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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

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

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period From            to            .Commission file number 001-34529


GRAPHIC

STR Holdings, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

27-1023344(I.R.S. Employer
Identification No.)


10 Water Street, Enfield, Connecticut 06082(Address of principal executive offices)

Registrant's
telephone number, including area code:(860) 749-8371

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

Title of each class

Name of each exchange on which registeredCommon Stock $0.01 par value per share

New York Stock Exchange


Securities
Registered Pursuant to Section 12(g) of the Act:None

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 ý

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 ý

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 ý    NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES o    NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
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. ý

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o     NO ý

The registrant completed the initial public offering of its common stock in November 2009. Accordingly, there was no public market for the registrant's common
stock as of June 30, 2009, the last day of the registrant's most recently completed second fiscal quarter.

On
March 19, 2010, the registrant had outstanding 41,349,710 shares of Common Stock, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant's Proxy Statement for the 2010 Annual Meeting of Stockholders, which will be filed by the registrant on or prior to 120 days
following the end of the registrant's fiscal year ended December 31, 2009, are incorporated by reference into Part III of this Form 10-K.



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TABLE OF CONTENTS



PART IITEM 1.

Business


3ITEM 1A.

Risk Factors


19ITEM 1B.

Unresolved Staff Comments


42ITEM 2.

Properties


42ITEM 3.

Legal Proceedings


43ITEM 4.

Reserved


44PART IIITEM 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


45ITEM 6.

Selected Financial Data


49ITEM 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


50ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk


85ITEM 8.

Financial Statements and Supplementary Data


87ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


130ITEM 9A(T).

Controls and Procedures


130ITEM 9B.

Other Information


130PART IIIITEM 10.

Directors, Executive Officers and Corporate Governance


131ITEM 11.

Executive Compensation


131ITEM 12.

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


131ITEM 13.

Certain Relationships and Related Transactions, and Director Independence


131ITEM 14.

Principal Accounting Fees and Services


131PART IVITEM 15.

Exhibits, Financial Statement Schedules


132


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PART I

ITEM 1.    Business

Overview

STR Holdings, Inc. ("we" or the "Company") conducts business in two segments.

We
are a leading global provider of encapsulants to the solar module industry. Encapsulants are a critical component used in solar modules. We supply solar module encapsulants to many of
the major solar module manufacturers and believe we were the primary supplier of encapsulants to each of our top 10 customers in 2009, which we believe is due to our superior product performance and
customer service. Our encapsulants are used in both crystalline and thin-film solar modules.

Our
Quality Assurance business is a leader in the consumer products quality assurance market, and we believe our Quality Assurance business is the only global testing services provider
exclusively focused on the consumer products market. Our Quality Assurance business provides inspection, testing and audit services that enable retailers and manufacturers to determine whether
products and facilities meet applicable safety, regulatory, quality, performance and social standards.

Solar Energy Overview

Solar energy has emerged as one of the most rapidly growing renewable energy sources. A number of different technologies have been
developed to harness solar energy. The most prevalent technology is the use of inter-connected photovoltaic ("PV") cells to generate electricity directly from sunlight. Solar energy has many
advantages over other existing renewable energy sources and traditional non-renewable energy sources relative to environmental impact, fuel price and delivery risk, distributed nature of
generation and matching of peak generation with demand.

PV
systems have been used to produce electricity for several decades. However, technological advances during the past decade and rising costs of electricity, combined with the
recognition of the advantages of solar power as a renewable energy source and the availability of government subsidies and incentives for solar power, have led to solar power becoming one of the
fastest growing renewable energy technologies.

According
to Solarbuzz, an independent solar energy research firm, solar power industry revenues were approximately $34 billion in 2009 from approximately $4 billion in
2003.

One
of the key drivers of the growing demand for solar power is government incentive programs for the development of solar energy, which make solar energy more cost competitive. In
recent years, the largest growth in the demand for solar energy has been in the European Union where government incentives are typically in the form of feed-in tariffs in which utility
companies are legally obligated to purchase electricity from renewable energy sources at a guaranteed rate that is higher than the standard grid electricity price. However, some European countries are
gradually reducing these incentives. For example, in 2008, Spain enacted new legislation that capped the incentive rate at 500 MW and Germany had an out of cycle reduction mainly in response to
the reduced cost of panels and internal rate of returns in excess of what is required to stimulate growth. Germany and Italy are proposing additional reductions that are expected to take place in the
second half of 2010. In the United States, government incentive programs are generally in the form of tax credits, loan guarantees and grants. The United States, China and a number of other countries
have recently enacted new legislation supporting solar energy. Government incentive programs have developed in response to the increasing scarcity and rising prices of conventional energy sources, the
desire for energy security/energy independence to counter perceived geopolitical supply risks surrounding fossil fuels, increasing concerns about environmental pollution from fossil fuels and the
consequent tightening of emission controls and changing consumer preferences toward renewable energy sources.

