemable under SFAS No. 150,~~ “~~Accounting~~Preferred ~~for Certain Financial Instruments with Characteristics of Both~~stock ~~Liabilities~~related ~~and~~embedded ~~Equity,~~derivative” ~~because~~liability ~~redemption is contingent upon the holders not exercising their conversion option~~ and the ~~host~~Investor ~~contract~~Warrants isincluded ~~classified as temporary equity~~ in ~~accordance with ASR 268 and EITF Abstracts, Topic D-98,~~the “~~Classification and Measurement of Redeemable Securities.~~Warrants” ~~The~~ ~~two embedded~~liability, ~~features~~on inour ~~the~~consolidated ~~Series~~balance Asheet ~~Preferred~~at ~~Stock~~January ~~did~~1, ~~not~~2009, ~~require bifurcation~~were ~~under~~estimated ~~SFAS~~using ~~No. 133 since~~ the ~~conversion feature met the paragraph 11(a) scope exception and the applicable criteria in EITF Issue No. 00~~Black-~~19,~~Scholes ~~“Accounting~~model ~~for Derivative Financial Instruments Indexed~~ to, ~~and~~be ~~Potentially Settled in~~$1, ~~a Company’s Own Stock~~493,”000 and ~~the redemption feature was determined to be clearly and closely related to the host contract~~$199, ~~therefore~~000, ~~failing the paragraph 12~~ ~~(a) criteria requiring bifurcation~~respectively. ~~Since there was no bifurcation of the embedded features there was no separate accounting for those features.~~

~~The~~As of ~~Investor~~December ~~Warrants~~31, ~~(Note~~2009, ~~10)~~we ~~have~~determined ~~been~~that, ~~recognized~~using asthe ~~permanent~~Black-Scholes ~~equity~~model, in the fair ~~Company’s~~value ~~statement~~ of ~~financial~~the ~~position. The~~Series A Preferred Stock related embedded derivative and the Investor Warrants ~~were~~had declined since January 1, 2009. Accordingly, we ~~classified~~have asrecorded ~~permanent~~a ~~equity~~gain ~~because~~on ~~they~~the ~~met~~change in fair value of the ~~paragraph~~embedded ~~11(a)~~derivative ~~scope~~and ~~exception~~warrants and recorded a corresponding reduction in ~~SFAS~~the ~~No.~~“Preferred ~~133~~stock related embedded derivative” and ~~all~~“Warrant” liability of $1,489,000, and $199,000, respectively, for the ~~criteria~~period infrom ~~EITF~~January ~~Issue~~1, ~~No.~~2009 to December 31, ~~00-19~~2009. ~~However,~~The ~~both~~effect of the ~~convertible~~income ~~Series~~from Athese ~~Preferred~~derivatives ~~Stock~~on the loss ~~conversion~~from ~~feature~~continuing operations and ~~Investor~~net ~~Warrants~~loss ~~contain~~for ~~settlement~~the ~~provisions~~year ~~such~~ended ~~that~~December 31, 2009 was ifto reduce the ~~Company~~net ~~makes~~loss ~~certain~~of ~~equity~~$2,342,000 ~~offerings~~to ina ~~the~~net ~~future~~loss atof a$654,000, ~~price~~and ~~lower than~~to reduce the ~~conversion~~net ~~prices~~loss ofper ~~the~~common ~~instruments,~~share ~~the~~from ~~conversion~~$0.33 ~~ratio~~to ~~would~~a benet loss per common share of ~~adjusted~~$0.22.

EITF Issue No. 07-5 provides that an instrument's strike price or the number of shares used to calculate the settlement amount are not fixed if its terms provide for any potential adjustment, regardless of the probability of such adjustment(s) or whether such adjustments are in the entity's control. If the instrument's strike price or the number of shares used to calculate the settlement amount are not fixed, the instrument (or embedded feature) would still be considered indexed to an entity's own stock if the only variables that could affect the settlement amount would be inputs to the fair value of a "fixed-for-fixed" forward or option on equity shares.

Accordingly, under the provisions of EITF Issue No. 07-5 the embedded conversion feature in the Company’s Series A Preferred Stock (the “Series A Conversion Feature”) and the Investor Warrants are not considered indexed to the Company’s stock because future equity offerings (or sales) of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares. As a result of the settlement provisions in the Company’s Series A Conversion Feature and the application of EITF Issue No. 07-5, effective January 1, 2009, the Series A Conversion Feature will no longer qualify for the paragraph 11(a) scope exception in SFAS No. 133, and is required to be bifurcated from its host, in accordance with paragraph 12 of SFAS No. 133, and accounted for as a derivative instrument. Also, as a result of the settlement provision in the Investor Warrants and the application of EITF Issue No. 07-5, effective January 1, 2009, the Investor Warrants will no longer qualify for the paragraph 11(a) scope exception in FAS 133, and are required to be accounted for as derivatives. In determining the classification of the Series A Conversion Feature and the Investor Warrants the Company considered guidance in EITF Issue No. 07-5 indicating that an instrument considered indexed to its own stock is evaluated under the provisions of EITF Issue No. 00-19 to determine whether it should be classified as equity, or as an asset or a liability, however, if the terms are such that it is not considered to be indexed to the entity’s own stock then equity classification is precluded. Accordingly, effective January 1, 2009 the Company’s Series A Conversion Feature and Investor Warrants will be recognized as liabilities in the Company’s consolidated balance sheet.

In accordance with EITF Issue No. 07-5, the cumulative effect of this change in accounting principle will be recognized as an adjustment to the opening balance of the Company’s equity on January 1, 2009. The Series A Preferred Stock host, the Series A Conversion Feature, the Investor Warrant and the cumulative effect adjustment will be determined based on amounts that would have been recognized if the guidance in EITF Issue No. 07-5 had been applied from the date the preferred stock and warrants were issued. The Series A Preferred Stock host will remain classified in temporary equity and stated at its fair value as the accounting for the instrument, excluding the Series A Conversion Feature, follows the applicable GAAP including ASR 268 and EITF Abstract Topic D-98. In accordance with SFAS No. 133, the fair value of the Series A Conversion Feature will be bifurcated from the host instrument and recognized as a liability on the Company’s consolidated balance sheet. The Investor Warrants will also be recognized at fair value as a liability on the Company’s consolidated balance sheet. The fair value of the conversion feature, the warrants and other issuance costs of the Series A Preferred Stock financing transaction, will be recognized as a discount to the Series A Preferred Stock host. The discount will be accreted to the Series A Preferred Stock host from the Company’s paid in capital, treated as a deemed dividend, over the period from the issuance date through the earliest redemption date of the Series A Preferred Stock. In addition, in accordance with SFAS No. 133, the Series A Conversion Feature liability and the Investor Warrant liability will be remeasured at fair value at the end of each period with the changes in fair value reported in earnings.

The implementation of EITF No. 07-5, and the resulting change in accounting principle will have a material impact on the Company’s statement of financial position as the liability position will increase substantially, the temporary equity will be substantially reduced, and the Company’s negative balance in permanent equity will increase. The future results of operations and earnings per share could be significantly impacted as a result of the gains and losses on the remeasurement of the Series A Conversion Feature and Investor Warrants. Future earnings per share will also be affected by the additional accretion resulting from a larger discount on the Series A Preferred Stock host. These changes will not affect the Company’s debt covenants as the Series A Preferred Stock and warrants are defined as equity in the debt agreements.

EITF Issue No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8.

Financial Statements and Supplementary Data.

Reference is made to the consolidated financial statements and accompanying notes included in this ~~Report~~report, which begin on page F-1.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Effective December 9, 2008, we dismissed Windes & McClaughry Accountancy Corporation (“Windes”) as our independent registered public accounting firm. Effective the same date, we appointed Farber Hass Hurley LLP (“FHH”), as our independent registered public accounting firm. We ~~have~~ had not consulted with FHH in the past regarding either: (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on ~~the~~our ~~Company's~~ financial statements; or (ii) any matter that was the subject of a disagreement or event identified in response to Item 304(a)(1)(iv) of Regulation S-K and the related instructions to that Item. The decision to change our independent registered public accounting firm was approved by our Audit Committee.

The reports issued by Windes on ~~the~~our ~~Company's~~ financial statements as of and for the ~~fiscal~~ fiscal years ended December 31, 2006 and 2007 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

In connection with its audits of our financial statements for the years ended December 31, 2007 and 2006, Windes advised management of the following matter that Windes considered to be a material weakness in the area of accounting and financial reporting: the current organization of our accounting department does not provide management with the appropriate resources and adequate technical skills to accurately account for and disclose our activities. Windes stated that this matter is evidenced by the following issues: (i) a number of material adjusting entries were proposed by Windes and recorded by us for the years ended December 31, 2007 and 2006, (ii) our closing procedures for the years ended December 31, 2007 and 2006 were not adequate and resulted in significant accounting adjustments for both years, and (iii) we were unable to adequately perform the financial reporting process as evidenced by a significant number of suggested revisions and comments by Windes to our financial statements and related disclosures for the years ended December 31, 2007 and 2006. As additional evidence of this material weakness, we restated our 2006 financial statements and restated our financial statements for the three months ended September 30, 2007.

During the fiscal years ended December 31, 2006 and 2007, and through December 9, 2008, there were no disagreements with Windes on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to Windes'’ satisfaction, would have caused Windes to make reference thereto in its reports on the financial statements for the years ended December 31, 2007 and 2006. The Company has authorized Windes to respond fully to the inquiries of the successor accountant concerning the subject matter of each of any disagreements and, if not, describe the nature of any limitation thereon, if any, and the reason therefore. During the period described in the first sentence of this paragraph, there were no "“reportable events"” (as defined in the ~~Securities~~SEC ~~and Exchange Commission~~ Regulation S-K, Item 304(a)(1)(v)).

40We provided Windes with a copy of the above disclosures and requested Windes to furnish a letter addressed to the SEC stating whether or not Windes agrees with the above statements.

The Company provided Windes with a copy of the above disclosures and requested Windes to furnish a letter addressed to the Securities and Exchange Commission stating whether or not Windes agrees with the above statements.

Item 9A.

Controls and Procedures.

Not applicable.

Item 9A 9A(T). Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

~~Changes in Internal Control Over Financial Reporting~~36

During the quarter ended December 31, 2008, management focused efforts to improve internal control over financial reporting. Weaknesses identified in our disclosure controls and procedures, and internal controls over financial reporting were analyzed and remediation efforts were pursued. We improved our control procedures primarily through engaging third party experts in compliance, presentation and internal control evaluation, as well as providing additional guidance and training to our present staff. As a result of these efforts, at December 31, 2008, the material weaknesses identified and reported in prior periods have been successfully remediated and adequate control procedures have been implemented in those areas to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our ~~CEO~~Chief Executive Officer and ~~CFO~~ Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, ~~2008~~2009 based on the guidelines established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, ~~2008~~2009 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with ~~Generally~~ ~~Accepted~~GAAP ~~Accounting Principles~~ applied in the United States.

This annual report does not include an attestation report of ~~the~~our ~~Company's~~ registered ~~public~~ public accounting firm regarding internal control over financial reporting. Management'’s report was not subject to attestation by ~~the~~our ~~Company's~~ registered public accounting firm pursuant to temporary rules of the ~~Securities~~ ~~and~~SEC ~~Exchange Commission~~ that permit ~~the~~us ~~company~~ to provide only management'’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal controls over the financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Item 9B.

Other Information.

None.

4237

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers

Our directors and executive officers as of ~~April~~March 12, ~~2009~~2010 are as follows:

Name	Age	Positions Held
Alan Strasbaugh	6061	Chairman of the Board
Chuck Schillings	50	President and Chief Executive Officer
Richard Nance	6061	Executive Vice President and Chief Financial Officer
Michael Kirkpatrick	5054	Director of Sales and Marketing
Allan Paterson	5760	Vice President of Business Development
Wesley Cummins	3132	Director
David Porter (1)	66	Director
Tom Walsh (1)	68	Director
John Givens (1)	46	Director
Martin Kulawski (1)	39	Director
Danilo Cacciamatta (1)	63	Director
Dan O’Hare (1)	46	Director

(1)	Member of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee.

Alan Strasbaugh has served as ~~our~~ Chairman of ~~the~~our ~~Board~~board of directors since May 2007 and as Chairman of the Board of our operating subsidiary, R. H. Strasbaugh, since 1978. Mr. Strasbaugh ~~also~~started ~~served~~employment asat R. H. Strasbaugh’s ~~Chief~~in ~~Executive~~1961. For ~~Officer~~the ~~from~~first ~~1988~~ten toyears ~~1998. Prior~~he toworked ~~that~~in most phases of manufacturing and engineering, hefollowed ~~served~~by eight years of manufacturing management, then ten years as ~~the~~General Manager and Director of Operations. He was CEO from 1990 to 1998, growing annual sales from of$8 Rmillion to $80 million. H Mr. Strasbaugh ~~for~~currently 10is ~~years~~employed at the company as an advisor. Mr He has a B.S. ~~Strasbaugh~~Degree ~~has~~in ~~been~~Mechanical Engineering from ~~awarded~~California ~~eight~~State ~~United~~Polytechnic ~~States~~University, Pomona. He has been awarded nine U.S. patents related to semiconductor manufacturing. Mr. Strasbaugh is ~~also~~uniquely ~~employed~~qualified byto usserve ason aour ~~technical~~board of directors given his long tenure ~~advisor~~with Strasbaugh and the critical capacities in which he has served. Mr. Strasbaugh’s ~~holds~~in adepth ~~B.S.~~knowledge ~~degree~~of inour ~~Mechanical~~operations, products, ~~Engineering~~and industry provides our board of directors with unique insights into ~~from~~our ~~California~~operations ~~Polytechnic~~and ~~State~~provides ~~University~~our board of directors with a broad perspective of the operational challenges, ~~Pomona~~opportunities and risks facing Strasbaugh.

Chuck Schillings has served as our President and Chief Executive Officer since May 2007 and as President and Chief Executive Officer of our operating subsidiary, R. H. Strasbaugh, since 2005. Mr. Schillings also served as a member of the board of directors of R. H. Strasbaugh between February 2003 and May 2007. From 2001 to 2004, Mr. Schillings was engaged in real estate development and was President and director of a not-for-profit organization he co-founded. From 1995 to 2001, he held several sales and marketing management positions at R. H. Strasbaugh. Mr. Schillings holds an M.S.B.A. degree in International Business from San Francisco State University and a B.S. degree in Business Finance with an Economics minor from San Diego State University.

Richard Nance has served as our Executive Vice President and Chief Financial Officer since May 2007 and as Chief Financial Officer and Vice President - Finance of R. H. Strasbaugh since 2002. ~~Prior to that, Mr. Nance was the Chief Financial Officer of Greentrac, a privately held software company.~~ He has worked as a chief financial officer for both public and private companies involved in software technology, manufacturing and international sales and distribution. Mr. Nance is a licensed Certified Public Accountant with prior experience as a National Bank Examiner with the United States Comptroller of the Currency, a commercial banker, and has over 1314 years of experience in business consulting, strategic planning and advisory services. Mr. Nance holds a B.B.A. degree in Banking and Finance from North Texas State University, a B.S. degree in Accounting from Central State University of Oklahoma and amemberships ~~membership~~ in the American Institute of Certified Public Accountants and the California Society of CPAs.

4338

Michael A. Kirkpatrick has served as Director of Sales and Marketing of R. H. Strasbaugh since 2004 and of Strasbaugh since May 2007. Mr. Kirkpatrick is responsible for the worldwide sales and marketing of all of our products. During his 15 years of employment at R. H. Strasbaugh, Mr. Kirkpatrick has served as United States Sales Manager and General Manager for R. H. Strasbaugh’s data storage business and has been actively involved in its CMP program. Mr. Kirkpatrick helped pioneer the application of CMP to the read/write head fabrication process. During his career at R. H. Strasbaugh, Mr. Kirkpatrick has been personally responsible for over $100 million in semiconductor equipment sales. He holds a B.S. degree in Business Administration and Marketing from California Polytechnic State University, San Luis Obispo, California.

Allan Paterson has served as Vice President of Business Development of R. H. Strasbaugh since 1995 and of Strasbaugh since May 2007 and is responsible for new product identification and the development of marketing and business development strategies. Mr. Paterson has over 25 years of experience in domestic and international business, marketing and sales development. His experience includes being responsible for sales, marketing and customer support for high technology companies in Europe, Israel and in the United States. Mr. Patterson has been awarded two United States patents related to semiconductor manufacturing. Mr. Paterson holds a Higher National Diploma in Electrical Technology from Cleveland College in the United Kingdom.