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Despite
the favorable conditions for the adoption of solar electricity generation, solar energy continues to represent only a small fraction of the world's energy output.

Solar Energy Systems

Solar electricity is primarily generated by PV systems that are comprised of solar modules, mounting structures and electrical
components. PV systems are either grid-connected or off-grid. Grid-connected systems are connected to the electricity transmission and distribution grid and feed
solar electricity into the end-user's electrical system and/or the grid. Such systems are commonly mounted on the rooftops of buildings, integrated into building facades or installed on
the ground using support structures and range in size from 2-3 kilowatts to multiple MW. Off-grid PV systems are typically much smaller and are frequently used in remote areas
where they may be the only source of electricity for the end-user.

Solar Modules

PV cells are semiconductor devices that act as converters, taking sunlight and converting it directly into electricity by a process
known as the photovoltaic effect. A solar module is an assembly of PV cells that are electrically inter-connected, laminated and framed in a durable and weatherproof package.

There
are two primary commercialized categories of solar cells: crystalline silicon and thin-film. PV devices can be manufactured using different semiconductor materials,
including mono- and poly-crystalline silicon for silicon cells, and amorphous silicon, gallium arsenide, copper indium gallium selenide and cadmium telluride for
thin-film cells. In 2009, approximately 82% of PV cell production used crystalline silicon-based technology. However, due to lower production costs, it is expected that
thin-film modules will account for an increasing percentage of PV cell production. Solarbuzz forecasts that the thin-film share will increase from approximately 18% in 2009 to
roughly 20% of total PV cell production by 2014 in its "Green World Scenario," which we believe represents the most appropriate of three forecast scenarios published by Solarbuzz because it balances
further growth resulting from increased development of governmental incentive programs with measured growth in industry production capacity.

Encapsulants

Regardless of the technology used to create solar energy from a PV system, the core component of the solar cell is the semiconductor
circuit. To protect and preserve the embedded semiconductor circuit, solar module manufacturers typically use an encapsulant. Encapsulants are critical to the proper functioning of solar modules, as
they protect cells from the elements, bond the multiple layers of a module together, and provide electrical insulation. Encapsulants must incorporate high optical transparency, stability at high
temperatures and high levels of ultraviolet radiation, good adhesion to different module materials, adequate mechanical compliance to accommodate stresses induced by differences in thermal expansion
coefficients between glass and cells, and good dielectric properties (electrical insulation). Even slight deteriorations of any of these properties of the encapsulant over time could significantly
impair the electrical output of the solar module, which is of critical importance in the solar industry where solar module manufacturers typically provide 20-to 25-year
warranties for their products.

Over
the years, various encapsulant materials have been used in solar modules, including ethylene-vinyl-acetate ("EVA"), polyvinyl butyral ("PVB") and silicone. EVA is the most commonly
used material. EVA is modified with additives to increase stability and make the encapsulant suitable for use in long-term outdoor applications, such as solar modules.

During
the solar module assembly process, the encapsulation process is typically accomplished by vacuum lamination, wherein a "pre-lam" stack (as depicted in the diagram
below) is fashioned into a

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singular
part comprising multiple layers. Thin sheets of EVA are inserted between the PV cells and typically the top and rear surfaces. Heating the "sandwich" then causes the EVA to cure, thus bonding
the module into one piece. This step occurs towards the end of the manufacturing process and is critical to the entire solar module as there is only one opportunity to laminate correctly.

GRAPHIC

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Shrinkage
can occur during the manufacturing process and may result in voids or holes in the encapsulant, during module lamination, which are considered defects and cause for rejection
of the entire panel. If there is a void in an encapsulant in the field, moisture can cause delamination and increase the possibility of corrosion. Due to direct exposure to the elements, the
encapsulant is susceptible to several performance failures that can jeopardize the integrity and performance of the entire solar module and lead to significant warranty costs for solar module
manufacturers. The most significant failures include:



Despite
the critical nature of encapsulant to solar cell applications, the encapsulant represents a small percentage of the overall manufacturing cost of the total solar module.

We
typically sell our encapsulants in square meters. However, because the solar industry's standard measurement for production volume and capacity is in MW, we convert our capacity and
production volume from square meters to MW depending on the applicable conversion efficiencies that are specific to our customers and whether the module is thin-film or crystalline silicon. The
conversion ranges from a rate of 9 thousand to 16 thousand square meter of encapsulant per MW. This rate is based on our calculations using publicly available information, our industry experience and
assumptions that our management believes to be appropriate and reasonable. Certain production capacity and market metrics included in this Annual Report on Form 10-K are based on these
calculations. Our calculations

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may
not be accurate, and we may change the methodology of our calculations in the future as new information becomes available. In that case, period to period comparisons of such metrics may not be
meaningful in the future.