Wesley Cummins has served as a member of our board of directors since May 2007. Mr. Cummins is President of B. Riley and Co. ~~Inc.~~LLC, ana ~~NASD-registered~~FINRA ~~broker-dealer~~member firm, where he oversees the firm’s investment banking, sales and trading and research. From July of 2006 through September 10, 2007, Mr. Cummins spearheaded the firm’s initiative to grow the financial advisory and capital raising services to middle publicly traded companies as Director of Capital Markets of B. Riley and Co. ~~Inc~~LLC. Mr. Cummins joined B. Riley’s Research Department in February 2002 and was promoted to Director of Research in January 2003. During his tenure, he grew B. Riley’s research coverage to more than 100 companies in the following sectors: retail, semiconductors, technology hardware, software, IT services, communications, media and healthcare. While Director of Research, Mr. Cummins was ranked No. 1 in the 2004 Forbes.com/StarMine-North American Analyst Survey in the Best Stock Picker category for the Communications Equipment sector. Prior to joining B. Riley, Mr. Cummins worked at Needham & Company and at Kennedy Capital Management. He holds a B.S.B.A. degree from Washington University in St. Louis. Mr. Cummins also currently serves as a Director for Flight Safety Technologies (AMEX: FLT), ~~and~~Applied Technologies, Inc. and Davidson Optronics. Mr. Cummins’ extensive knowledge of the capital markets and all aspects of finance is invaluable in discussions by our board of directors surrounding our capital and liquidity needs, as well as strategic planning in these areas. His extensive experience serving other public and private company boards results in familiarity with corporate and board functions.

~~David~~Dr. ~~Porter~~Martin ~~has~~Kulawski has served as a member of our board of directors since ~~May 2007~~August 2009. ~~Prior~~Currently, toDr. Kulawski is president of his ~~retirement~~ onown ~~January~~firm, 1Advaplan, a ~~2000~~CMP foundry and consulting service, Mrand has held that position since September 2007. From ~~Porter~~2000 to 2007 he was ~~employed~~Project Manager at ~~Ford~~the ~~Motor~~Government Technical ~~Company~~Institute ~~for thirty-six~~of ~~years~~Finland. ~~During~~From ~~his~~1998 ~~retirement,~~to ~~Mr.~~2000 ~~Porter~~he ~~has~~was ~~served~~a onteam leader ~~the~~for CMP tool installation and process integration at customer sites for ~~Board~~Peter ofWolters ~~Directors~~Company. Dr. Kulawski is a member of CMP user groups in the ~~San~~United ~~Luis~~States ~~Obispo~~and ~~Botanical~~Europe ~~Gardens~~and has been a speaker and aslecturer ~~the~~at ~~chairperson~~semiconductor ofconferences in the ~~Gardens~~United States, Europe and Asia. He has authored more than 15 papers published in scientific journals. Dr. Kulawski was awarded a Master of ~~Exploration~~Science ~~Task~~Degree ~~Force~~in Electrical Engineering with a Solid State Electronics minor in 1998 from Christian Albrecht University and isa Ph.D. with a ~~private~~CMP thesis from the Technical ~~investor~~University of Helsinki. MrDr. ~~Porter~~Kulawski’s ~~education~~qualifications ~~includes~~to anserve ~~Executive~~on ~~Business~~our ~~Program~~board atof ~~the~~directors ~~University~~include his extensive knowledge of ~~Michigan~~the semiconductor industry and anthe Atechnologies, as well as his experience with tool systems and processes, which provide him with a deep technological expertise about our products and current technologies.B Dr. inKulawski ~~Chinese~~provides ~~History~~our ~~from~~board of directors ~~Stanford~~with ~~University~~unique insights regarding our anticipated future technological needs and those of the industries within which we compete, as well as the related challenges, opportunities and risks.

John Givens has served as a member of our board of directors since November 2007. Dr. Givens is President of Innovative Materials Group, Inc. and CMP Solutions, Ltd. which he founded and has worked for since 1999 and 2002, respectively. Through these businesses, Dr. Givens provides consulting services to companies in the CMP industry. Dr. Givens has focused his career on the innovation and development of materials and processes necessary to enable integrated circuit fabrication. Dr. Givens’ experience includes working as the Vice President of Engineering for Thomas West, Inc. and the CMP Section Manager for VLSI Technology. Dr. Givens has presented, authored and co-authored over 60 publications and holds 52 patents concerning advanced interconnect methodologies. He is a member of many engineering technical societies. Dr. Givens received his B.S. in Metallurgical Engineering, M.S. in Metallurgical Engineering and Ph.D. in Materials Science & Engineering from the University of Illinois at Urbana – Champaign.39

44Dan O’Hare has served as a member of our board of directors since August 2009. Mr. O’Hare has been with the accounting firm of Glenn, Burdette, Phillips and Bryson since 1989 specializing in tax planning and business consulting. He has been the President and managing partner since 1999. Prior to that he held positions at Arthur Young and Ernst and Whinney. He has served board and officer positions at the California Society of Certified Public Accountants. He currently serves on the board of Heritage Oaks Bancorp and serves on Heritage Oaks Bancorp’s compensation committee and as the financial expert on its audit committee. He has testified as an expert witness at Civil, Probate and Domestic Superior Courts. Mr. O’Hare earned a Bachelor of Business Administration Degree in 1985 from Notre Dame University. Mr. O’Hare’s qualifications to serve on our board of directors include his extensive background in accounting, tax and business consulting, as well as his leadership experience and experience serving on boards and board committees of other companies. Mr. O’Hare provides our board of directors with extensive expertise in the areas of finance, financial risk assessment and corporate governance.

~~Danilo~~Tom ~~Cacciamatta~~Walsh has ~~served as~~been a member of our board of directors since ~~April~~August ~~2008~~2009. Mr. Walsh, a ~~Cacciamatta~~former ~~has~~long-standing ~~been~~employee ~~the~~of ~~Chief~~Strasbaugh, ~~Executive~~began ~~Officer~~his ofemployment ~~Cacciamatta~~with ~~Accountancy~~R.H. ~~Corporation,~~Strasbaugh in 1959. After a ~~Public~~short ~~Company~~period ~~Accounting~~in ~~Oversight~~manufacturing, ~~Board~~he ~~registered~~moved into ~~firm~~engineering. He quickly rose to be chief designer and Vice President, Engineering. Mr. Walsh is responsible for the design and ~~more~~engineering ~~than~~direction of over one hundred products and over twelve thousand machine tools manufactured during the past ~~five~~forty years. Mr. ~~Prior~~Walsh’s designs tohave ~~forming~~been ~~Cacciamatta~~copied ~~Accountancy~~and propagated worldwide by countless other companies ~~Corporation~~in the optics and semiconductor industries. While directing the Engineering Department at Strasbaugh, Mr. ~~Cacciamatta~~Walsh ~~was~~studied ~~employed~~mechanical byengineering at ~~KPMG~~California ~~Peat~~State ~~Marwick~~University ~~from~~at ~~1972~~Long toBeach ~~1988 in~~but stopped a ~~variety~~few ofunits ~~positions,~~short ~~including~~of ~~audit~~a Bachelor ~~partner~~of ~~from~~Science ~~1980 to 1988~~degree. Mr. ~~Cacciamatta~~ ~~currently~~Walsh ~~serves~~is on the ~~boards~~third largest holder of Strasbaugh ~~directors~~common ~~and~~stock. His ~~audit~~employment ~~committee~~with ofStrasbaugh ended ~~California~~in ~~First~~2005 ~~National~~but ~~Bancorp~~he ~~(NasdaqGM:~~has ~~CFNB)~~remained an advisor to the Engineering Department. Mr. ~~Cacciamatta is~~Walsh’s aqualifications ~~member~~to ofserve ~~the~~on ~~American~~our ~~Institute~~board of directors ~~Certified~~include ~~Public~~his ~~Accountants~~extensive ~~and~~experience ~~the~~with Strasbaugh which includes ~~California~~intimate ~~Society~~knowledge of ~~Certified~~our ~~Public~~operations ~~Accountants~~and products. Mr. ~~Cacciamatta~~Walsh provides ~~received~~our aboard ~~B.A.~~of ~~degree~~directors ~~from~~with ~~Pomona~~unique ~~College~~insights into the challenges, opportunities and anrisks ~~M.B.A.~~associated ~~degree~~with ~~from~~our ~~the University~~product ofdevelopment ~~California~~and atoverall ~~Riverside~~strategic decisions.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the ~~Securities~~ Exchange Act ~~of 1934, as amended,~~ requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities, or reporting persons, to file initial reports of ownership and reports of changes in ownership of our common stock and other equity securities with the ~~Securities and Exchange Commission~~SEC. The reporting persons are required by the ~~Securities~~SEC ~~and Exchange Commission~~ regulations to furnish us with copies of all reports that they ~~file. Based~~ solely upon a review of copies of the reports furnished to us during our fiscal year ended December 31, 2008 and thereafter, or any written representations received by us from reporting persons that no other reports were required, we believe that all of the Section 16(a) filing requirements applicable to our reporting persons during 2008 were complied with. During 2008 Alan Strasbaugh, Wesley Cummins, David Porter, John Givens, Chuck Schillings, Richard Nance, Michael Kirkpatrick, Allan Paterson, and Lloyd I. Miller, III, each filed Form 3 they were required to file ~~during 2007~~.

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during the year ended December 31, 2009 and Forms 5 and amendments thereto furnished us with respect to the year ended December 31, 2009, our knowledge of and written representations that no Form 5 is required, no person that was a reporting person during the year ended December 31, 2009, except for Daniel O’Hare, Martin Kulawski and Lloyd I. Miller, III, failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2009 or prior fiscal years. Daniel O’Hare and Martin Kulawski each filed one late Form 3 during 2009. In addition, Lloyd I. Miller, III did not file a Form 5 for the fiscal year ended December 31, 2009, and we have not received a written representation from Lloyd I. Miller, III stating that no Form 5 is required. Further, based solely on our knowledge, Daniel O’Hare, Martin Kulawski, Tom Walsh, Wes Cummins and Alan Strasbaugh each failed to file one Form 4 to report one transaction during the fiscal year ended December 31, 2009.

Composition of the Board of Directors

Our board of directors has responsibility for our overall corporate governance and meets regularly throughout the year. Our bylaws provide that our board of directors may fix the exact number of directors between four and seven. Our board of directors has fixed the number of directors at five.

Our directors are elected annually and hold office until the next annual meeting of shareholders, until their successors are elected or until their earlier death, resignation or removal. Our directors are kept informed of our business through discussions with our executive officers, by reviewing materials provided to them and by participating in meetings of our board of directors and its committees.

For so long as our shares of Series A Preferred Stock remain outstanding, the holders of at least a majority of our issued and outstanding shares of Series A Preferred Stock are entitled to nominate one member of our board of directors. In addition, the holders of at least a majority of our issued and outstanding shares of Series A Preferred Stock are entitled to nominate a second member of our board of directors for successive one-year-terms upon the accumulation of accrued and unpaid dividends for three or more six-month periods or our failure to comply with the covenants or agreements set forth in our articles of incorporation. The ~~right~~holders toof ~~nominate a~~our ~~second~~Series A ~~director~~Preferred ~~will~~Stock ~~terminate~~have ~~upon~~nominated ~~the~~Wesley ~~cure~~Cummins as a member of ~~the~~our board ~~defaults~~of ~~creating~~directors and currently have the right to nominate a second ~~director. Our~~member ~~executive~~of our ~~officers~~board ~~are~~of ~~appointed by~~directors. The ~~and~~right ~~serve~~to atnominate ~~the~~a ~~discretion~~second ofdirector ~~our~~will terminate ~~board~~upon ofthe ~~directors.~~cure ~~There~~of ~~are~~the nodefaults ~~family relationships~~creating ~~among~~the ~~our~~right ~~executive~~to ~~officers~~nominate ~~and~~a ~~directors~~second director.

Our executive officers are appointed by and serve at the discretion of our board of directors. There are no family relationships among our executive officers and directors.

As discussed below, we have adopted procedures by which shareholders may elect nominees to our board of directors.

Corporate Governance

Our board of directors believes that good corporate governance is paramount to ensure that Strasbaugh is managed for the long-term benefit of our shareholders. Our board of directors has adopted corporate governance guidelines that guide its actions with respect to, among other things, the composition of the board of directors and its decision making processes, board of directors meetings and involvement of management, the board of directors’ standing committees and procedures for appointing members of the committees, and its performance evaluation for our Chief Executive Officer.

Our board of directors has adopted a Code of Ethics and Corporate Conduct that applies to all of our directors, officers and employees and an additional Code of Business Ethics that applies to our Chief Executive Officer and senior financial officers. The Codes of Ethics, as applied to our principal executive officer, principal financial officer and principal accounting officer constitutes our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002. Our Code of Ethics and Corporate Conduct and our Code of Business Ethics that applies to our Chief Executive Officer and Senior Corporate Financial Officer is posted on our Internet website, located at http://www.strasbaugh.com. We will provide to any person, without charge, upon written request, a copy of our Codes of Ethics. Written requests should be made to Dan O’Hare, the Board of Directors, Strasbaugh, 825 Buckley Road, San Luis Obispo, California 93401.

We intend to satisfy the disclosure requirements of the federal securities laws relating to amendments to or waivers from provisions of these codes, by describing on our Internet website, located at http://www.strasbaugh.com, within four business days following the date of a waiver or a substantive amendment, the date of the waiver or amendment, the nature of the amendment or waiver, and the name of the person to whom the waiver was granted.

~~Information on our Internet website is not a part of this Report or incorporated into any other filings we make with the SEC.~~41

Information on our Internet website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.

Director Independence

Our corporate governance guidelines provide that a majority of the board of directors and all members of the Audit, Compensation and Nominating and Corporate Governance Committees of the board of directors must be independent.

On an annual basis, each director and executive officer is obligated to complete a Director and Officer Questionnaire that requires disclosure of any transactions with Strasbaugh in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Following completion of these questionnaires, the board of directors, with the assistance of the Nominating and Corporate Governance Committee, makes an annual determination as to the independence of each director using the current standards for “independence” established by the SEC and NASDAQ Market Place Rules, additional criteria set forth in our corporate governance guidelines and consideration of any other material relationship a director may have with Strasbaugh.

Our board of directors has determined that ~~all~~each of our directors ~~are~~who served on our board during the year ended December 31, 2009 is independent under these standards, except for Mr. Strasbaugh, who serves as our Chairman of the Board, and Mr. Cummins, who is employed by B. Riley and Co. LLC and was nominated ~~Inc. See~~to ~~“Certain~~serve ~~Relationships~~on ~~and~~our ~~Related~~board ~~Transactions”~~by the holders of our Series A Preferred ~~below~~Stock.

Shareholder Communications with our Board of Directors

Our board of directors has implemented a process by which shareholders may send written communications directly to the attention of our board of directors or any individual member of our board of directors. ~~Danilo~~Dan ~~Cacciamatta~~O’Hare, the ~~Chairman~~ Chairman of our Audit Committee, is responsible for monitoring communications ~~from~~ from shareholders and providing copies of such communications to the other ~~directors~~ directors as he considers appropriate. Communications will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that Mr. ~~Cacciamatta~~O’Hare considers to be important for the directors to consider. Shareholders who wish to communicate with our board of directors can write to ~~Danilo~~Dan ~~Cacciamatta~~O’Hare, The Board of Directors, Strasbaugh, 825 Buckley Road, San Luis Obispo, California 93401.

Committees of the Board of Directors

Our board of directors has established standing Audit, Compensation and Nominating and Corporate Governance Committees. Each committee has a written charter that is reviewed annually and revised as appropriate. A copy of each committee’s charter is available on our Internet website, located at http://www.strasbaugh.com.

Audit Committee

Our Audit Committee selects our independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors, and reviews our financial statements for each interim period and for our year end.

Our Audit Committee operates pursuant to a charter approved by our board of directors and our Audit Committee, according to the rules and regulations of the SEC. Our Audit Committee consists of Messrs. Cacciamatta, Givens and Porter. Mr. Cacciamatta serves as the Chairman of our Audit Committee. Our board of directors has determined that each of Messrs. Cacciamatta, Givens and Porter is “independent” under our Corporate Governance Guidelines, and the Nasdaq Marketplace Rules and that each satisfies the other requirements under SEC rules regarding audit committee membership. Mr. Cacciamatta qualifies as an “audit committee financial expert” under applicable SEC rules and regulations governing the composition of the Audit Committee, and satisfies the “financial sophistication” requirements of the NASDAQ Marketplace Rules.42

Our Audit Committee operates pursuant to a charter approved by our board of directors and our Audit Committee, according to the rules and regulations of the SEC. Our Audit Committee consists of Messrs. O’Hare, Walsh and Kulawski. Mr. O’Hare serves as the Chairman of our Audit Committee. Our board of directors has determined that each of Messrs. O’Hare, Walsh and Kulawski is “independent” under our Corporate Governance Guidelines and the Nasdaq Marketplace Rules and that each satisfies the other requirements under SEC rules regarding audit committee membership. Mr. O’Hare qualifies as an “audit committee financial expert” under applicable SEC rules and regulations governing the composition of the Audit Committee, and satisfies the “financial sophistication” requirements of the NASDAQ Marketplace Rules.

Compensation Committee

Our Compensation Committee is responsible for establishing and administering our overall policies on compensation and the compensation to be provided to our executive officers, including, among other things, annual salaries and bonuses, stock options, stock grants, other stock-based awards, and other incentive compensation arrangements. In addition, the Compensation Committee reviews the philosophy and policies behind the salary, bonus and stock compensation arrangements for all other employees. Although our Compensation Committee makes all compensation decisions as to our executive officers, our Chief Executive Officer makes recommendations to our Compensation Committee regarding compensation for the other named executive officers. Our Compensation Committee has the authority to administer our 2007 Share Incentive Plan with respect to grants to executive officers and directors, and also has authority to make equity awards under our 2007 Share Incentive Plan to all other eligible individuals. However, our board of directors may retain, reassume or exercise from time to time the power to administer our 2007 Share Incentive Plan. Equity awards made to members of the Compensation Committee must be authorized and approved by a disinterested majority of our board of directors.

The Compensation Committee evaluates both performance and compensation to ensure that the total compensation paid to our executive officers is fair, reasonable and competitive so that we can attract and retain superior employees in key positions. The Compensation Committee believes that compensation packages offered to our executives, including the named executive officers, should include both cash and equity-based compensation that reward performance as measured against established goals. The Compensation Committee has the authority to retain consultants, and other advisors and in furtherance of the foregoing objectives.

Our Compensation Committee operates pursuant to a charter approved by our board of directors and our Compensation Committee. Our Compensation Committee consists of Messrs. ~~Cacciamatta~~Walsh, ~~Givens~~Kulawski and ~~Porter~~O’Hare. Mr. ~~Porter~~Walsh acts as as Chairman of our Compensation Committee. Our board of directors has determined that each of Messrs. ~~Porter~~Walsh, ~~Cacciamatta~~Kulawski and ~~Givens~~O’Hare is “independent” under the current NASDAQ Marketplace Rules.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee selects nominees for our board of directors. The Nominating and Corporate Governance Committee will consider candidates for director recommended by any shareholder that is the beneficial owner of shares representing more than 1% of the then-outstanding shares of our common stock and who has beneficially owned those shares for at least one year. The Nominating and Corporate Governance Committee will evaluate those recommendations by applying its regular nominee criteria and considering the additional information described in the Nominating and Corporate Governance Committee’s below-referenced charter. Shareholders that desire to recommend candidates for the board of directors for evaluation may do so by contacting Strasbaugh in writing, identifying the potential candidate and providing background and other relevant information. Our Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. Candidates may also come to the attention of the Nominating and Corporate Governance Committee through current members of our board of directors, professional search firms and other persons. In evaluating potential candidates, our Nominating and Corporate Governance Committee will take into account a number of factors, including, among others, the following:

~~● the candidate’s independence from management;~~43

● the candidate’s independence from management; ● whether the candidate has relevant business experience; ● judgment, skill, integrity and reputation; ● existing commitments to other businesses; ● corporate governance background; ● financial and accounting background, to enable the committee to determine whether the candidate would be suitable for Audit Committee membership; and ● the size and composition of our board of directors.

●While ~~judgment~~our board of directors has not adopted a formal policy with respect to diversity, our ~~skill~~board of directors seeks directors who have a diversity of experience, expertise, ~~integrity~~viewpoints, skills, and ~~reputation;~~specialized knowledge.

●Our Nominating ~~existing~~and ~~commitments~~Corporate Governance Committee operates pursuant to ~~other~~a ~~businesses;~~charter approved by our board of directors and our Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee consists of Messrs. Kulawski, O’Hare and Walsh. Mr. Kulawski acts as chairman of our Nominating and Corporate Governance Committee. Our board of directors has determined that each of Messrs. Kulawski, O’Hare and Walsh is “independent” under the NASDAQ Marketplace Rules.

●Board Leadership ~~corporate governance background;~~Structure

●We currently ~~financial~~utilize a board leadership structure under which our most tenured employee, and ~~accounting~~former ~~background~~Chief Executive Officer, toserves ~~enable~~as the ~~committee~~Chairman toof ~~determine~~our board ~~whether~~of directors. The board of directors believes that Mr. Strasbaugh is the one ~~candidate~~director ~~would~~who beis ~~suitable~~the ~~for~~most ~~Audit~~familiar ~~Committee~~with ~~membership;~~our business and industry, and most capable of effectively identifying strategic priorities and leading the discussion and execution of our overall business strategy.

●Mr. Strasbaugh began his employment at R.H. Strasbaugh in 1961. For the ~~size~~first ten years he worked in most phases of manufacturing and ~~composition~~engineering, followed by eight years of manufacturing management, then ten years as General Manager and Director of Operations. He was Chief Executive Officer from 1990 to 1998, growing annual sales from $8 million to $80 million. We believe Mr. Strasbaugh is uniquely qualified as the chairman based on his in-depth familiarity with our operations, ~~board~~our products and the industry within which we operate. We believe the close working relationship between Mr. Strasbaugh and our Chief Executive Officer enhances the unified leadership and direction of our board of directors and executive management.

Our board ~~Nominating~~of ~~and~~directors ~~Corporate~~is ~~Governance~~comprised ~~Committee~~of ~~operates~~active ~~pursuant~~and toengaged adirectors. ~~charter approved~~The ~~by our~~ board of directors and ~~our~~its ~~Nominating~~various ~~and~~committees ~~Corporate~~closely ~~Governance~~oversee the effectiveness of ~~Committee. Our~~management ~~Nominating~~policies and ~~Corporate~~decisions. ~~Governance~~Each ~~Committee~~committee ~~consists~~of the board of directors is comprised entirely of ~~Messrs~~independent directors. ~~Cacciamatta~~As a result, ~~Givens~~independent ~~and~~directors directly ~~Porter. Mr.~~oversee ~~Porter~~such ~~acts~~critical matters as ~~chairman~~ the integrity of our ~~Nominating~~financial statements, ~~and~~the ~~Corporate~~compensation ~~Governance Committee. Our board~~ of ~~directors~~our ~~has~~executive ~~determined~~management, ~~that~~the ~~each~~selection and evaluation of ~~Messrs. Porter~~our directors, ~~Cacciamatta~~ and ~~Givens~~the isdevelopment ~~“independent”~~and ~~under~~implementation ~~the~~of ~~NASDAQ~~our corporate ~~Marketplace Rules~~programs.

Board Role in Risk Oversight

Our board of directors oversees an enterprise−wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long−term organizational performance and enhance shareholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the company. The involvement of the full board of directors in setting our business strategy is a key part of its assessment of management’s appetite for risk and also a determination of what constitutes an appropriate level of risk for Strasbaugh. Risk is assessed throughout the business, focusing on three primary areas of risk: financial risk, legal/compliance risk and operational/strategic risk.

While the board of directors has the ultimate oversight responsibility for the risk management process, various committees of our board of directors also have responsibility for risk management. The Audit Committee focuses on financial risk, including internal controls. In addition, in setting compensation, the Compensation Committee strives to create incentives that encourage a level of risk−taking behavior consistent with our overall business strategy.

Compensation Committee Interlocks and Insider Participation

No member of our board of directors has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity.

Item 11.

Executive Compensation.

Summary Compensation Table

The following table ~~also~~provides ~~shows~~information concerning the compensation for the individual ~~years~~who ~~ended~~served ~~December 31,~~as ~~2007~~our ~~and~~principal executive officer during the year ended December 31, ~~2008,~~2009 ~~the~~and ~~compensation~~our ~~awarded~~two orhighest paid ~~to,~~executive orofficers ~~earned~~who ~~by,~~were ~~our~~serving ~~current~~as ~~Chief~~an ~~Executive~~executive ~~Officer~~officer ~~and~~on ~~two~~December ~~most~~31, ~~highly~~2009. These ~~compensated~~three ~~executive~~individuals ~~officers,~~are orcollectively referred to in this report as the “named executive officers.”

Name and Principal Position	Year ($)	Salary ($)(4)		Bonus ($)		Stock Awards ($)(1)		All other Compensation ($)			Total ($)
Chuck Schillings	2008		217,046		—		—		3,958	(3)		221,004
President and Chief Executive Officer of Strasbaugh and R. H. Strasbaugh(2)	2009		221,944		—		22,000		2,827	(3)		246,771
Richard Nance	2008		178,111		—		—		—			178,111
Chief Financial Officer of Strasbaugh and R. H. Strasbaugh(2)	2009		182,003		—		29,260		—			211,263
Allan Paterson	2008		167,992		—		—		3,346	(3)		171,338
Vice President of Business Development of Strasbaugh and R. H. Strasbaugh(2)	2009		182,003		—		22,000		538	(3)		204,541

Name and Principal Position	Year ($)	Salary ($)		Bonus ($)		Option Awards ($)(1)		All other Compensation ($)			Total ($)
Chuck Schillings	2007		226,603		50,000		38,061		3,318	(4)		317,982
President and Chief Executive Officer of Strasbaugh and R. H. Strasbaugh(2), (3)	2008		217,046		—		62,000		3,958	(4)		283,004
Richard Nance	2007		190,325		30,000		50,621		—			270,946
Chief Financial Officer of Strasbaugh and R. H. Strasbaugh(3)	2008		178,111		—		82,460		—			260,571
Allan Paterson	2007		167,576		—		38,061		1,904	(4)		207,541
Vice President of Business Development of Strasbaugh and R. H. Strasbaugh(3)	2008		167,992		—		62,000		3,346	(4)		233,338

(1) The amount reflected in this column is the ~~compensation~~aggregate ~~cost~~grant wedate ~~recognized~~incremental ~~for~~fair ~~financial~~value ~~statement~~of ~~reporting~~the ~~purposes~~restricted ~~during~~shares ~~2007~~of ~~and~~common ~~2008~~stock ~~under~~issued ~~SFAS~~in ~~No.~~the ~~123(R),~~Option ~~excluding~~Exchange ~~estimates~~Program ofduring ~~forfeitures~~2009, ~~related~~computed toin ~~service~~accordance ~~based~~with ~~vesting~~FASB ~~conditions~~ASC Topic 718. The incremental fair value of ~~each~~the ~~grant~~modified awards is estimated based on the ~~date~~closing price of ~~grant~~our common stock on September 24, 2009, the date the exchange offer was terminate, using the Black-Scholes option-pricing model based on assumptions described in Note 97 to our consolidated financial statements.

(2) ~~Mr.~~Amounts ~~Schillings~~for ~~was~~2008 ~~appointed~~and ~~our~~2009 ~~chief~~represent compensation received for services provided as an executive officer onof ~~May~~Strasbaugh ~~24,~~and ~~2007~~R. H. Strasbaugh.

(3) ~~Amounts~~Represents ~~for~~our ~~2008~~contributions ~~represent~~to ~~compensation~~the ~~received~~employee’s ~~for~~401(k) ~~services provided as an executive officer of Strasbaugh and R~~plan. ~~H. Strasbaugh.~~

(4) ~~Represents~~Amounts ~~our~~reported ~~contributions~~as toearned ~~the~~may be less than base salaries contained in an employee’s ~~401(k)~~applicable ~~plan~~employment agreement as a result of plant shut-down periods implemented as cost savings measures.

Employment Agreements

Executive Employment Agreements dated May 24, 2007 with each of Chuck Schillings and Richard Nance

The Executive Employment Agreements with Mr. Schillings and Mr. Nance provide for a three-year term and automatic one-year renewals thereafter, unless either the employee or Strasbaugh provides written notice to the other at least 90 days prior to the expiration of the then-current term.

Mr. Schillings is employed as our President and Chief Executive Officer and receives an annual base salary of $245,000 during the first 12-month period that his agreement is in effect, after which our Compensation Committee may, in its sole discretion, increase Mr. Schillings’ annual base salary. Further, Mr. Schillings is eligible for an annual cash bonus, based upon performance criteria to be established by the board, of up to 40% of his annual base salary. On May 24, 2007, Mr. Schillings was issued options to purchase an aggregate of 200,000 shares of our common stock pursuant to our 2007 Share Incentive Plan.

Mr. Nance is employed as our Executive Vice President and Chief Financial Officer and receives an annual base salary of $200,000 during the first 12-month period that his agreement is in effect, after which our Compensation Committee may, in its sole discretion, increase Mr. Nance’s annual base salary. Further, Mr. Nance is eligible for an annual cash bonus, based upon performance criteria to be established by the Board, of up to 35% of his annual base salary. On May 24, 2007, Mr. Nance was issued options to purchase an aggregate of 266,000 shares of our common stock pursuant to our 2007 Share Incentive Plan.

We are required to provide each of Messrs. Schillings and Nance certain benefits, to the extent we offer them, including the right to participate in our employee medical, dental, life and disability insurance plans, and any additional compensation, benefit, pension, stock option, stock purchase, and 401(k) plans. We are also required to provide Mr. Schillings with five weeks of paid vacation per year and Mr. Nance with three weeks of paid vacation per year.

Each of Messrs. Schillings and Nance are also entitled to reimbursement for all reasonable business expenses incurred in the performance of their services under the Executive Employment Agreements, including expenditures for entertainment, gifts, cellular telephone expenses, and travel.

If the employment relationship with Mr. Schillings or Mr. Nance is terminated (a) by us or the employee upon 90 days’ written notice, (b) by us for due cause, or (c) by the employee upon 30 days’ written notice or by the employee breaching his employment agreement by refusing to continue his employment and failing to give the requisite 90 days’ written notice, all compensation and benefits shall cease as of the date of termination, other than: (i) those benefits that are provided by retirement and benefit plans and programs specifically adopted and approved by us for the employee that are earned and vested by the date of termination; (ii) employee’s pro rata annual salary through the date of termination; (iii) any restricted stock awards which have vested as of the date of termination pursuant to the terms of the agreement granting the awards; and (iv) accrued vacation as required by California law.

If the employment relationship is terminated due to incapacity or death of the employee, the employee or his estate or legal representative, will be entitled to (i) those benefits that are provided by retirement and benefits plans and programs specifically adopted and approved by us for his benefit that are earned and vested at the date of termination, (ii) a prorated incentive bonus for the fiscal year in which incapacity or death occurs, and, (iii) even though no longer employed by us, the employee shall continue to receive the annual salary compensation for six months following the date of termination, offset, however, by any payments received by the employee as a result of any disability insurance maintained by us for his benefit.

If the employment relationship is terminated by the employee for good reason or by us upon written notice, then the employee shall be entitled to (i) his salary in effect as of the date of termination through the end of the month during which the termination occurs plus credit for any vacation earned but not taken, (ii) six months of base salary, (iii) a prorated incentive bonus for the fiscal year during which termination occurs and (iv) maintain, at our expense, all medical and life insurance to which he was entitled immediately prior to the date of termination for a period not to exceed 12 months.

The term “good reason” is defined in each of the Executive Employment Agreements as (i) a general assignment by us for the benefit of creditors or filing by us of a voluntary bankruptcy petition or the filing against us of any involuntary bankruptcy which remains undismissed for 30 days or more or if a trustee, receiver or liquidator is appointed, (ii) any material changes in the employee’s titles, duties or responsibilities without his express written consent, or (iii) the employee is not paid the compensation and benefits required under the Executive Employment Agreement.

The term “due cause” is defined in each of the Executive Employment Agreements as (i) any intentional misapplication by the employee of Strasbaugh funds or other material assets, or any other act of dishonesty injurious to Strasbaugh committed by the employee; or (ii) the employee’s conviction of (a) a felony or (b) a crime involving moral turpitude; or (iii) the employee’s use or possession of any controlled substance or chronic abuse of alcoholic beverages, which use or possession the board reasonably determines renders the employee unfit to serve in his capacity as a senior executive of Strasbaugh; or (iv) the employee’s breach, nonperformance or nonobservance of any of the terms of his employment agreement with us, including but not limited to the employee’s failure to adequately perform his duties or comply with the reasonable directions of the board; but notwithstanding anything in the foregoing subsections (iii) or (iv) to the contrary, we may not terminate the employee unless our board of directors first provides the employee with a written memorandum describing in detail how his performance thereunder is not satisfactory and the employee is given a reasonable period of time (not less than 30 days) to remedy the unsatisfactory performance related by the board of directors to the employee in that memorandum. A determination of whether the employee has satisfactorily remedied the unsatisfactory performance shall be promptly made by a majority of the disinterested directors of the board (or the entire board, but not including the employee, if there are no disinterested directors) at the end of the period provided to the employee for remedy, and the board’s determination shall be final.

Option Exchange Program

On October 12, 2009, we issued 504,000 shares of restricted common stock to holders of options to purchase 1,008,000 shares of our common stock who tendered such options to us for cancellation in exchange for the issuance of the shares of restricted common stock. The issuance was pursuant to an option exchange program, or the Option Exchange Program, in which employees were entitled to exchange outstanding options to purchase shares of our common stock for shares of restricted common stock at the rate of two options for one share of restricted common stock. The restricted shares were issued pursuant to our 2007 Share Incentive Plan and are subject to vesting, such that any of the restricted shares issued to an employee who ceases to be employed on or before March 31, 2010 will be cancelled. In connection with the Option Exchange Program, Mr. Shillings tendered options to purchase 200,000 shares of our common stock for cancellation in exchange for 100,000 shares of restricted common stock and Mr. Nance tendered options to purchase 266,000 shares of common stock for cancellation in exchange for 133,000 shares of restricted common stock.