Financial Information About Our Segments and Geographic Areas

Financial information about our segments and geographic areas is included in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Note 17, Reportable Segments and Geographical Information, of the Notes to Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Our Solar Business

We are a leading manufacturer of encapsulants that are specialty extruded sheets and film used in the production of solar modules. We
were the first to develop the original EVA encapsulants used in commercial solar module manufacturing in the 1970s in conjunction with the Jet Propulsion Laboratory of the California Institute of
Technology under a NASA contract for the U.S. Energy Research and Development Administration, which later became known as the U.S. Department of Energy. We have no ongoing relationships with any of
these agencies. We have sold our EVA encapsulants commercially since the late 1970s. We have continually improved our encapsulants, and we have developed many significant solar encapsulant innovations
since we first commercialized our encapsulants, including encapsulants that maintain their dimensional stability and ultra-fast curing formulations. Our encapsulants are used in both of
the prevailing solar panel technologies, crystalline and thin-film, and are valued by our customers because they maintain their size and shape throughout the solar module manufacturing
process, have fast curing times and have demonstrated long-term stability. These attributes are critical to solar module manufacturers, which typically provide 20- to
25-year warranties of the performance of their solar modules and continually seek to maximize manufacturing yield and optimize efficiency. Despite the critical nature of encapsulant to
solar cell applications, the encapsulant represents a small percentage of the overall manufacturing cost of the total solar module.

Our
PhotoCap® products consist primarily of EVA, which is modified with additives and put through our proprietary manufacturing process to increase product stability and make
the encapsulant suitable for use in extreme, long-term outdoor applications. The inclusion of specific additives results in a limited shelf life before our encapsulants must be integrated
into a solar module, making stocking impractical. Encapsulants are made-to-order to customer specifications for use in their solar module manufacturing process.

Our Competitive Strengths

We believe that our Solar business possesses a number of key competitive strengths, including:



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Our Growth Strategy

Our objective is to enhance our position as a leading global provider of encapsulants to solar module manufacturers. Our strategies to
meet that objective are:





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Our Solar Products

We have 14 commercial encapsulant formulations. We develop our formulations internally, drawing on our considerable accumulated
experience and in conjunction with our customers to meet their varying requirements. Our encapsulant formulations offer a range of properties and processing attributes, including various curing times
and temperatures that align with the requirements of our customers' lamination processes and module constructions. Our formulations can be used in both crystalline and thin-film modules,
except that we have developed a non-EVA encapsulant specifically for thin-film solar modules.

Our Solar Markets and Customers

Our customers are solar module manufacturers located in the United States, Europe and Asia. Our largest customers include manufacturers
of both crystalline silicon and thin-film modules and include many of the world's largest solar module manufacturers. In 2009, we believe we were the primary supplier of encapsulants to
each of our top 10 customers. First Solar accounted for 27.1%, 19.1% and 13.8% of our Solar net sales in the years 2009, 2008 and 2007, respectively. Our top five customers in our Solar segment
accounted for approximately 55.0%, 47.0% and 46.0% of our Solar net sales in 2009, 2008 and 2007, respectively.

We
typically sell our encapsulants on a purchase order basis or through supply contracts that are less than one year and specify prices and delivery parameters but can be canceled or
postponed prior

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to
production. We have contracts with five of our largest customers and also have long-term and prepayment arrangements with some of our customers. In addition, we provide technical
support to our customers and work with our customers when they are qualifying solar modules that utilize our products, which can take from two months to over a year.

Historically,
our sales strategy has focused on developing long-term relationships with solar module manufacturers and working with them during their product development
efforts. We intend to increase our marketing and sales efforts by building a sales organization at each of our Solar manufacturing facilities. We also are exploring the use of independent sales
consultants and distributors in relation to our Asian growth strategy.

Our Solar Operations

Facilities and Equipment

We have five production facilities. The manufacturing facilities are located in Enfield, Connecticut; Somers, Connecticut;
St. Augustine, Florida; Asturias, Spain; and Johor, Malaysia.

We
currently operate 15 production lines worldwide with total annual production capacity of 5,350 MW. We expect our global production capacity to increase to 6,350 MW in
2010.

Our
production lines incorporate our proprietary technology and processes. We rely on third-party equipment manufacturers to produce our manufacturing lines to our specifications, which
we then further customize in-house. The majority of our production lines are interchangeable by having the capability to produce our 14 EVA formulations and can be used in any of our
facilities. As such, this provides us with flexibility in meeting shifting trends in global module demand.

Encapsulant Production Process

Our production process typically begins by mixing EVA pellets with several additives to give the encapsulant its desired properties.
The mixture is then melted, homogenized, pressurized and forced through a die to create an "EVA curtain," forming a continuous encapsulant sheet. The sheet then progresses to downstream equipment in a
proprietary process, is wound into rolls with paper liner, slit to the desired width and packaged for shipment to customers.

Our
manufacturing quality program is ISO 9000 certified. We have a high level of automation at each of our facilities that includes real-time monitoring of the
process. Such automation provides consistency across our facilities so that with few exceptions, we can typically manufacture customer orders at any of our locations. In addition, our inventory
monitoring system allows us to efficiently plan our production schedule by location.

Furthermore,
we test our products in real-time and at a high frequency after production. Each of our manufacturing facilities is supervised by a quality manager, who
maintains quality assurance programs, and has discretion to discard products that do not meet required standards.

Raw and Other Materials

Resin and paper liner are the two primary materials used in our process, with resin accounting for more than half of our direct
manufacturing costs. A number of additives as well as packaging materials represent the remainder of our raw material costs.

We
have multiple qualified vendors for resin. We typically carry a six week supply of resin to provide protection against supply interruptions resulting from inclement weather, natural
disasters and strikes. The stock is distributed among our production facilities and warehouses so that a disruptive event in one location would not affect our ability to continue production at our
other facilities. We

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have
qualified resin suppliers local to each of our manufacturing facilities and continue to qualify additional local resin suppliers.

We
have multiple qualified suppliers of paper liner. Our primary paper suppliers are located in the United States and Europe, and we purchase paper based on pricing and required lead
times. Our main U.S. paper supplier has an Asian distribution network, and we are working to identify local paper suppliers in Asia.

Our Solar Competition

We compete with a number of encapsulant manufacturers, including Bridgestone, Etimex and Mitsui. We also face limited competition from
suppliers of non-EVA encapsulants. Over the years, various encapsulant materials have been used in solar modules, including PVB and silicone. Some of our competitors are large, global
companies with substantial financial, manufacturing and logistics resources and strong customer relationships. Also, low-cost solar module manufacturers are emerging in Asia, primarily in
China, which compete with our customers. As the China solar market matures, we expect other encapsulant providers from China and the greater Asian markets to compete with us. We compete on the basis
of several factors, including:



We
believe our relations with the leading solar module manufacturers, the proven performance of our products, our history of innovation, our global manufacturing base, our technical
knowledge and management expertise provide us with significant competitive advantages.

Qualification and Certification

Design certification programs for solar modules measure the performance of solar modules under simulated environmental conditions. In
certifying their solar modules, our customers must test any solar module with the encapsulant utilized in their product. The certification and qualification tests related to any solar modules are
defined in the following standards: IEC 61215 (crystalline silicon) and IEC 61646 (thin-film).

A
successful qualification test program typically means that the tested models/types of solar modules have been subjected to and passed the minimum requirements of the relevant test
standards. Qualification or certification does not guarantee any performance but is designed to provide reasonable assurance that the solar modules of the tested model or type will perform reliably
under field conditions.

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Under guidelines developed by the IEC/TC82/WG2 committee in 2000, modifications to the encapsulation system for solar modules can require retesting of the solar
module. Such guidelines call for various retesting if there is any change in the chemistry of the encapsulant used in the solar module.

Our Quality Assurance Business

We have offered quality assurance services since 1973. Since forming our Quality Assurance business, we have expanded our service
offerings and have increased the scale of the business to meet the growing worldwide needs of the consumer products industry. Our Quality Assurance business is a leader in the consumer products
quality assurance market, and we believe our Quality Assurance business is the only global testing services provider exclusively focused on the consumer products market. We offer services that help
clients determine whether the products designed and manufactured by them or on their behalf meet applicable safety, regulatory, quality, performance and social standards.

Our
consumer products Quality Assurance business includes corporate social responsibility auditing, laboratory testing, inspections and associated consultancy services. The primary
markets for these
services include clients in diverse industries such as electronics, footwear and leather goods, hard goods, textiles, toys and toy premiums, over-the-counter pharmaceuticals,
nutritional supplements, food, household chemicals and health and beauty aids. We also provide laboratory and non-laboratory technical services required to bring engineered plastic
materials and products to the marketplace. In addition, we work with brand owners and retailers to ensure that their supply chain partners comply with applicable local legal requirements, worker
welfare and health and safety standards, as well as corporate codes of conduct.