Outstanding Equity Awards At Fiscal Year-End – 2009

	Stock Awards
Name and Principal Position	Number of shares or Units of stock that have not vested (#)(1)	Market value of shares or Units that have not vested ($)(2)
Chuck Schillings President and Chief Executive Officer of Strasbaugh and R. H. Strasbaugh	100,000	25,000
Richard Nance Chief Financial Officer of Strasbaugh and R. H. Strasbaugh	133,000	33,250
Allan Paterson Vice President of Business Development of Strasbaugh and R. H. Strasbaugh	100,000	25,000

(1)

The amount reflected in this column is the number of restricted shares of our common stock issued in exchange for outstanding options during 2009 under the Option Exchange Program. There was no other consideration given. The options surrendered for shares reflected in this column were exercisable at a price of $1.71 per share. The restricted shares will vest on March 31, 2010.

(2)	The market value of the shares of restricted stock that have not vested is computed by reference to the closing sale price of our common stock on December 31, 2009.

Compensation of Directors

Director Compensation Table – 2009

The following table summarizes for the twelve months ended December 31, 2009, the compensation awarded to or paid to, or earned by, those who served on our board of directors during 2009.

Name	Fees Earned or Paid in Cash ($)		Option Awards ($)(1)			All Other Compensation ($)			Total ($)
Alan Strasbaugh		—		4,770	(2)		90,923	(3)		95,693
Wesley Cummins		12,000		4,770	(2)		—			16,770
Daniel O’Hare		7,500		9,540	(5)		—			17,040
Tom Walsh		6,332		9,540	(5)		32,288	(4)		48,160
Martin Kulawski		6,168		9,540	(5)		31,350	(4)		47,058
John Givens(6)		10,500		—			5,400	(7)		15,900
Danilo Cacciamatta(6)		15,750		—			5,400	(7)		21,150
David Porter(6)		12,250		—			5,400	(7)		17,650

(1)

The amount reflected in this column is the aggregate grant date fair value of options granted during 2009 computed in accordance with FASB ASC Topic 718. The fair value of the option award is estimated on the option grant date based on the closing price of our common stock on the grant date using the Black-Scholes option-pricing model based on assumptions described in Note 7 to our consolidated financial statements.

(2)

The director was granted options to purchase 18,000, 10,673 and 9,000 shares of our common stock on May 24, 2007, August 1, 2008, and August 1, 2009, respectively, which options remained outstanding on December 31, 2009. The stock options vest pursuant to a three year vesting schedule, whereby 33% of each option becomes exercisable on the first annual anniversary of its grant date, 33% of each option becomes exercisable on the second annual anniversary of its grant date and 34% becomes exercisable on the third annual anniversary of its grant date. The options expire ten years from the date of grant.

(3)

Includes $90,385 of base salary paid to Mr. Alan Strasbaugh pursuant to the terms of his Employment Agreement, dated May 24, 2007, and $538 of our contributions to his 401(k) plan. The base salary earned is less than the base salary under Mr. Strasbaugh’s employment agreement as a result of plant shut-down periods implemented as cost savings measures during 2009.

(4)	Represents payments made for consulting services during the year ended December 31, 2009.

(5)

The director was granted options to purchase 18,000 shares of our common stock on August 7, 2009, which options remained outstanding on December 31, 2009. The stock options vest pursuant to a three year vesting schedule, whereby 33% of each option becomes exercisable on the first annual anniversary of its grant date, 33% of each option becomes exercisable on the second annual anniversary of its grant date and 34% becomes exercisable on the third annual anniversary of its grant date.

(6)	On August 7, 2009, directors Cacciamatta, Givens and Porter resigned from the board of directors. All options issued to Messrs. Givens, Porter and Cacciamatta expired 90 days after their respective resignations.

(7)	Represents one-time payment in connection with such person’s resignation as a director on August 7, 2009.

We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our board of directors. In setting the compensation of directors, we consider the significant amount of time that members of the board of directors spend in fulfilling their duties to Strasbaugh as well as the experience level we require to serve on our board of directors. Our board of directors, through its Compensation Committee, annually reviews the compensation and compensation policies for members of the board of directors. In recommending director compensation, the Compensation Committee is guided by three goals:

	●	compensation should fairly pay directors for work required in a company of our size and scope;

	●	compensation should align directors’ interests with the long-term interests of our shareholders; and

	●	the structure of the compensation should be clearly disclosed to our shareholders.

On August 1, 2009, each of Messrs. Cummins and Strasbaugh was issued options to purchase 9,000 shares of our common stock pursuant to our 2007 Share Incentive Plan. On August 7, 2009, each of Messrs. O’Hare, Walsh and Kulawski was issued options to purchase 18,000 shares of our common stock pursuant to our 2007 Share Incentive Plan.

Employment Agreement dated May 24, 2007 with Alan Strasbaugh

The Employment Agreement with Mr. Strasbaugh provides for a five-year term and renewal based upon mutual agreement. For providing services to Strasbaugh as a technical advisor, Mr. Strasbaugh is to receive an annual base salary of $100,000.

We are required to provide Mr. Strasbaugh with certain benefits, to the extent we offer them, including the right to participate in our employee medical, dental, life and disability insurance plans. Additionally, Mr. Strasbaugh is eligible for holiday and vacation pay in accordance with our employment policies. Mr. Strasbaugh is also entitled to reimbursement for all reasonable business expenses incurred on behalf of Strasbaugh, including expenditures for travel.

The Employment Agreement with Mr. Strasbaugh may only be terminated for “cause,” or upon disability or death. Upon termination on death, Mr. Strasbaugh’s estate will be entitled to receive a payment equal to 60 days of Mr. Strasbaugh’s base salary.

The term “cause” is defined in the Employment Agreement as (i) any act of personal dishonesty, including, but not limited to, any intentional misapplication of Strasbaugh’s funds or other property, or action resulting in personal gain to the employee at the expense of Strasbaugh; or (ii) employee’s regular neglect of his duties or Employee’s gross negligence or willful misconduct in the performance of his duties; or (iii) disobedience of a lawful and reasonable order or directive given to employee by our board of directors and within the scope of employee’s duties that is not cured within ten (10) days after receiving written notice from us; or (iv) employee’s participation in a criminal activity or in an activity involving moral turpitude that has a material adverse effect (the report in the public media of conduct described in this subparagraph (iv), above, shall be deemed to cause a material adverse effect on Strasbaugh); or (v) employee’s misappropriation or disclosure to others in competition with us any of our confidential information, including investment prospects, analysis or advice, customer lists, plans or other property interests of Strasbaugh.

Outstanding Equity Awards At Fiscal Year-End

The following table sets forth information about outstanding equity awards held by our named executive officers as of December 31, 2008.

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)			Option Exercise Price ($)	Option Expiration Date
Chuck Schillings		66,000	(1)	—		134,000	(1)	1.71	5/24/17
Richard Nance		87,780	(1)	—		178,220	(1)	1.71	5/24/17
Allan Paterson		66,000	(1)	—		134,000	(1)	1.71	5/24/17

(1) The stock option was granted on May 24, 2007 and vests pursuant to a three year vesting schedule, whereby 33% of the option became exercisable on May 24, 2008, 33% of the option becomes exercisable on May 24, 2009 and 34% becomes exercisable on May 24, 2010.

Option Exercises and Stock Vested

None of the named executive officers acquired shares through the exercise of options during the year ended December 31, 2008.

Compensation of Directors

We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our board of directors. In setting the compensation of directors, we consider the significant amount of time that members of the board of directors spend in fulfilling their duties to Strasbaugh as well as the experience level we require to serve on our board of directors. The board of directors, through its Compensation Committee, annually reviews the compensation and compensation policies for members of the board of directors. In recommending director compensation, the Compensation Committee is guided by three goals:

● compensation should fairly pay directors for work required in a company of our size and scope;

● compensation should align directors’ interests with the long-term interests of our shareholders; and

● the structure of the compensation should be clearly disclosed to our shareholders.

Each of our directors is paid $12,000 per year for serving on the board of directors. The Chairman of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee is paid an additional $12,000, $4,000 and $2,000 per year, respectively, for serving in such capacity. Directors who serve (but do not chair) on the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are paid an additional $3,000, $2,000 and $1,000 per year, respectively, for serving in such capacity. On May 24, 2007, each of our directors (other than Mr. Givens and Mr. Cacciamatta) was issued options to purchase 18,000 shares of our common stock pursuant to our 2007 Share Incentive Plan. On April 25, 2008, each of Mr. Givens and Mr. Cacciamatta was issued options to purchase 18,000 shares of our common stock pursuant to our 2007 Share Incentive Plan. Also, on August 1, 2008, each of Messrs. Cummins, Mr. Porter, and Mr. Strasbaugh was issued options to purchase 10,673 shares of our common stock, and Mr. Cacciamatta and Mr. Givens were issued options to purchase 2,373 and 6,444 shares of our common stock, respectively, pursuant to our 2007 Share Incentive Plan. In addition, directors are reimbursed for certain reasonable documented expenses in connection with attendance at meetings of our board of directors and its committees. Employee directors do not receive compensation in connection with their service as directors.

Director Compensation Table

The following table summarizes for the twelve months ended December 31, 2008, the compensation awarded to or paid to, or earned by, our current directors.

Name	Fees Earned or Paid in Cash ($)		Option Awards ($)(1)			All Other Compensation ($)			Total ($)
Alan Strasbaugh		—		6,440	(2)		89,538	(3)		95,978
David Porter		27,250		6,440	(2)		—			33,690
Wesley Cummins		16,750		6,440	(2)		—			23,190
John Givens		16,750		3,303	(5)		1,900	(4)		21,953
Danilo Cacciamatta		18,000		2,954	(6)		—			20,954

(1) The amount reflected in this column is the compensation cost we recognized for financial statement reporting purposes during 2008 under SFAS No. 123(R), excluding estimates of forfeitures related to service based vesting conditions. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model based on assumptions described in Note 9 to our consolidated financial statements.

(2) The director was granted options to purchase 18,000 and 10,673 shares of our common stock on May 24, 2007 and August 1, 2008, respectively, which options remained outstanding on December 31, 2008. The stock options vest pursuant to a three year vesting schedule, whereby 33% of the option becomes exercisable on the first annual anniversary date, 33% of the option becomes exercisable on the second annual anniversary date and 34% becomes exercisable on the third annual anniversary date. The options expire ten years from the date of grant.

(3) Includes $88,461 of base salary paid to Mr. Alan Strasbaugh pursuant to the terms of his Employment Agreement dated May 24, 2007, and $1,077 of our contributions to his 401(k) plan.

(4) Represents payments made for consulting services during the year ended December 31, 2008.

(5) Mr. Givens was granted options to purchase 18,000 and 6,444 shares of our common stock on April 25, 2008 and August 1, 2008, respectively, which options remained outstanding on December 31, 2008. The stock options vest pursuant to a three year vesting schedule, whereby 33% of the option becomes exercisable on the first annual anniversary date, 33% of the option becomes exercisable on the second annual anniversary date and 34% becomes exercisable on the third annual anniversary date. The options expire ten years from the date of grant.

(6) Mr. Cacciamatta was granted options to purchase 18,000 and 2,373 shares of our common stock on April 25, 2008 and August 1, 2008, respectively, which options remained outstanding on December 31, 2008. The stock options vest pursuant to a three year vesting schedule, whereby 33% of the option becomes exercisable on the first annual anniversary date, 33% of the option becomes exercisable on the second annual anniversary date and 34% becomes exercisable on the third annual anniversary date. The options expire ten years from the date of grant.

Indemnification of Directors and Officers

Our articles of incorporation provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of Strasbaugh for breach of a director’s duties to Strasbaugh or our shareholders except for liability:

~~● for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law;~~50

● for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; ● for acts or omissions that a director believes to be contrary to the best interests of Strasbaugh or our shareholders or that involve the absence of good faith on the part of the director; ● for any transaction for which a director derived an improper personal benefit; ● for acts or omissions that show a reckless disregard for the director’s duty to Strasbaugh or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of serious injury to Strasbaugh or our shareholders; ● for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to Strasbaugh or our shareholders; and ● for engaging in transactions described in the California Corporations Code or California case law that result in liability, or approving the same kinds of transactions.

● for any transaction for which a director derived an improper personal benefit;

● for acts or omissions that show a reckless disregard for the director’s duty to Strasbaugh or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of serious injury to Strasbaugh or our shareholders;

● for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to Strasbaugh or our shareholders; and

● for engaging in transactions described in the California Corporations Code or California case law that result in liability, or approving the same kinds of transactions.

Our articles of incorporation also provide that we are authorized to provide indemnification to our agents, as defined in Section 317 of the California Corporations Code, through our bylaws or through agreements with such agents or both, for breach of duty to us and our shareholders, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. Our bylaws also authorize us to purchase and maintain insurance on behalf of any of our directors or officers against any liability asserted against that person in that capacity, whether or not we would have the power to indemnify that person under the provisions of the California Corporations Code. We have entered and expect to continue to enter into agreements to indemnify our directors and officers as determined by our board of directors. These agreements provide for indemnification of related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.

Our bylaws provide for indemnification of our officers, directors, employees, and other agents to the extent and under the circumstances permitted by California law. In all cases where indemnification is permitted by the bylaws, a determination to indemnify such person must be made when ordered by a court and must be made in a specific case upon a determination that indemnification is required or proper in the circumstances. Such determination must be made:

● by our board of directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding which is the subject of the request for indemnification; or ● if such a quorum is not obtainable, or, even if obtainable, a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or ● by a majority of our shareholders.

● if such a quorum is not obtainable, or, even if obtainable, a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or

● by a majority of our shareholders.

The limitation of liability and indemnification provisions in our articles of incorporation and bylaws may discourage shareholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other shareholders. Furthermore, a shareholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

Insofar as indemnification for liabilities under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information with respect to the beneficial ownership of our voting stock as of March 115, ~~2009~~2010, the date of the table, by:

● each person known by us to beneficially own more than 5% of the outstanding shares any class of our voting stock; ● each of our directors; ● each of our current executive officers identified at the beginning of the “Management” section of this; and ● all of our directors and executive officers as a group.

●Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the securities. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of voting stock shown as beneficially owned by them. Except as indicated in the discussion of the beneficial ownership limitations on the Series A Preferred Stock below and except as indicated by footnote, all shares of common stock underlying derivative securities, if any, that are currently exercisable or convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table are deemed to be outstanding for the purpose of calculating the percentage ownership of each listed person or group but are not deemed to be outstanding as to any other person or group. Percentage of beneficial ownership of our ~~directors;~~common stock is based on 14,705,587 shares of common stock outstanding as of the date of the table. Percentage of beneficial ownership of our Series A Preferred Stock is based on 5,909,089 shares of Series A Preferred Stock outstanding as of the date of the table.

●The address of each of ~~our~~the ~~current~~following shareholders, unless otherwise indicated below, is c/o Strasbaugh, 825 Buckley Road, San Luis Obispo, California 93401. Messrs. Schillings, Nance, Kirkpatrick and Paterson are executive officers ~~identified~~of atStrasbaugh. Messrs. ~~the~~Alan ~~beginning~~Strasbaugh, Cummins, ofO’Hare, ~~the~~Walsh ~~“Management”~~and ~~section~~Kulawski are directors of Strasbaugh. Larry ~~this;~~Strasbaugh ~~and~~is the brother of Alan Strasbaugh.

~~● all of our directors and executive officers as a group.~~52

Name of Beneficial Owner	Title of Class	Amount and Nature of Beneficial Ownership			Percent of Class
Alan Strasbaugh	Common		7,543,048	(1)		51.18%
Chuck Schillings	Common		1,148,508	(2)		7.81%
Richard Nance	Common		133,000	(3)		*
Wesley Cummins	Common		142,535	(4)		*
Thomas A. Walsh	Common		1,272,783			8.66%
Martin Kulawski	Common		—			—
Dan O’Hare	Common		—			—
Allan Paterson	Common		100,000	(3)		*
Michael A. Kirkpatrick	Common		848,508			5.77%
Larry Strasbaugh	Common		2,616,712			17.79%
Lloyd I. Miller, III	Common#		2,314,603	(5)		13.61%
	Series A Preferred		2,000,000	(6)		33.85%
Milfam II L.P.	Common#		1,155,629	(7)		7.29%
	Series A Preferred		1,000,000			16.92%
Harvey SMidCap Fund LP	Common#		745,878	(8)		4.99%
	Series A Preferred		1,186,363			20.08%
James Schwartz	Common#		745,878	(9)		4.99%
	Series A Preferred		1,363,636	(10)		23.08%
Jeffrey Moskowitz	Common#		745,878	(9)		4.99%
	Series A Preferred		1,363,636	(10)		23.08%
Bryant Riley	Common#		743,497	(11)		4.99%
	Series A Preferred		772,727			13.08%
The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust	Common#		522,727	(12)		3.43%
	Series A Preferred		454,545			7.69%
Kayne Anderson Capital Income Partners (QP), LP	Common#		418,183	(13)		2.77%
	Series A Preferred		363,637			6.15%
Richard A. Kayne	Common#		627,274	(14)		4.09%
	Series A Preferred		545,455	(15)		9.23%
John P. Francis	Common#		365,910	(16)		2.43%
	Series A Preferred		318,182	(17)		5.38%
All directors and executive officers as a group (9 persons)	Common#		11,179,382	(18)		75.61%

Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the securities. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of voting stock shown as beneficially owned by them. Except as indicated in the discussion of the beneficial ownership limitations on the Series A Preferred Stock below and except as indicated by footnote, all shares of common stock underlying derivative securities, if any, that are currently exercisable or convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table are deemed to be outstanding for the purpose of calculating the percentage ownership of each listed person or group but are not deemed to be outstanding as to any other person or group. Percentage of beneficial ownership of our common stock is based on 14,201,587 shares of common stock outstanding as of the date of the table. Percentage of beneficial ownership of our Series A Preferred Stock is based on 5,909,089 shares of Series A Preferred Stock outstanding as of the date of the table.