Because
our Quality Assurance business serves a diverse and global client base, we strive to operate where our clients operate. Our Quality Assurance business has an extensive network of
17 laboratories, 72 inspection and audit offices and 21 sales offices in 36 countries across North America, South America, Europe, Asia, Indian sub-continent and Africa. With an experienced
team of over 1,000 scientists, technicians, engineers, auditors, trainers and inspectors, our Quality Assurance business enables retailers to effectively manage their quality control systems and helps
promote the introduction of safe and high-quality products to the marketplace. We sell our quality assurance services through our direct sales force and sales and marketing efforts. We are
required to work with a partner in certain countries either because of local laws and regulations or because such arrangements are customary to doing business in such countries. Also, we may enter
into strategic alliances with other quality assurance providers in order to meet client demands in countries where it may not be practicable for us to operate on a stand-alone basis.

Growth
in the global consumer products testing industry is driven by factors such as increasing globalization of consumer products manufacturing in developing countries, the movement
towards shorter product life-cycles and mass customization, as well as increasing regulatory oversight and requirements. The primary clients for consumer product quality assurance services
are large North American and European retailers that manage global supply chains of manufacturers, vendors and importers. In particular, retailers, importers and manufacturers that choose to outsource
production to developing countries rely on quality assurance services to evaluate product quality and standards.

Quality Assurance Competition

Our consumer product testing and quality assurance services compete with:



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The
development of a technical reputation, the depth of industry knowledge and internationally recognized accreditations are the primary barriers to entry for large-scale competitors.
The key competitive factors include the level of technical and industry knowledge, pricing, geographic footprint, level of client service, timeliness, accuracy, marketing, breadth of service offering,
level of consultation and information usefulness and technical excellence in a given product category.

Quality Assurance Data Management System

We believe the features in our Quality Assurance Data Management System provide us with a strong competitive advantage. Through a host
of web-based tools presently in use and in development, we provide real-time vendor monitoring, on-demand report generation, quality trending and defect analysis.
These features allow clients to view the performance of particular vendors and place some vendors on reduced inspection programs, which in turn reduces costs. Furthermore, this information provides
quality managers with an opportunity to demonstrate the cost of quality and the effectiveness of their program. We plan to
enhance these tools to allow clients to place orders, pay invoices and view an even greater amount of information via the Internet.

Quality Assurance Accreditations

Our Quality Assurance business's reputation for quality is demonstrated by our more than 40 internationally recognized
accreditations and memberships, which require us to meet and maintain varying standards and requirements. Each quality assurance location is required to maintain a quality management system and is
expected to continue to add industry-specific technical proficiency accreditations. Our Quality Assurance business is accredited for social compliance auditing by the Fair Labor Association, Social
Accountability International ("SA 8000"), Worldwide Responsible Apparel Production, The International Council of Toy Industries and is a signatory of the United Nations Global Compact and a
member of Business For Social Responsibility. In addition, we were the first foreign company to receive the Commodity Inspection and Quarantine ("CIQ") accreditation from the Chinese government, a
requirement for all inspection companies conducting operations in China.

We
also actively participate in quality assurance industry trade organizations, including the Ethical Trading Initiative, Business Social Compliance Initiative and Initiative Clause
Sociale.

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Key Global Accreditations and Memberships

United States

Europe

Brazil

Hong Kong

Membership

Accreditation / Laboratory Approval

Quality Assurance Clients

Our Quality Assurance business has established relationships with many global retailers and manufacturers of consumer products, which
we believe is the result of our relationship-based sales approach. We have a broad client base, serving over 5,000 clients in 2009, with our top five clients accounting for approximately 22.1%, 18.0%
and 18.2% of our Quality Assurance net sales in the years ended December 31, 2009, 2008 and 2007, respectively. The average length of our relationship with our top 10 clients in 2009 was
approximately 14 years.

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Employees

As of December 31, 2009, we employed approximately 2,200 people on a full or part-time basis. We maintain a
non-unionized workforce, with the exception of some employees in our Solar manufacturing facility in Spain where unions are required and our Quality Assurance facilities in mainland China,
where union representation is more typical. We have not experienced any significant work stoppages during the past five years.

Executive Officers

The following table sets forth the names and ages, as of December 31, 2009, of our executive officers. The descriptions below
include each such person's service as a board member or an executive officer of STR Holdings, Inc. and our predecessor.

Name

Age

PositionDennis L. Jilot


62

Chairman, President and Chief Executive OfficerBarry A. Morris


55

Executive Vice President and Chief Financial OfficerRobert S. Yorgensen


46

Vice President and President, STR SolarMark A. Duffy


47

Vice President and President, STR Quality Assurance


Dennis L. Jilot.Dennis L. Jilot has been our President and Chief Executive Officer and a director since 1997 and has been our
Chairman since 2002.
Prior to joining us, Mr. Jilot was Executive Vice President of Corning Clinical Laboratories, President and Chief Executive Officer of Corning Nichols Institute and President and Chief
Operating Officer of MetPath Incorporated. Mr. Jilot holds a B.S. from the University of Wisconsin at Stevens Point and completed the Executive M.B.A. program at the University of Virginia
Darden School of Business.

Barry A. Morris.Barry A. Morris joined us as our Vice President and Chief Financial Officer in 2002 and became our Executive
Vice President in
September 2008. Prior to joining us, Mr. Morris was Chief Financial Officer of General Bearing Corporation as well as Director of Financial Services and Corporate Controller for BTR Inc.
He holds a B.S. from American International College and an M.B.A. from the University of Connecticut.

Robert S. Yorgensen.Robert S. Yorgensen became our Vice President in November 2008 and has been the President of STR Solar since
1997.
Mr. Yorgensen has been employed by us for 24 years. Mr. Yorgensen has held a variety of positions with us, including Extruded Products Manager and Senior Technical Specialist of
Materials RD&E and Specialty Manufacturing, Technical Specialist of Materials RD&E and Specialty Manufacturing and Project Leader of Development Engineering and Specialty
Manufacturing. He holds a Bachelor of Technology, Mechanical Engineering from the University of Connecticut and an A.S. from Hartford State Technical College.

Mark A. Duffy.Mark A. Duffy joined us in August 2009 as President of STR Quality Assurance. Mr. Duffy has 25 years of
experience in a
wide range of consumer products and food ingredients businesses. Most recently, Mr. Duffy spent seven years as President for Griffith Laboratories USA. Prior to that, he was the Vice President
of Sales, North America for the Johnson Wax Professional, a division of SC Johnson. Previously, Mr. Duffy was Director of Sales for Food Service for the Quaker Oats Company, a subsidiary of
PepsiCo. He also held several sales and marketing positions of increasing responsibility in the Food Service Division of Nestle USA. He holds a B.S. from Boston College.

Each
executive officer holds office for a term of one year and until his or her successor is duly elected and qualified, in accordance with our bylaws.

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Corporate Reorganization and Initial Public Offering

On June 15, 2007, DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds ("DLJMB"), and its
co-investors, together with members of our board of directors, our executive officers and other members or management, acquired 100% of the voting equity interests in our wholly-owned
subsidiary, Specialized Technology Resources, Inc. for $365.6 million, including transaction costs. They acquired Specialized Technology Resources, Inc. for investment purposes.

In
connection with the acquisition:



We
refer to the foregoing transactions collectively as the "DLJ Transactions".

Prior
to November 5, 2009, we conducted our business through STR Holdings LLC and its subsidiaries. STR Holdings (New) LLC ("NewCo"), a Delaware limited liability
company, was formed on September 30, 2009 as an indirect subsidiary of STR Holdings LLC and held no material assets and did not engage in any operations.

Pursuant
to the corporate reorganization on November 5, 2009, STR Holdings LLC liquidated. A subsidiary of NewCo merged with and into Specialized Technologies
Resources, Inc. ("STRI") and, as a
result, STRI became a wholly-owned subsidiary of NewCo. The unitholders of STR Holdings LLC became unitholders of NewCo. NewCo converted from a limited liability company into a Delaware
'C' corporation, named STR Holdings, Inc., and all outstanding units of NewCo automatically converted into a single class of common stock of STR Holdings, Inc.

On
November 12, 2009, we closed our initial public offering ("IPO") of 12,300,000 shares of common stock at an offering price of $10 per share, of which 3,300,000 shares were sold
by the Company and 9,000,000 shares were sold by selling stockholders, resulting in net proceeds to the Company of approximately $25.0 million after deducting underwriting discounts,
commissions and other

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offering
costs of approximately $7.8 million. In connection with the IPO, we repaid $15.0 million of borrowings under our first lien credit facility, and also paid $2.6 million to
terminate an advisory services and monitoring agreement we entered into in connection with the Acquisition. We did not receive any proceeds from the sale of shares by the selling stockholders, which
included entities affiliated with members of our board of directors and an affiliate of Credit Suisse Securities (USA) LLC, an underwriter participating in the IPO, and each of our executive
officers.