The terms of the Series A Preferred Stock and the Investor Warrants held by the selling security holders prohibit conversion of the Series A Preferred Stock or exercise of the Investor Warrants to the extent that such conversion or exercise would result in a holder, together with its affiliates, beneficially owning in excess of 4.99% of our outstanding shares of common stock. A holder may waive these 4.99% beneficial ownership limitations upon 61-days’ prior written notice to us. Also, these beneficial ownership limitations do not preclude a holder from exercising an Investor Warrant, converting Series A Preferred Stock or selling the shares underlying Investor Warrants or Series A Preferred Stock in stages over time where each stage does not cause the holder and its affiliates to beneficially own shares in excess of the 4.99% limitation amount.

The address of each of the following shareholders, unless otherwise indicated below, is c/o Strasbaugh, 825 Buckley Road, San Luis Obispo, California 93401. Messrs. Schillings, Nance, Kirkpatrick and Paterson are executive officers of Strasbaugh. Messrs. Alan Strasbaugh, Porter, Cummins and Givens are directors of Strasbaugh. Larry Strasbaugh is the brother of Alan Strasbaugh.

Name of Beneficial Owner	Title of Class	Amount and Nature of Beneficial Ownership			Percent of Class
Alan Strasbaugh	Common		7,524,431	(1)		52.96	%
Chuck Schillings	Common		914,508	(2)		6.41	%
Richard Nance	Common		87,780	(3)		*
David Porter	Common		5,940	(4)		*
Wesley Cummins	Common		54,138	(5)		*
John Givens	Common		—			—
Danilo Cacciamatta	Common		—			—
Allan Paterson	Common		—			—
Michael A. Kirkpatrick	Common		848,508			5.97	%
J. Michael Gullard	Common		2,045			*
Larry Strasbaugh	Common		2,616,712			18.43	%
Thomas A. Walsh	Common		1,272,783			8.96	%
Lloyd I. Miller, III	Common		2,309,528	(6)		14.00	%
	Series A Preferred		2,000,000	(7)		33.85	%
Milfam II L.P.	Common		1,155,629	(8)		7.53	%
	Series A Preferred		1,000,000			16.92	%
Harvey SMidCap Fund LP	Common		745,878	(9)		4.99	%
	Series A Preferred		1,186,363			20.08	%
James Schwartz	Common		745,878	(10)		4.99	%
	Series A Preferred		1,363,636	(11)		23.08	%
Jeffrey Moskowitz	Common		745,878	(10)		4.99	%
	Series A Preferred		1,363,636	(11)		23.08	%
Bryant Riley	Common		735,246	(12)		4.99	%
	Series A Preferred		772,727			13.08	%
The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust	Common		522,727	(13)		3.55	%
	Series A Preferred		454,545			7.69	%
Kayne Anderson Capital Income Partners (QP), LP	Common		418,183	(14)		2.86	%
	Series A Preferred		363,637			6.15	%
Richard A. Kayne	Common		627,274	(15)		4.23	%
	Series A Preferred		545,455	(16)		9.23	%
John P. Francis	Common		365,910	(17)		2.51	%
	Series A Preferred		318,182	(18)		5.38	%
All directors and executive officers as a group (9 persons)	Common		9,435,305	(19)		66.44	%

*	Less than 1%.

~~(1)~~# ~~Includes~~The 5terms of the Series A Preferred Stock and the Investor Warrants held by the stockholder prohibits conversion of the Series A Preferred Stock or exercise of the Investor Warrants to the extent that such conversion or exercise would result in a holder,~~940~~ ~~shares~~together ~~underlying~~with ~~options~~its affiliates, beneficially owning in excess of 4.99% ~~Also~~of ~~includes~~our ~~196~~outstanding shares of common stock. ~~held~~A byholder Mrmay waive these 4.99% ~~Strasbaugh~~beneficial ownership limitations upon 61-days’s ~~wife~~prior written notice to us. Also, these beneficial ownership limitations do not preclude a holder from exercising an Investor Warrant, converting Series A Preferred Stock or selling the shares underlying Investor Warrants or Series A Preferred Stock in stages over time where each stage does not cause the holder and its affiliates to beneficially own shares in excess of the 4.99% limitation amount. The 4.99% limitation can be waived by a stockholder.

~~(2) Includes 66,000 shares underlying options.~~53

(31) ~~Represents~~Includes 15,557 shares underlying options. Also includes 196 shares of common stock held by Mr. Strasbaugh’s wife.

(42) ~~Represents~~Includes 100,000 shares underlying ~~options~~restricted stock.

(53) Represents ~~48,198~~ shares underlying arestricted ~~Placement Warrant and 5,940 shares underlying options~~stock.

(64) Includes 248,~~045~~198 shares ~~of outstanding common stock, 1,000,000 shares~~ underlying ~~Series~~a APlacement ~~Preferred~~Warrant ~~Stock~~ and ~~150~~15,~~000~~557 shares underlying ~~Investor Warrants held directly by Lloyd I~~options. ~~Miller, III.~~ Also includes 178,~~155,629~~780 shares of common stock ~~represented~~reported ~~in this table~~ as beneficially owned by ~~Milfam II L.P. Further, includes the following shares of common stock over which~~ Mr. ~~Miller~~Cummins ~~has~~on ~~the~~a ~~sole~~Form power to vote or dispose of: 109 shares held by the Catherine C. Miller - Irrevocable Trust Agreement; 109 shares held by the Kimberly S. Miller - Irrevocable Trust Agreement; 48 shares held by Milfam LLC; 48 shares held by Lloyd I. Miller, IV and 209 shares held by Alexandra B. Miller. Also includes the following shares of common stock over which Mr. Miller has shared power to vote or dispose of: 622 shares held by the Trust A-4 -filed ~~Lloyd~~with ~~I. Miller; 661 shares held by Trust C - Lloyd I. Miller and 48 shares held by~~ the ~~Lloyd~~SEC ~~Crider~~on -June ~~Irrevocable Trust Agreement. On May 30~~16, ~~2007, Mr~~2009. Miller waived the 4.99% beneficial ownership limitation applicable to the Series A Preferred Stock and Investor Warrants held by himself and Milfam II L.P. The address for Lloyd I. Miller, III is 4550 Gordon Drive, Naples, Florida 34102.

57(5) Includes 1,000,000 shares underlying Series A Preferred Stock and 150,000 shares underlying Investor Warrants held directly by Lloyd I. Miller, III. Also includes 1,155,629 shares of common stock represented in this table as beneficially owned by Milfam II L.P. Further includes 3,230 shares of outstanding common stock over which Lloyd I. Miller, III has sole dispositive and voting power as (i) a manager of a limited liability company, (ii) the trustee to a certain grantor retained annuity trust, (iii) the custodian to accounts set up under Florida Uniform Gift to Minors Act, (iv) trustee of certain generation-skipping trusts, and (vi) an individual. Further, includes 5,744 shares of common stock over which Lloyd I. Miller, III has shared dispositive and voting power as (i) an investment advisor to the trustee of a certain family trust and (ii) co-trustee of a certain generation-skipping trust. On May 30, 2007, Mr. Miller waived the 4.99% beneficial ownership limitation applicable to the Series A Preferred Stock and Investor Warrants held by himself and Milfam II L.P. The address for Lloyd I. Miller, III is 4550 Gordon Drive, Naples, Florida 34102.

(76) Includes 1,000,000 shares of Series A Preferred Stock owned by Mr. Miller and 1,000,000 shares of Series A Preferred stock represented in this table as held by Milfam II L.P.

(87) Represents 5,629 shares of outstanding common stock, 1,000,000 shares underlying Series A Preferred Stock and 150,000 shares underlying Investor Warrants. Mr. Lloyd I. Miller, III has the power to vote or dispose of the shares beneficially held by Milfam II L.P. Milfam LLC is the general partner of Milfam II L.P. and Lloyd I. Miller, III is the manager of Milfam LLC. On May 30, 2007, Mr. Miller waived the 4.99% beneficial ownership limitation applicable to the Series A Preferred Stock and Investor Warrants held by Milfam II LP. The address for Milfam II L.P. is c/o Lloyd I. Miller, III, 4550 Gordon Drive, Naples, Florida 34102.

(9)	Represents 745,878 shares underlying Series A Preferred Stock and Investor Warrants. The number of shares beneficially owned is limited to 4.99% of our outstanding common stock pursuant to the terms of the Series A Preferred Stock and Investor Warrants. If beneficial ownership limitations had not been in effect, the Harvey SMidCap Fund LP would have beneficially owned a total of 1,364,317 shares of common stock, or 8.76% of our outstanding common stock, representing 1,186,363 shares underlying Series A Preferred Stock and 177,954 shares underlying Investor Warrants. Power to vote or dispose of the shares beneficially owned by Harvey SMidCap Fund LP is held by Harvey Partners LLC. The individuals authorized to act on behalf of Harvey Partners LLC in the voting and disposition of the shares are James Schwartz and Jeffrey Moskowitz. The address for Harvey SMidCap Fund LP is 350 Madison Avenue, 8th Floor, New York, New York 10017.
(10)	Represents shares underlying Series A Preferred Stock and Investor Warrants held by Harvey SMidCap Fund LP and Harvey SMidCap Offshore Fund LTD. The number of shares beneficially owned is limited to 4.99% of our outstanding common stock pursuant to the terms of the Series A Preferred Stock and Investor warrants. If beneficial ownership limitations had not been in effect, Mr. Schwartz and Mr. Moskowitz would each have beneficially owned a total of 1,568,181 shares underlying the Series A Preferred Stock and Investor Warrants held by Harvey SMidcap Fund LP and Harvey SMidcap Offshore Fund LTD, or 8.76% of our outstanding common stock, representing 1,186,363 shares underlying Series A Preferred Stock and 177,954 shares underlying Investor Warrants held by Harvey SMidCap Fund LP and 177,273 shares underlying Series A Preferred Stock and 26,591 shares underlying Investor Warrants held by Harvey SMidCap Offshore Fund LTD. Harvey Partners LLC holds the power to vote or dispose of the shares beneficially owned by Harvey SMidCap Fund LP and Harvey SMidCap Offshore Fund LTD. Mr. Schwartz and Mr. Moskowitz are each authorized to act alone on behalf of Harvey Partners LLC. The address for Mr. Schwartz and Mr. Moskowitz is 350 Madison Avenue, 8th Floor, New York, New York 10017.
(11)	Represents 1,186,363 shares of Series A Preferred Stock held by Harvey SMidCap Fund LP and 177,273 shares of Series A Preferred Stock held Harvey SMidCap Offshore Fund LTD. Harvey Partners LLC holds the power to vote or dispose of the shares beneficially owned by Harvey SMidCap Fund LP and Harvey SMidCap Offshore Fund LTD. Mr. Schwartz and Mr. Moskowitz are each authorized to act alone on behalf of Harvey Partners LLC.
(12)	Includes 2,045 shares of outstanding common stock held by Bryan and Carleen Riley JTWROS, 18,345 shares underlying Placement Warrants and 532,802 shares underlying both Series A Preferred Stock and Investor Warrants held by Mr. Riley. Also includes 21,761 shares of common stock and 138,756 shares underlying Placement Warrants held by B. Riley and Co. Inc. Mr. Riley has shared power to vote or dispose of the shares held by B. Riley and Co. Inc. Additionally includes the following shares of common stock over which Mr. Riley has the sole power to vote or dispose of: 322 shares held by BR Investco, LLC; 112 shares held by B. Riley and Co. Retirement Trust; 738 shares held by Investment Advisory Client; and 20,365 shares held by Riley Investment Partners Master Fund, L.P. The number of shares beneficially owned is limited to 4.99% of the outstanding common stock of the Company pursuant to the terms of the Series A Preferred Stock and Investor warrants. If beneficial ownership limitations had not been in effect, the selling security holder would have beneficially owned a total of 1,229,836 shares of common stock, or 7.99% of our outstanding common stock, which includes 772,727 shares underlying the Series A Preferred Stock and 115,909 shares underlying Investor Warrants. The address for Mr. Riley is c/o Riley Investment Management LLC, 11100 Santa Monica Boulevard, Suite 800, Los Angeles, California 90025.

(8)

Represents 745,878 shares underlying Series A Preferred Stock and Investor Warrants. The number of shares beneficially owned is limited to 4.99% of our outstanding common stock pursuant to the terms of the Series A Preferred Stock and Investor Warrants. If beneficial ownership limitations had not been in effect, the Harvey SMidCap Fund LP would have beneficially owned a total of 1,364,317 shares of common stock, or 8.49% of our outstanding common stock, representing 1,186,363 shares underlying Series A Preferred Stock and 177,954 shares underlying Investor Warrants. Power to vote or dispose of the shares beneficially owned by Harvey SMidCap Fund LP is held by Harvey Partners LLC. The individuals authorized to act on behalf of Harvey Partners LLC in the voting and disposition of the shares are James Schwartz and Jeffrey Moskowitz. The address for Harvey SMidCap Fund LP is 350 Madison Avenue, 8th Floor, New York, New York 10017.

58(9) Represents shares underlying Series A Preferred Stock and Investor Warrants held by Harvey SMidCap Fund LP and Harvey SMidCap Offshore Fund LTD. The number of shares beneficially owned is limited to 4.99% of our outstanding common stock pursuant to the terms of the Series A Preferred Stock and Investor warrants. If beneficial ownership limitations had not been in effect, Mr. Schwartz and Mr. Moskowitz would each have beneficially owned a total of 1,568,181 shares underlying the Series A Preferred Stock and Investor Warrants held by Harvey SMidcap Fund LP and Harvey SMidcap Offshore Fund LTD, or 9.64% of our outstanding common stock, representing 1,186,363 shares underlying Series A Preferred Stock and 177,954 shares underlying Investor Warrants held by Harvey SMidCap Fund LP and 177,273 shares underlying Series A Preferred Stock and 26,591 shares underlying Investor Warrants held by Harvey SMidCap Offshore Fund LTD. Harvey Partners LLC holds the power to vote or dispose of the shares beneficially owned by Harvey SMidCap Fund LP and Harvey SMidCap Offshore Fund LTD. Mr. Schwartz and Mr. Moskowitz are each authorized to act alone on behalf of Harvey Partners LLC. The address for Mr. Schwartz and Mr. Moskowitz is 350 Madison Avenue, 8th Floor, New York, New York 10017.

(13)	Represents 454,545 shares underlying Series A Preferred Stock and 68,182 shares underlying Investor Warrants. The individuals authorized to act on behalf of The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust in the voting and disposition of the shares are Robert A Lichtenstein and Annette Lichtenstein, trustees of The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust. The address for The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust is 4573 Tara Drive, Encino, California 91316.
(14)	Represents 363,637 shares underlying Series A Preferred Stock and 54,546 shares underlying Investor Warrants. Power to vote or dispose of the shares is held by Kayne Anderson Capital Advisors, LP, the General Partner of Kayne Anderson Capital Income Partners (QP), LP and Kayne Anderson Investment Management, Inc., the investment advisor to Kayne Anderson Capital Income Partners (QP), LP. Richard A. Kayne is authorized to act on behalf of Kayne Anderson Capital Advisors, LP as its chief executive officer and on behalf of Kayne Anderson Investment Management, Inc. as its chief executive officer. The address for Kayne Anderson Capital Income Partners (QP), LP is 350 Madison Avenue, 8th Floor, New York, New York 10017.
(15)	Includes 136,364 shares underlying Series A Preferred Stock and 45,454 shares underlying Investor Warrants held by Kayne Anderson Income Partners, LP and 20,455 shares underlying Series A Preferred Stock and 6,818 shares underlying Investor Warrants held by Kayne Anderson Capital Income Fund, Ltd. Also includes the 418,183 shares of common stock represented in this table as beneficially owned by Kayne Anderson Capital Income Partners (QP), LP. Power to vote or dispose of the shares is held by Kayne Anderson Capital Advisors, LP, the General Partner of the three affiliated entities and Kayne Anderson Investment Management, Inc., the investment advisor to the three affiliated entities. Mr. Kayne is authorized to act on behalf of Kayne Anderson Capital Advisors, LP as its chief executive officer and on behalf of Kayne Anderson Capital Advisors, LP as its chief executive officer. The address for Mr. Kayne is c/o Kayne Anderson Capital Advisors, LP, 1800 Avenue of the Stars, 2nd Floor, Los Angeles, California 90067.
(16)	Represents 136,364 shares underlying Series A Preferred Stock held by Kayne Anderson Income Partners, LP, 20,455 shares underlying Series A Preferred Stock held by Kayne Anderson Capital Income Fund, Ltd. and 363,637 shares underlying Series A Preferred Stock held by Kayne Anderson Capital Income Partners (QP), LP.
(17)	Represents 159,091 shares underlying Series A Preferred Stock and 23,864 shares underlying Investor Warrants held by Catalysis Offshore, Ltd. and 159,091 shares underlying Series A Preferred Stock and 23,864 shares underlying Investor Warrants held by Catalysis Partners, LLC. Power to vote or dispose of the shares is held by Francis Capital Management, LLC. Mr. Francis is authorized to act on behalf of Francis Capital Management, LLC in the voting and disposition of the shares. The address for Mr. Francis is 429 Santa Monica Boulevard, Suite 320, Santa Monica, California 90401.
(18)	Represents 159,091 shares underlying Series A Preferred Stock held by Catalysis Offshore, Ltd. and 159,091 shares underlying Series A Preferred Stock and held by Catalysis Partners, LLC.
(19)	Includes 171,600 shares underlying options and 48,198 shares underlying a Placement Warrant held by Mr. Cummins. Also includes 196 shares of common stock held by Mr. Strasbaugh’s wife.