Under
the STR Holdings LLC Agreement, STR Holdings LLC's Class A, B, C, D, E and F units were subject to a priority distribution of shares of common stock in the
event of an IPO. In connection with the IPO, the priority distribution of shares was based on our equity value as represented by the IPO price. For the units issued in connection with the DLJMB
acquisition of us (the "Acquisition"), the shares of our common stock were distributed as follows: (i) first, the Class A unitholders received an aggregate amount of common stock equal
in value to their aggregate capital contributions; and (ii) second, a pro rata distribution was made with respect to the Class A, B, C, D and F units until the Class A unitholders
received an aggregate amount of common stock equal in value to 2.5 times their aggregate capital contributions; and (iii) finally, a pro rata distribution was made of the remaining shares to
each Class A, B, C, D, E and F unitholder based upon the number of units held by each unitholder. Class C and D incentive units that were issued in 2008 did not convert nor did any of
the Class E incentive units that were issued as a result of not meeting the required aggregate value distribution thresholds.

The
following table presents the number of shares of common stock and unvested restricted common stock issued on November 6, 2009 for the respective units at the conversion. The
number of shares of common stock and unvested restricted common stock issued was based upon the vesting provisions of the outstanding units and reflect the units vested and unvested at the date of
conversion:

Class of Units

Shares of
Common Stock

Shares of Unvested
Restricted
Common Stock

Total Shares of
Common StockA units


35,352,504


397,491


35,749,995B units


195,053





195,053C units


542,685


553,588


1,096,273D units


176,211


217,884


394,095E units








F units


478,578


95,716


574,294Total


36,745,031


1,264,679


38,009,710


We
have retrospectively adjusted our earnings per share to reflect the conversion of units to shares resulting from the reorganization and conversion (See Note 3 of the Notes to
Consolidated Financial Statements in Item 8 of this Annual Report). The corporate reorganization did not affect our operations, which we continue to conduct through our operating subsidiaries.

On
December 7, 2009, we closed the partial exercise of the over-allotment option granted by the selling stockholders given in connection with the IPO which resulted in
a total purchase of 1,695,000 shares at the IPO price of $10 per share. We did not receive any of the proceeds from the sale of the shares as a result of the exercise of the
over-allotment option.

Intellectual Property

We own a number of trademarks, service marks, trade secrets and other intellectual property rights that relate to our products and
services. Our intellectual property consists of 14 encapsulant formulations, as well as several processes and sub-processes, a service mark on our corporate logo and

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our
trademarks "STR®" and "PhotoCap®." As appropriate, we require employees, suppliers and customers to execute confidentiality agreements.

We
typically rely on trade secrets, rather than patents, to protect our proprietary processes, methods, documentation and other technology, including our encapsulant formulations, as
well as certain other business information. Patent protection requires a costly and uncertain federal registration process that would place our confidential information in the public domain. However,
we do hold a provisional global patent and we have filed a patent application with respect to one of our solar products in development due to the specific nature of the product. Typically, we utilize
trade secrets to protect the formulations and processes we use to manufacture our products, including our encapsulants, and also to safeguard our proprietary formulations and methods. We believe we
can effectively protect our trade secrets indefinitely through use of confidentiality agreements and other security measures. While we enter into confidentiality agreements with our employees and
third parties to protect our intellectual property rights, such confidentiality provisions related to our trade secrets could be breached and may not provide meaningful protection for our trade
secrets. Also, others may independently develop technologies or products that are similar or identical to ours. In such case, our trade secrets would not prevent third parties from competing with us.

Environmental Regulation

We are subject to a variety of environmental, health and safety, pollution-control laws and regulations in the jurisdictions in which
we operate. We do not believe the costs of compliance with these laws and regulations will be material. We use, generate and discharge hazardous substances, chemicals and wastes at some of our
facilities in connection with our product development, testing and manufacturing activities. Any failure by us to control the use of, to remediate the presence of or to restrict adequately the
discharge of such substances, chemicals or wastes could subject us to potentially significant liabilities, clean-up costs, monetary damages and fines or suspensions in our business
operations. In addition, some of our facilities are located on properties with a history of use involving hazardous substances, chemicals and wastes and may be contaminated. Although we have not
incurred, and do not currently anticipate, any material liabilities in connection with such contamination, we may be required to make expenditures for environmental remediation in the future.

Available Information

Information regarding the Company, including corporate governance policies, ethics policies and charters for the committees of the
board of directors can be found on our Internet website at http://www.strholdings.com and copies of these documents are available to stockholders, without charge, upon request to Investor Relations,
STR Holdings, Inc. 10 Water Street, Enfield, CT 06082. The information contained in our website is not intended to be incorporated into this Form 10-K. In addition, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on our Internet website on the same day that we electronically file such material
with, or furnish it to, the Securities and Exchange Commission (the "SEC"). Information filed with the SEC may be read or copied at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Information on operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These filings are also available
to the public from commercial document retrieval services and at the Internet website maintained by the SEC at http://www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.