(10)

Represents 1,186,363 shares of Series A Preferred Stock held by Harvey SMidCap Fund LP and 177,273 shares of Series A Preferred Stock held Harvey SMidCap Offshore Fund LTD. Harvey Partners LLC holds the power to vote or dispose of the shares beneficially owned by Harvey SMidCap Fund LP and Harvey SMidCap Offshore Fund LTD. Mr. Schwartz and Mr. Moskowitz are each authorized to act alone on behalf of Harvey Partners LLC.

5954

(11)

Includes 2,045 shares of outstanding common stock held by Bryan and Carleen Riley JTWROS, 18,345 shares underlying Placement Warrants and 532,802 shares underlying both Series A Preferred Stock and Investor Warrants held by Mr. Riley. Also includes 21,761 shares of common stock and 138,756 shares underlying Placement Warrants held by B. Riley and Co. LLC. Mr. Riley has shared power to vote or dispose of the shares held by B. Riley and Co. LLC. Additionally includes the following shares of common stock over which Mr. Riley has the sole power to vote or dispose of: 322 shares held by BR Investco, LLC; 112 shares held by B. Riley and Co. Retirement Trust; 738 shares held by Investment Advisory Client; and 20,365 shares held by Riley Investment Partners Master Fund, L.P. The number of shares beneficially owned is limited to 4.99% of the outstanding common stock of the Company pursuant to the terms of the Series A Preferred Stock and Investor warrants. If beneficial ownership limitations had not been in effect, the selling security holder would have beneficially owned a total of 1,229,836 shares of common stock, or 6.93% of our outstanding common stock, which includes 772,727 shares underlying the Series A Preferred Stock and 115,909 shares underlying Investor Warrants. The address for Mr. Riley is c/o Riley Investment Management LLC, 11100 Santa Monica Boulevard, Suite 800, Los Angeles, California 90025.

(12)

Represents 454,545 shares underlying Series A Preferred Stock and 68,182 shares underlying Investor Warrants. The individuals authorized to act on behalf of The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust in the voting and disposition of the shares are Robert A Lichtenstein and Annette Lichtenstein, trustees of The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust. The address for The Robert A Lichtenstein & Annette Lichtenstein Revocable Trust is 4573 Tara Drive, Encino, California 91316.

(13)

Represents 363,637 shares underlying Series A Preferred Stock and 54,546 shares underlying Investor Warrants. Power to vote or dispose of the shares is held by Kayne Anderson Capital Advisors, LP, the General Partner of Kayne Anderson Capital Income Partners (QP), LP and Kayne Anderson Investment Management, Inc., the investment advisor to Kayne Anderson Capital Income Partners (QP), LP. Richard A. Kayne is authorized to act on behalf of Kayne Anderson Capital Advisors, LP as its chief executive officer and on behalf of Kayne Anderson Investment Management, Inc. as its chief executive officer. The address for Kayne Anderson Capital Income Partners (QP), LP is 350 Madison Avenue, 8th Floor, New York, New York 10017.

(14)

Includes 136,364 shares underlying Series A Preferred Stock and 45,454 shares underlying Investor Warrants held by Kayne Anderson Income Partners, LP and 20,455 shares underlying Series A Preferred Stock and 6,818 shares underlying Investor Warrants held by Kayne Anderson Capital Income Fund, Ltd. Also includes the 418,183 shares of common stock represented in this table as beneficially owned by Kayne Anderson Capital Income Partners (QP), LP. Power to vote or dispose of the shares is held by Kayne Anderson Capital Advisors, LP, the General Partner of the three affiliated entities and Kayne Anderson Investment Management, Inc., the investment advisor to the three affiliated entities. Mr. Kayne is authorized to act on behalf of Kayne Anderson Capital Advisors, LP as its chief executive officer and on behalf of Kayne Anderson Capital Advisors, LP as its chief executive officer. The address for Mr. Kayne is c/o Kayne Anderson Capital Advisors, LP, 1800 Avenue of the Stars, 2nd Floor, Los Angeles, California 90067.

(15)

Represents 136,364 shares underlying Series A Preferred Stock held by Kayne Anderson Income Partners, LP, 20,455 shares underlying Series A Preferred Stock held by Kayne Anderson Capital Income Fund, Ltd. and 363,637 shares underlying Series A Preferred Stock held by Kayne Anderson Capital Income Partners (QP), LP.

(16)

Represents 159,091 shares underlying Series A Preferred Stock and 23,864 shares underlying Investor Warrants held by Catalysis Offshore, Ltd. and 159,091 shares underlying Series A Preferred Stock and 23,864 shares underlying Investor Warrants held by Catalysis Partners, LLC. Power to vote or dispose of the shares is held by Francis Capital Management, LLC. Mr. Francis is authorized to act on behalf of Francis Capital Management, LLC in the voting and disposition of the shares. The address for Mr. Francis is 429 Santa Monica Boulevard, Suite 320, Santa Monica, California 90401.

(17)	Represents 159,091 shares underlying Series A Preferred Stock held by Catalysis Offshore, Ltd. and 159,091 shares underlying Series A Preferred Stock and held by Catalysis Partners, LLC.

(18)	Includes 31,114 shares underlying options, 333,000 shares underlying restricted stock, and 48,198 shares underlying a Placement Warrant held by Mr. Cummins. Also includes 196 shares of common stock held by Mr. Strasbaugh’s wife.

Equity Compensation Plan Information

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, ~~2008~~2009.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)			(b)		(c)
Equity compensation plans approved by security holders		1,327,416	(1)	$	1.69		672,584	(2)
Equity compensation plans not approved by security holders		—			—		—
Total		1,327,416					672,584

(1) Represents shares of common stock underlying options that are outstanding under our 2007 Share Incentive Plan. The material features of our 2007 Plan are described in Note 9 to our consolidated financial statements for the year ended December 31, 2008.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)			(b)		(c)
Equity compensation plans approved by security holders		434,646	(1)	$	1.24		1,061,354	(2)
Equity compensation plans not approved by security holders		—			—		—
Total		434,646					1,061,354

(21) Represents shares of common stock ~~available~~underlying ~~for~~options ~~issuance~~that are outstanding under ~~options~~our ~~that~~2007 ~~may~~Share beIncentive ~~issued~~Plan. ~~under~~The material features of our 2007 Share Incentive Plan are described in Note 7 to our consolidated financial statements for the year ended December 31, 2009.

(2)	Represents shares of common stock available for issuance under our 2007 Share Incentive Plan.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Policy Regarding Related Party Transactions

We recognize that related party transactions present a heightened risk of conflicts of interest and in connection with this offering, have adopted a policy to which all related party transactions shall be subject. Pursuant to the policy, the Audit Committee of our board of directors will review the relevant facts and circumstances of all related party transactions, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in arm’s-length dealings with an unrelated third party and the extent of the related party’s interest in the transaction. Pursuant to the policy, no director may participate in any approval of a related party transaction to which he or she is a related party.

The Audit Committee will then, in its sole discretion, either approve or disapprove the transaction. If advance Audit Committee approval of a transaction is not feasible, the transaction may be preliminarily entered into by management, subject to ratification of the transaction by the Audit Committee at the Audit Committee’s next regularly scheduled meeting. If at that meeting the Audit Committee does not ratify the transaction, management shall make all reasonable efforts to cancel or annul such transaction.

Certain types of transactions, which would otherwise require individual review, have been preapproved by the Audit Committee. These types of transactions include, for example, (i) compensation to an officer or director where such compensation is required to be disclosed in our proxy statement, (ii) transactions where the interest of the related party arises only by way of a directorship or minority stake in another organization that is a party to the transaction and (iii) transactions involving competitive bids or fixed rates.

Share Exchange Transaction

Pursuant to the Share Exchange Transaction we issued to the shareholders of R. H. Strasbaugh an aggregate of 13,770,366 shares of our common stock in exchange for the same number of R. H. Strasbaugh’s common stock. The 1:1 exchange ratio was determined by arms-length negotiations between Strasbaugh (formerly, CTK Windup Corporation) and R. H. Strasbaugh (formerly, Strasbaugh) and was not based on any particular valuation or other financial data with respect to either company or a comparison of comparable companies or transactions.

In connection with the Share Exchange Transaction we issued to (i) Alan Strasbaugh, the Chairman of our board of directors, 7,518,295 shares of our common stock in exchange for 7,518,295 shares of common stock of R. H. Strasbaugh held by Alan Strasbaugh; (ii) Chuck Schillings, our President and Chief Executive Officer, 848,508 shares of our common stock in exchange for 848,508 shares of common stock of R. H. Strasbaugh held by Mr. Schillings; (iii) Larry Strasbaugh, the brother of Alan Strasbaugh, 2,616,712 shares of our common stock in exchange for 2,616,712 shares of common stock of R. H. Strasbaugh held by Larry Strasbaugh; (iv)Thomas Walsh 1,272,783 shares of our common stock in exchange for 1,272,783 shares of common stock of R. H. Strasbaugh held by Mr. Walsh; and (v) Michael Kirkpatrick, our Director of Sales and Marketing, 848,508 shares of our common stock in exchange for 848,508 shares of common stock of R. H. Strasbaugh held by Mr. Kirkpatrick. As a result of the Share Exchange Transaction each of Mr. Alan Strasbaugh, Mr. Schillings, Mr. Larry Strasbaugh, Mr. Walsh and Mr. Kirkpatrick became the beneficial owners of more than 5% of our common stock. Except for Mr. Walsh, none of the shareholders of R. H. Strasbaugh acquired the shares they exchanged within two years prior to May 24, 2007. On February 6, 2007, Mr. Walsh acquired 548,865 shares of R. H. Strasbaugh common stock upon exercise of an option to purchase shares of R. H. Strasbaugh’s common stock that was originally granted several years ago and extended on April 10, 2006, at an exercise price of $0.07 per share.

Employment Agreements

We are or have been a party to employment and compensation arrangements with related parties, as more particularly described above under the headings “Compensation of Executive Officers,” “Employment Agreements” and “Compensation of Directors.”

Indemnification Agreements

We have entered into an indemnification agreement with each of our directors and executive officers. The indemnification agreements and our certificate of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by California law.

Facilities Lease

Our corporate headquarters, in San Luis Obispo, is ~~jointly~~ owned by Alan Strasbaugh ~~and~~ ~~his former wife, April Paletsas, with each owning an undivided one-half interest in the property,~~ and leased to R. H. Strasbaugh, onthe ~~a month-to-month~~term ~~basis~~of the lease is one year, at $84,000 per month. During the years ended December 31, ~~2008~~2009 and ~~2007~~2008 our total lease costs were approximately $1,000,000 each year. Alan Strasbaugh is the chairman of our board of directors, the chairman of the board of directors of R. H. Strasbaugh and an employee of ~~Strasbaugh. In connection with certain litigation between Mr.~~ Strasbaugh ~~and Ms~~. ~~Paletsas, Mr. Strasbaugh has made an offer to acquire Ms. Paletsas’ interest in the property, as more particularly described in Item 3, “Legal Proceedings.”~~

61Option Exchange Program

~~Repayment~~In connection with the Option Exchange Program described above, we issued 100,000 shares of ~~Loans~~restricted stock to Mr. Chuck Shillings in exchange for options to purchase 200,000 shares of our common stock that he tendered to us for cancellation. We also issued to Mr. Richard Nance 133,000 shares of restricted stock in exchange for options to purchase shares 266,000 shares of our common stock that he tendered to us for cancellation.

~~On May~~Director 31, 2007, R. H. Strasbaugh paid $746,776 to Alan Strasbaugh, Chairman of our board of directors, in full discharge of a Promissory Note dated February 12, 2002. R. H. Strasbaugh issued the Note to Alan Strasbaugh in the original principal amount of $852,262, which amount represented the amount of past due rent, and the note bore interest at the prime interest rate plus 1.0%.Independence

~~On May~~Our ~~24,~~corporate ~~2007,~~governance ~~R. H.~~guidelines ~~Strasbaugh~~provide ~~paid~~that ~~$761,799 to Agility, then~~ a ~~beneficial owner~~majority of ~~6.9% of~~ the ~~then~~board ~~issued~~of directors and ~~outstanding~~all ~~shares~~members of ~~common~~the ~~stock of R. H. Strasbaugh~~Audit, inCompensation ~~full~~and ~~discharge~~Nominating ofand Corporate ~~all~~Governance ~~obligations~~Committees ~~under~~of athe ~~Loan Agreement~~board ~~dated~~of ~~September~~directors ~~23,~~must ~~2005~~be independent.

~~Series~~On an Aannual ~~Preferred~~basis, ~~Stock~~each ~~Financing~~director and executive officer is obligated to complete a Director and Officer Questionnaire that requires disclosure of any transactions with Strasbaugh in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Following completion of these questionnaires, the board of directors, with the assistance of the Nominating and Corporate Governance Committee, makes an annual determination as to the independence of each director using the current standards for “independence” established by the SEC and NASDAQ Market Place Rules, additional criteria set forth in our corporate governance guidelines and consideration of any other material relationship a director may have with Strasbaugh.

OnOur ~~May~~board ~~24,~~of ~~2007,~~directors wehas ~~issued~~determined tothat each ~~Lloyd I. Miller, III 1,000,000 shares~~ of our ~~Series~~ Adirectors who ~~Preferred Stock at a price of $2.20 per share, for an aggregate~~served ~~purchase~~on ~~price~~our ofboard ~~$2,200,000. On~~during the ~~same~~year ~~date,~~ended weDecember ~~also issued to Milfam II L.P. 1~~31,~~000,000~~ ~~shares~~2009 ~~of our Series~~is Aindependent ~~Preferred Stock at a price~~under ofthese ~~$2.20 per share~~standards, except for ~~an aggregate purchase price of $2,200,000~~Mr. ~~Lloyd I. Miller~~ Strasbaugh, ~~III~~who ~~has~~serves ~~the~~as ~~power~~our toChairman ~~vote or dispose~~ of the ~~shares held by Milfam II L.P. On May 30~~Board, ~~2007,~~and ~~Lloyd I~~Mr. ~~Miller~~ Cummins, ~~III~~ ~~waived~~who ~~the~~is ~~4.99%~~employed ~~conversion limitation with respect to the shares of Series A Preferred Stock and Investor Warrants held~~ by ~~him and Milfam II L~~B.~~P. Thus, the waiver was effective as of July~~ ~~30,~~Riley ~~2007~~ and ~~both Mr~~Co. ~~Miller~~ LLC and ~~Milfam~~was IInominated ~~L.P.~~to ~~are~~serve ~~beneficial~~on ~~owners~~our ofboard ~~more~~by ~~than~~the 5%holders of our Series A ~~common~~Preferred ~~stock~~Stock.

In connection with the Series A Preferred Stock Financing, we issued a Placement Warrant to purchase 385,434 shares of our common stock to B. Riley and Co. Inc., as compensation for services rendered as placement agent in the Series A Preferred Stock Financing. B. Riley and Co. Inc. assigned portions of its Placement Warrant to the following, each of whom is either an employee of B. Riley and Co. Inc. or an affiliate of an employee of B. Riley and Co. Inc: Bryant Riley, Michael C. Munck, Kenneth W. Tang, The Donnelly Revocable Living Trust, The Guardi Family Trust, Thomas John Kelleher and Mary Meighan Kelleher as trustees of The Kelleher Family Trust Established January 18, 2007, Wesley Cummins, Shane Pavitt, Knut Grevle, Pete Benedict and Wyatt Carr. B. Riley and Co. Inc. currently holds a Placement Warrant to purchase 138,756 shares of our common stock.57

Pursuant to an assignment from B. Riley and Co. Inc. of its Placement Warrant to purchase 385,434 shares of our common stock, we issued a Placement Warrant to purchase 18,345 shares of our common stock to Mr. Bryant Riley, a former member of our board of directors. Additionally, as an investor in the Series A Preferred Stock Financing, we issued to Mr. Riley 772,727 shares of our Series A Preferred Stock and an Investor Warrant to purchase 115,909 shares of our common stock. Mr. Riley shares the power to vote or dispose of the shares beneficially owned by B. Riley and Co. Inc. with the management of B. Riley and Co. Inc.

Pursuant to an assignment from B. Riley and Co. Inc. of its Placement Warrant to purchase 385,434 shares of our common stock, we issued a Placement Warrant to purchase 48,198 shares of our common stock to Wesley Cummins, a member of our board of directors.

Both Mr. Riley and Mr. Cummins, in their capacity as employees of B. Riley and Co. Inc., provided investment banking services to us in connection with the Series A Preferred Stock Financing. B. Riley has represented to us that the assignments made to both Mr. Riley and Mr. Cummins were in consideration of services rendered by Mr. Riley and Mr. Cummins, respectively, as employees of B. Riley and Co. Inc., in connection with the investment banking services B. Riley provided us in connection with the Series A Preferred Stock Financing. Additionally, both Mr. Riley and Mr. Cummins have represented to us that they received the Placement Warrants assigned to them by B. Riley in the ordinary course of business as transaction-based compensation for investment banking services.

Repurchase of Preferred Stock

On May 24, 2007, R. H. Strasbaugh, our wholly-owned subsidiary, repurchased from Lam Research Corporation, then a beneficial owner of 21.2% of the then issued and outstanding shares of common stock of R. H. Strasbaugh, 4,087,980 shares of R. H. Strasbaugh’s convertible preferred stock for $3,000,000. Prior to the repurchase, Lam Research Corporation held all of the then issued and outstanding shares of Convertible Preferred Stock of R. H. Strasbaugh.

Repurchase of Common Stock and Warrants

On May 24, 2007, R. H. Strasbaugh repurchased from Agility, then a beneficial owner of 6.9% of the outstanding shares of common stock of R. H. Strasbaugh, 771,327 shares of common stock of R. H. Strasbaugh, and a warrant to purchase shares of R. H. Strasbaugh common stock for $750,000 and $450,000, respectively. Pursuant to the warrant that was repurchased, Agility had the right to purchase 4.1% of R. H. Strasbaugh’s issued stock, on a fully diluted basis, at anytime between September 23, 2005 and September 23, 2015 at an exercise price of $0.01 per share.

Item 14.

Principal Accounting Fees and Services.

The following table presents the aggregate fees billed to us for professional audit services rendered by Farber Hass Hurley LLP (“FHH”), for the ~~year~~years ended ~~December~~ December 31, 2009 and 2008. We appointed FHH as our independent registered public accounting firm on December 9, 2008.

	2008
	2009		2008
Audit Fees	$	5105,~~100~~150	$	5,100
Audit-Related Fees		-0-		-0-
Tax Fees		-0-		-0-
All Other Fees		-0-		-0-
Total	$	5105,~~100~~150	$	5,100

~~The~~ ~~following~~Audit Fees. Consist ~~table~~of ~~presents~~amounts billed for professional services rendered for the ~~aggregate~~audit ~~fees~~of ~~billed~~our toannual usconsolidated ~~for~~financial ~~professional~~statements ~~audit~~included ~~services~~in ~~rendered~~our byAnnual ~~Windes~~Report &on ~~McClaughry~~Form ~~(“Windes”)~~10-K, and reviews of our ~~former~~interim ~~independent~~consolidated ~~accountants,~~financial ~~for~~statements ~~the~~included ~~year~~in ~~ended~~our ~~December~~Quarterly ~~31,~~Reports ~~2007:~~on Form 10-Q.

Audit Fees	$	444,095
Audit-Related Fees		-0-
Tax Fees		13,430
All Other Fees		-0-
Total	$	457,525

Audit Fees. Consist of amounts billed for professional services rendered for the audit of our annual consolidated financial statements included in our Annual Report on Form 10-K, and reviews of our interim consolidated financial statements included in our Quarterly Reports on Form 10-Q, and our Registration Statement on Form S-1, including amendments thereto.

Audit-Related Fees. Audit-Related Fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements but are not reported under “Audit Fees.”

Tax Fees. Tax Fees consist of fees for professional services for tax compliance activities, including the preparation of federal and state tax returns and related compliance matters.

All Other Fees. Consists of amounts billed for services other than those noted above.

Our Audit Committee has determined that all non-audit services provided by FHH and Windes are and were compatible with maintaining audit independence.

Our Audit Committee is responsible for approving all audit, audit-related, tax and other services. The Audit Committee pre-approves all auditing services and permitted non-audit services, including all fees and terms to be performed for us by our independent registered public accounting firm at the beginning of the fiscal year. Non-audit services are reviewed and pre-approved by project at the beginning of the fiscal year. Any additional non-audit services contemplated by us after the beginning of the fiscal year are submitted to the Audit Committee chairman for pre-approval prior to engaging the independent auditor for such services. These interim pre-approvals are reviewed with the full Audit Committee at its next meeting for ratification. During 2009 and 2008, all services performed by FHH were pre-approved by our Audit Committee in accordance with these policies and applicable SEC regulations. During ~~2007~~2008, all services performed by Windes ~~were~~ were pre-approved by our Audit Committee in accordance with these policies and applicable SEC regulations.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a)(1), (a)(2) and (c) Financial Statements and Financial Statement Schedules

Reference is made to the financial statements and financial statement schedule listed on and attached following the Index to Consolidated Financial Statements contained on page F-1 of this ~~Report~~report.

(a)(3) and (b) Exhibits

Reference is made to the exhibits listed on the Index to Exhibits that follows the financial statements and financial statement schedule.

6459

STRASBAUGH AND SUBSIDIARY

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets as of December 31, 2009 and 2008	F-3
Consolidated Balance Sheets as of December 31, 2008 and 2007	F-4
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008	F-4
Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007	F-5
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders’ Deficit for the Years Ended December 31, 2009 and 2008	F-5
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders’ Equity for the Years Ended December 31, 2008 and 2007	F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008	F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007	F-8
Notes to Consolidated Financial Statements for the Years Ended December 31, 2009 and 2008	F-8
Notes to Consolidated Financial Statements for the Years Ended December 31, 2008 and 2007	F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Shareholders of Strasbaugh

We have audited the accompanying consolidated balance ~~sheet~~sheets of Strasbaugh (a California corporation) and subsidiary as of December 31, 2009 and 2008, and the related ~~statements~~ statements of operations, redeemable convertible preferred stock and shareholders’ ~~equity~~deficit, and cash flows for ~~the year~~ ~~then ended. These financial~~each ~~statements~~of ~~are~~ the ~~responsibility~~two ofyears in the ~~Company~~period ended December 31, 2009. Strasbaugh’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our ~~audit~~audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The ~~Company~~company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ~~Company~~company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial ~~statements. An~~ ~~audit also includes~~ statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~audit~~audits ~~provides~~provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Strasbaugh and subsidiary as of December 31, 2009 and 2008, and the results of ~~their~~its operations and ~~their~~its cash flows ~~for~~ for each of the ~~year~~two ~~then~~years in the period ended December 31, in2009 in conformity with accounting principles generally accepted in the United States of America.

~~/s/~~ Farber Hass Hurley LLP

Granada Hills, California

~~April~~March 1530, ~~2009~~2010

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Shareholders of Strasbaugh

We have audited the accompanying consolidated balance sheet of Strasbaugh (a California corporation) and subsidiary as of December 31, 2007, and the related consolidated statements of operations, redeemable convertible preferred stock and shareholders’ equity, and cash flows for the period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Strasbaugh and subsidiary as of December 31, 2007, and the results of their operations and their cash flows for the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

/S/ WINDES & McCLAUGHRY

Irvine, California

June 9, 2008

F-3

STRASBAUGH AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

ASSETS

	December 31,
	2008			2007
	2009			2008
CURRENT ASSETS
Cash and cash equivalents	$	491,240		$	~~1,864~~49
Accounts receivable, net of allowance for doubtful accounts of $224 and $55 in 2008 and 2007, respectively		1,309			2,985
Accounts receivable, net of allowance for doubtful accounts of $13 and $224 in 2009 and 2008, respectively		3,298			1,309
Investments in securities		~~239~~—			~~244~~239
Inventories		5,~~659~~256			65,~~169~~659
Prepaid expenses		~~264~~287			~~282~~264
Deposits and other assets		—			69
		10,081			7,520
		7,520			11,613
PROPERTY AND EQUIPMENT, NET		2,046			2,150
PROPERTY AND EQUIPMENT, NET		2,150			2,384
OTHER ASSETS
Investments in securities		—			885
Capitalized intellectual property, net of accumulated amortization of $82 and $54 at December 31, 2009 and 2008, respectively		402			381
Capitalized intellectual property, net of amortization of $54 and $29 in 2008 and 2007, respectively		381			306
Deposits and other assets		28			36
Deposits and other assets		36			—
		430			417
		417			1,191
TOTAL ASSETS	$	12,557		$	10,087
TOTAL ASSETS	$	10,087		$	15,188
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable	$	100		$	100
Notes payable, current portion	$	—		$	100
Accounts payable		1,~~231~~323			~~517~~1,231
Accrued expenses		12,~~963~~379			21,~~606~~963
Deferred revenue		217			119
Customer deposits		3,997			147
		3,511			3,342
Deferred revenue		48			70
COMMITMENTS AND CONTINGENCIES (Notes 8, 9, 10 and 12)
		7,747			3,511
OTHER LIABILITIES
Preferred stock related embedded derivative and warrants		4			—
		7,751			—
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock (“Series A”), no par value, aggregate preference in liquidation $14,071, 15,000,000 shares authorized, 5,909,089 shares issued and outstanding		11,964			11,542
Redeemable convertible preferred stock (“Series A”), no par value, aggregate preference in liquidation $15,077, 15,000,000 shares authorized, 5,909,089 shares issued and outstanding		11,203			11,964
SHAREHOLDERS’ EQUITY (DEFICIT)
SHAREHOLDERS’ DEFICIT
Preferred stock, no par value, 5,769,736 shares authorized, 4,087,980 shares issued and outstanding		—			—
Preferred stock, no par value, 5,769,736 shares authorized, zero shares issued and outstanding		—			—
Common stock, no par value, 100,000,000 shares authorized 14,201,587 issued and outstanding		56			56
Common stock, no par value, 100,000,000 shares authorized 14,705,587 and 14,201,587 issued and outstanding at December 31, 2009 and 2008, respectively		56			56
Additional paid-in capital		2623,~~803~~776			2726,~~926~~803
Accumulated other comprehensive loss		~~(61~~—	)		—(61	)
Accumulated deficit		(3230,~~186~~229	)		(2732,~~678~~186	)
		(5,388	)		304
		(6,397	)		(5,388	)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	10,087		$	15,188
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	12,557		$	10,087

~~The accompanying notes are an integral part of these statements.~~F-3

F-4

STRASBAUGH AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years Ended
	December 31,
	2008			2007
	2009			2008
REVENUES
Tools	$	37,~~041~~410		$	113,~~703~~041
Parts and service		65,~~513~~463			76,~~815~~513
NET REVENUES		912,~~554~~873			199,~~518~~554
COST OF SALES
Tools		25,~~777~~774			72,~~491~~777
Parts and service		42,~~331~~676			34,~~906~~331
TOTAL COST OF SALES		78,~~108~~450			117,~~397~~108
GROSS PROFIT		24,~~446~~423			82,~~121~~446
OPERATING EXPENSES
Selling, general and administrative expenses		43,~~429~~855			54,~~961~~429
Research and development		23,~~954~~593			2,~~580~~954
		7,383			8,541
		7,448			7,383
LOSS FROM OPERATIONS		(43,~~937~~025	)		(~~420~~4,937	)
OTHER INCOME (EXPENSE)
Rental income		~~321~~581			2321
Interest income		359			8635
Interest expense		(1422	)		(~~311~~14	)
Other (expense) income, net		87			(124	)
Gain on change in value of embedded derivative and warrants (Note 2)		1,688			—
		429			(347	)
Other income, net		77			87
LOSS BEFORE PROVISION FOR INCOME TAXES		(4,508	)		(767	)
		2,333			429
PROVISION FOR INCOME TAXES		—			10
LOSS BEFORE INCOME TAXES		(692	)		(4,508	)
NET LOSS	$	(4,508	)	$	(777	)
BENEFIT FROM INCOME TAXES		12			—
NET (LOSS) INCOME PER COMMON SHARE
NET LOSS	$	(680	)	$	(4,508	)
Basic	$	(0.43	)	$	0.28
NET LOSS PER COMMON SHARE
Diluted	$	(0.43	)	$	0.24
Basic	$	(0.22	)	$	(0.43	)
Diluted	$	(0.22	)	$	(0.43	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		14,~~202~~312			14,~~281~~202
Diluted		14,~~202~~312			1914,~~758~~202

~~The accompanying notes are an integral part of these statements.~~F-4

STRASBAUGH AND SUBSIDIARY

CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND SHAREHOLDERS’ DEFICIT

(In thousands, except share data)

																	Accumulated						Total Shareholders’ Equity and
																	Other						Redeemable
	Redeemable Convertible													Additional			Comprehensive						Convertible
	Preferred Stock					Preferred Stock				Common Stock				Paid-In			Income			Accumulated			Preferred
	Shares		Amount			Shares		Amount		Shares		Amount		Capital			(Loss)			Deficit			Stock
BALANCE, JANUARY 1, 2008		5,909,089	$	11,542			—	$	—		14,201,587	$	56	$	27,926		$	—		$	(27,678	)	$	11,846
Comprehensive loss:
Net loss																					(4,508	)		(4,508	)
Other comprehensive loss:
Unrealized loss on investments, net of tax of $0																		(61	)					(61	)
Total comprehensive loss																								(4,569	)

Series A issuance costs		—		(521	)		—		—		—		—		—			—			—			(521	)
Stock-based compensation expense		—		—			—		—		—		—		453			—			—			453
Accretion of redeemable convertible preferred stock		—		505			—		—		—		—		(505	)		—			—			—
Preferred stock dividend accumulated		—		1,071			—		—		—		—		(1,071	)		—			—			—
Preferred stock dividend paid		—		(633	)		—		—		—		—		—			—			—			(633	)
BALANCE, DECEMBER 31, 2008		5,909,089	$	11,964			—	$	—		14,201,587	$	56	$	26,803		$	(61	)	$	(32,186	)	$	6,576

F-5

STRASBAUGH AND SUBSIDIARY

~~AND~~CONSOLIDATED ~~SHAREHOLDERS’~~STATEMENT ~~EQUITY~~OF ~~(DEFICIT)~~REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND SHAREHOLDERS’ DEFICIT (Continued)

(In thousands, except share data)

																										Total
																				Accumulated						Total Shareholders’ Equity and
																										Shareholders’
																				Other						Redeemable
																				Accumulated						Equity and
	Redeemable Convertible																Additional			Comprehensive						Convertible
	Redeemable																			Other						Redeemable
	Convertible																Additional			Comprehensive						Convertible
	Preferred Stock					Preferred Stock						Common Stock					Paid-In			Income			Accumulated			Preferred
	Shares		Amount			Shares			Amount			Shares			Amount		Capital			(Loss)			Deficit			Stock
BALANCE, JANUARY 1, 2007		—		—			4,087,980		$	8,595			13,992,828		$	17	$	23,409		$	—		$	(26,901	)	$	5,120
BALANCE, JANUARY 1, 2009		5,909,089	$	11,964			—		$	—			14,201,587		$	56	$	26,803		$	(61	)	$	(32,186	)	$	6,576
Cumulative effect of change in accounting principle (Note 2)		—		(3,191	)		—			—			—			—		(1,138	)		—			2,637			(1,692	)
Comprehensive loss:
Net loss																								(~~777~~680	)		(~~777~~680	)
Other comprehensive loss:																											—
Unrealized loss on investments, net of tax of $0																											—
Unrealized gain, net of tax of $0																					61			—			61
Total comprehensive loss																											(~~777~~619	)
Repurchase of participating preferred stock for $3,000		—		—			(4,087,980	)		(8,595	)		—			—		5,595			—			—			(3,000	)
Stock option expense		—		—			—			—			—			—		483			—			—			483
Issuance of common stock to CTK, net of issuance costs of $312		—		—			—			—			431,221			1		62			—			—			63
Issuance of restricted stock, less amortization		—		—			—			—			504,000			—		58			—			—			58
Sale of Series A redeemable convertible preferred stock, net of issuance costs of $2,311		5,909,089		10,689			—			—			—			—		—			—			—			10,689
Accretion of redeemable convertible preferred stock		—		1,275			—			—			—			—		(1,275	)		—			—			—
Fair value of warrants issued (Note 11)		—		—			—			—			—			—		350			—			—			350
Preferred stock dividend accumulated		—		1,155			—			—			—			—		(1,155	)		—			—			—
Repurchase of common stock		—		—			—			—			(771,327	)		—		(751	)		—			—			(751	)
BALANCE, DECEMBER 31, 2009		5,909,089	$	11,203			—		$	—			14,705,587		$	56	$	23,776		$	—		$	(30,229	)	$	4,806
Issuance of common stock from exercise of options		—		—			—			—			548,865			38		—			—			—			38
Stock-based compensation expense		—		—			—			—			—			—		114			—			—			114
Accretion of redeemable convertible preferred stock		—		220			—			—			—			—		(220	)		—			—			—
Preferred stock dividend		—		633			—			—			—			—		(633	)		—			—			—
BALANCE, DECEMBER 31, 2007		5,909,089	$	11,542			—		$	—			14,201,587		$	56	$	27,926		$	—		$	(27,678	)	$	11,846

The accompanying notes are an integral part of these statements.

F-6

STRASBAUGH AND SUBSIDIARY

~~AND~~CONSOLIDATED ~~SHAREHOLDERS’~~STATEMENTS ~~EQUITY~~OF ~~(DEFICIT)~~CASH ~~(Continued)~~FLOWS

(In thousands~~, except share data~~)

																								Total
	For the Year Ended
																								Shareholders’
	December 31,
																		Accumulated						Equity and
	2009			2008
	Redeemable																	Other						Redeemable
CASH FLOWS FROM OPERATING ACTIVITIES
	Convertible														Additional			Comprehensive						Convertible
Net loss	$	(680	)	$	(4,508	)
	Preferred Stock						Preferred Stock				Common Stock				Paid-In			Income			Accumulated			Preferred
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Shares			Amount			Shares		Amount		Shares			Amount	Capital			(Loss)			Deficit			Stock
Depreciation and amortization		362			358
BALANCE, JANUARY 1, 2008		5,909,089		$	11,542			—	$	—		14,201,587	$	56	$	27,926		$	—		$	(27,678	)	$	11,846
Allowance for doubtful accounts		(211	)		169
Comprehensive loss:
Inventory reserves		100			1,629
Net loss																						(4,508	)		(4,508	)
Noncash interest expense		22			14
Other comprehensive loss:
Stock-based compensation		541			453
Unrealized loss on investments net of tax of $0																			(61	)					(61	)
Gain on embedded derivative (Note 2)		(1,489	)		—
Total comprehensive loss																									(4,569	)
Gain on warrants (Note 2)		(199	)		—
Series A issuance costs		—			(521	)		—		—		—		—		—			—			—			(521	)
Gain on extinguishment of debt		(100	)		—
Stock-based compensation expense		—			—			—		—		—		—		453			—			—			453
Losses on sales of investment securities		6			6
Accretion of redeemable convertible preferred stock		—			505			—		—		—		—		(505	)		—			—			—
Changes in assets and liabilities:
Preferred stock dividend accumulated		—			1,071			—		—		—		—		(1,071	)		—			—			—
Accounts receivable		(1,778	)		1,507
Preferred stock dividend paid		—			(633	)		—		—		—		—		—			—			—			(633	)
Inventories		284			(1,037	)
BALANCE, DECEMBER 31, 2008		5,909,089		$	11,964			—	$	—		14,201,587	$	56	$	26,803		$	(61	)	$	(32,186	)	$	6,576
Prepaid expenses		(23	)		18
Deposits and other assets		—			29
Accounts payable		92			714
Accrued expenses		394			(657	)
Deferred revenue		(22	)		98
Customer deposits		3,850			—
Net Cash Provided by (Used in) Operating Activities		1,149			(1,207	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investment securities		294			590
Proceeds from the maturity of investment securities		—			233
Purchase of property and equipment		(203	)		(177	)
Capitalized cost of intellectual property		(49	)		(100	)
Net Cash Provided by Investing Activities		42			546
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance cost of redeemable convertible preferred stock		—			(521	)
Preferred dividends paid		—			(633	)
Net Cash Used in Financing Activities		—			(1,154	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		1,191			(1,815	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		49			1,864
CASH AND CASH EQUIVALENTS, END OF YEAR	$	1,240		$	49

The accompanying notes are an integral part of these statements.

F-7

STRASBAUGH AND SUBSIDIARY

~~(In~~NOTES ~~thousands)~~TO CONSOLIDATED FINANCIAL STATEMENTS

	For the Year Ended
	December 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,508	)	$	(777	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		358			313
Change in allowance for doubtful accounts		169			(15	)
Change in inventory reserves		1,629			(1,100	)
Noncash interest expense		14			113
Stock-based compensation		453			114
Losses on sales of investment securities		6			—
Changes in assets and liabilities:
Accounts receivable		1,507			1,281
Inventories		(1,037	)		1,385
Prepaid expenses		18			56
Deposits and other assets		29			67
Accounts payable		714			(521	)
Accrued expenses		(657	)		(335	)
Deferred revenue		98			(1,082	)
Accrued warrant		—			(450	)
Net Cash Used in Operating Activities		(1,207	)		(951	)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in securities		—			(1,129	)
Proceeds from the sale of investment securities		590			—
Proceeds from the maturity of investment securities		233			—
Purchase of property and equipment		(177	)		(70	)
Capitalized cost of intellectual property		(100	)		(132	)
Net Cash Provided by (Used in) Investing Activities		546			(1,331	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit		—			(2,650	)
Repayment of notes payable		—			(1,798	)
Repurchase of participating preferred stock		—			(3,000	)
Issuance of redeemable convertible preferred stock		—			12,650
Issuance cost of redeemable convertible preferred stock		(521	)		(1,961	)
Issuance of warrants		—			350
Proceeds from stock options exercised		—			38
Proceeds from issuance of shares in share exchange transaction		—			63
Preferred dividends paid		(633	)		—
Repurchase of common stock		—			(751	)
Net Cash (Used in) Provided By Financing Activities		(1,154	)		2,941
NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,815	)		659
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		1,864			1,205
CASH AND CASH EQUIVALENTS, END OF YEAR	$	49		$	1,864
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	—		$	204
Income taxes	$	—		$	73
Noncash investing and financing activities:
Fair value accretion on conditionally redeemable convertible preferred stock	$	505		$	220
Preferred stock dividend	$	1,071		$	633
Unrealized loss on investments in securities	$	61		$	—

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

The accompanying notes are an integral part of these statements.

F-8

NOTE 1 – Summary of Significant Accounting Policies

The following significant accounting policies are in conformity with accounting principles generally accepted in the United States of America. Such policies are consistently followed by Strasbaugh, a California corporation and subsidiary (the “Company”), in preparation of its consolidated financial statements.

Organization and Description of Business

The consolidated financial statements include the accounts of Strasbaugh, a California corporation formerly known as CTK Windup Corporation (“Strasbaugh”), and its wholly-owned subsidiary, R. H. Strasbaugh, a California corporation (“R. H. Strasbaugh,” and together with Strasbaugh, the “Company”). All material inter-company accounts and transactions have been eliminated in the consolidation.

The Company designs, manufactures, markets and ~~manufactures~~sells precision surfacing systems and solutions for the global semiconductor and semiconductor equipment, ~~electronics~~silicon wafer and silicon wafer equipment, ~~precision~~data ~~optics~~storage, ~~and~~micro-electromechanical ~~aerospace~~system, ~~industries~~light emitting diode, and precision optics markets. Products are sold to customers throughout the United States, Europe, and Asia and Pacific Rim countries.

Share Exchange Transaction

On May 24, 2007, Strasbaugh completed a share exchange transaction (the “Share Exchange Transaction”) with R. H. Strasbaugh, a California corporation formerly known as Strasbaugh. Upon completion of the Share Exchange Transaction, Strasbaugh acquired all of the issued and outstanding shares of R. H. Strasbaugh’s capital stock. In connection with the Share Exchange Transaction, Strasbaugh issued an aggregate of 13,770,366 shares of its common stock to R. H. Strasbaugh’s shareholders. The Share Exchange Transaction has been accounted for as a recapitalization of R. H. Strasbaugh with R. H. Strasbaugh being the accounting acquiror. As a result, the historical financial statements of R. H. Strasbaugh ~~will~~are be the financial statements of the legal acquiror, Strasbaugh (formerly ~~known~~ known as CTK Windup Corporation).

Immediately prior to the consummation of the Share Exchange Transaction, CTK Windup Corporation amended and restated its articles of incorporation to effectuate a 1-for-31 reverse split of its common stock, to change its name from CTK Windup Corporation to Strasbaugh, to increase its authorized common stock from 50,000,000 shares to 100,000,000 shares, to increase its authorized preferred stock from 2,000,000 shares to 15,000,000 shares (of which 5,909,089 shares have been designated Series A Cumulative Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”)) and to eliminate its Series A Participating Preferred Stock. On May 17, 2007, prior to the filing of CTK Windup Corporation’s amended and restated articles of incorporation, the Company’s subsidiary, R. H. Strasbaugh (then known as Strasbaugh), amended its articles of incorporation to change its name from Strasbaugh to R. H. Strasbaugh.

F-98

STRASBAUGH AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

NOTE 1 – Summary of Significant Accounting Policies (continued)

Estimates and Assumptions

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or US GAAP, requires ~~management~~ management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and ~~expenses~~ expenses during the reporting periods. Actual results could differ from those ~~estimates~~ estimates and those differences could be material. Significant estimates include the fair value of the Company'’s common stock and the fair value of options and ~~warrants~~ warrants to purchase common stock, provision for doubtful accounts receivable, inventory obsolescence, and depreciation and amortization. Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.

~~Concentrations~~Supplemental Disclosure of ~~Credit~~Cash ~~Risk~~Flow Information

Financial instruments that subject the Company to credit risk consist primarily of cash, cash equivalents and trade accounts receivable. Throughout 2007 and most of 2008, the Company maintained cash balances in excess of federally insured limits. With regard to cash and cash equivalents, the Company maintains its excess cash balances in checking and money market accounts at high-credit quality financial institution(s). The Company has not experienced any significant losses in any of the short-term investment instruments we have used for excess cash balances. The Company does not require collateral on its trade receivables. Historically, the Company has not suffered significant losses with respect to trade accounts receivable. However, recent developments in the global economy and credit markets have caused unusual fluctuations in the values of various investment instruments. Additionally, these developments have, in some cases, limited the availability of credit funds that borrowers such as the Company normally utilize in day-to-day operations which could impact the timing or ultimate recovery of trade accounts. No assurances can be given that these recent developments will not negatively impact the Company's operations as a result of concentrations of these investments.

	Year Ended
	December 31,
	2009		2008
Cash paid for:
Interest	$	—	$	—
Income taxes	$	1,000	$	—
Noncash investing and financing activities:
Fair value accretion on redeemable convertible preferred stock	$	1,275,000	$	505,000
Preferred stock dividend	$	1,155,000	$	1,071,000
Restricted common stock for employees and directors	$	58,000	$	—
Unrealized gain (loss) on investments in securities	$	61,000	$	(61,000	)
Property and equipment transferred to/from inventory, net	$	19,000	$	71,000

~~The~~Additional ~~Company~~information ~~sells~~to ~~its~~the ~~products~~statements onof ~~credit~~cash ~~terms,~~flows ~~performs~~with ~~ongoing~~regard ~~credit~~to ~~evaluations~~certain noncash ofinvesting ~~its~~and ~~customers,~~financing transactions includes inventory transferred from property and ~~maintains~~equipment anand ~~allowance~~inventory ~~for~~transferred ~~potential~~to ~~credit~~property and ~~losses~~equipment. ~~During~~Inventory ~~the~~is ~~years~~transferred ~~ended~~at ~~December~~the ~~31,~~lower ~~2008~~of ~~and 2007~~cost, ~~the~~market or ~~Company’s~~net ~~top~~book 10value ~~customers~~and ~~accounted~~is ~~for~~depreciated ~~57%~~over ~~and~~its ~~68%~~useful oflife ~~net~~once ~~revenues, respectively. Sales~~transferred to property, ~~major~~plant ~~customers~~and ~~(over~~equipment. These ~~10%)~~items asare atypically ~~percentage~~tools ofused ~~net~~for ~~revenues~~testing, ~~were~~demonstrations ~~26%~~and on-going engineering and ~~36%~~are ~~for~~sometimes ~~the~~sold ~~years~~as used ~~ended~~tools ~~December 31,~~to ~~2008~~customers ~~and 2007,~~in ~~respectively~~the future as needed.

A decision by a significant customer to substantially decrease or delay purchases from the Company, or the Company’s inability to collect receivables from these customers, could have a material adverse effect on the Company’s financial condition and results of operations. As of December 31, 2008 and 2007, the amount due from the major customers (over 10%) discussed above represented 5% and 21% of total accounts receivable, respectively.F-9

~~F-10~~STRASBAUGH AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

NOTE 1 – Summary of Significant Accounting Policies (continued)

Concentrations of Credit Risk

Financial instruments that subject the Company to credit risk consist primarily of cash, cash equivalents and trade accounts receivable. Throughout most of 2009 and 2008, the Company maintained cash balances in excess of federally insured limits. With regard to cash and cash equivalents, the Company maintains its excess cash balances in checking and money market accounts at high-credit quality financial institutions. The Company has not experienced any significant losses in any of the short-term investment instruments we have used for excess cash balances. The Company does not require collateral on its trade receivables. Historically, the Company has not suffered significant losses with respect to trade accounts receivable. However, recent developments in the global economy and credit markets have caused unusual fluctuations in the values of various investment instruments. Additionally, these developments have, in some cases, limited the availability of credit funds that borrowers such as the Company normally utilize in day-to-day operations which could impact the timing or ultimate recovery of trade accounts. No assurances can be given that these recent developments will not negatively impact the Company’s operations as a result of concentrations of these investments.

The Company sells its products on credit terms, performs ongoing credit evaluations of its customers, and maintains an allowance for potential credit losses. During the years ended December 31, 2009 and 2008, the Company’s top 10 customers accounted for 85% and 57% of net revenues, respectively. Sales to major customers (over 10%) as a percentage of net revenues were 58% and 26% for the years ended December 31, 2009 and 2008, respectively.

A decision by a significant customer to substantially decrease or delay purchases from the Company, or the Company’s inability to collect receivables from these customers, could have a material adverse effect on the Company’s financial condition and results of operations. As of December 31, 2009 and 2008, the amount due from the major customers (over 10%) discussed above represented 80% and 5% of total accounts receivable, respectively.

Product Warranties

The Company provides limited warranty for the replacement or repair of defective products at no cost to its customers within a specified time period after the sale. The Company makes no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. The Company estimates the costs that may be incurred under its limited warranty and reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Warranty claims costs are not material given the nature of the Company’s products and services which normally result in repairs and returns in the same accounting period.

Fair Value of Financial Instruments

The carrying values of financial instruments approximate their fair values. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments. The carrying values of the notes payable approximate fair value because the interest rates on these instruments approximate market interest rates currently available to the Company.

The Company's investments are comprised of available for sale securities with a carrying amount of $239,000 at December 31, 2008. The Company's financial assets that are measured at fair value on a recurring basis are comprised of fixed income available for sale securities at December 31, 2008. The fair value of these financial assets was determined using the following inputs at December 31, 2008:F-10

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Fixed income available-for-sale securities		239,000		—		239,000		—
Total	$	239,000	$	—	$	239,000	$	—

STRASBAUGH AND SUBSIDIARY

~~Fixed~~NOTES ~~income~~TO ~~available-for-sale~~CONSOLIDATED ~~securities~~FINANCIAL generally include U.S. government agency securities, state and municipal bonds, and corporate bonds and notes. Valuations are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices for securities that are traded less frequently than exchange-traded instruments or quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.STATEMENTS

~~There are~~FOR noTHE ~~liabilities~~YEARS ~~carried~~ENDED atDECEMBER ~~fair~~31, ~~value~~2009 ~~and~~AND ~~there are no assets or liabilities measured at fair value on a nonrecurring basis.~~2008

NOTE 1 – Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments (continued)

The Company’s assets (liabilities) measured at fair value on a recurring basis were determined using the following inputs:

	Fair Value Measurements at December 31, 2009
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total			(Level 1)		(Level 2)		(Level 3)
Preferred stock related embedded derivative	$	(4,000	)	$	—	$	—	$	(4,000	)
Warrants		—			—		—		—
Total	$	(4,000	)	$	—	$	—	$	(4,000	)

	Fair Value Measurements at December 31, 2008
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Fixed income available-for-sale securities	$	239,000		—	$	239,000		—
Total	$	239,000	$	—	$	239,000	$	—

The Company’s investments were comprised of available-for-sale securities with carrying amounts totaling $239,000 at December 31, 2008. The Company has no assets measured at fair value on a recurring basis at December 31, 2009. The Company’s financial assets that were measured at fair value on a recurring basis were comprised of fixed income available for sale securities at December 31, 2008.

At December 31, 2008, fixed income available-for-sale securities generally included U.S. government agency securities, state and municipal bonds, and corporate bonds and notes. Valuations were based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices for securities that were traded less frequently than exchange-traded instruments or quoted prices in markets that were not active; or other inputs that were observable or could have been corroborated by observable market data.

F-11

STRASBAUGH AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

NOTE 1 – Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments (continued)

Beginning January 1, 2009, the Company carried its preferred stock related embedded derivative and Investor Warrants (as defined in Note 8) . on its balance sheet as liabilities (see Note 2) carried at fair value determined by using the Black Scholes valuation model. As of December 31, 2009, the assumptions used in the valuation of the preferred stock related embedded derivative included the Company’s Series A Cumulative Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) conversion price of $2.20 and in the valuation of the Investor Warrants with an exercise price of $2.42, as well as the Company’s stock price of $0.25, discount rate of 1.1%, and volatility of 51%.

A reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Preferred Stock Related Embedded Derivative and Warrant Liabilities

Balance January 1, 2009	$	1,692,000
Total unrealized gains

Filing Compare · Strasbaugh