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ITEM 1A.    Risk Factors

An investment in our common stock involves a high degree of risk. You should carefully consider the following
risks, as well as the other information in this Annual Report on Form 10-K, before making an investment in our Company. If any of the following risks actually occurs, our business,
results of operations or financial condition may be adversely affected. In such an event, the trading price of our common stock could decline and you could lose part or all of your
investment.

Risks Related to Our Solar Business

If demand for solar energy in general and solar modules in particular does not continue to develop or takes longer to develop than we anticipate, sales in our Solar business
may not grow or may decline, which would negatively affect our financial condition and results of operations.

We expect that a significant amount of the growth in our overall business will come from the sale of encapsulants by our Solar
business. Because our encapsulants are used in the production of solar modules, our financial condition and results of operations and future growth are tied to a significant extent to the overall
demand for solar energy and solar modules. The solar energy market is at a relatively early stage of development and the extent to which solar modules will be widely adopted is uncertain. Many factors
may affect the viability and widespread adoption of solar energy technology and demand for solar modules, and in turn, our encapsulants, including:



For
example, in 2009, we experienced a decline in our Solar business mainly due to decreased global demand for solar energy as a result of legislative changes, such as the cap in
feed-in tariffs in Spain implemented in 2008, the global recession and the worldwide credit crisis.

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If
demand for solar energy and solar modules fails to develop sufficiently, demand for our customers' products as well as demand for our encapsulants will decrease, and we may not be
able to grow our business or Solar net sales and our financial condition and results of operations will be harmed.

A significant reduction or elimination of government subsidies and economic incentives or a change in government policies that promote the use of solar energy could have a
material adverse effect on our business and prospects.

Demand for our encapsulants depends on the continued adoption of solar energy and the resultant demand for solar modules. Demand for
our products depends, in large part, on government incentives aimed to promote greater use of solar energy. In many countries in which solar modules are sold, solar energy would not be commercially
viable without government incentives. This is because the cost of generating electricity from solar energy currently exceeds, and we believe will continue to exceed for the foreseeable future, the
costs of generating electricity from conventional energy sources.

The
scope of government incentives for solar energy depends, to a large extent, on political and policy developments relating to environmental and energy concerns in a given country that
are subject to change, which could lead to a significant reduction in, or a discontinuation of, the support for renewable energy in such country. Federal, state and local governmental bodies in many
of the target markets for our Solar business, including Germany, Italy, Spain, the United States, France, Japan and South Korea, have provided subsidies and economic incentives in the form of
feed-in tariffs, rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of solar energy products to promote the use of solar energy and
to reduce dependency on other forms of energy. These government economic incentives could be reduced or eliminated earlier than anticipated. For example, the German government recently has announced
legislation that is expected to reduce feed-in tariffs beginning in the second half of 2010. This announcement has resulted in the pull-in of demand from solar module
manufacturers due to increased end-user demand being driven by the incentive to purchase a solar system prior to the expected enactment of the decreased feed-in tariff
incentives. As such, we may see atypical Solar sales during the first half of 2010 that may not occur during the second half of 2010. Also, in September 2008, the Spanish parliament adopted new
legislation that decreased the feed-in tariff for solar energy by approximately 27% and capped its subsidized PV installations at 500 MW for 2009. This event drove an
over-supply of solar module inventory in the supply chain during the first half of 2009 and was one of the main drivers behind our sales volume decline in 2009 compared to 2008.

Moreover,
electric utility companies, or generators of electricity from fossil fuels or other renewable energy sources, could also lobby for changes in the relevant legislation in their
markets to protect their revenue streams. Reduced growth in or the reduction, elimination or expiration of government subsidies and economic incentives for solar energy, especially those in our target
markets, could cause our Solar net sales to decline and harm our business.

Our Solar business is dependent on a limited number of customers, which may cause significant fluctuations or result in declines in our Solar net sales.

The solar module industry is relatively concentrated. As a result, we sell substantially all of our encapsulants to a limited number of
solar module manufacturers. We expect that our results of operations will, for the foreseeable future, continue to depend on the sale of encapsulants to a relatively small number of customers. Sales
to First Solar accounted for 27.1%, 19.1% and 13.8% of our Solar net sales in the years 2009, 2008 and 2007, respectively. In addition, the top five customers in our Solar segment accounted for
approximately 55.0%, 47.0% and 46.0% of our Solar net sales in 2009, 2008 and 2007, respectively. Furthermore, participants in the solar industry, including our customers, are experiencing pressure to
reduce their costs. Because we are part of the overall supply chain to our

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customers,
any cost pressures experienced by them may affect our business and results of operations. Our customers may not continue to generate significant Solar net sales for us. Conversely, we may
be unable to meet the production demands of our customers or maintain these customer relationships. Also, new entrants into the solar module manufacturing industry, primarily from China, could
negatively impact the demand for, and pricing of, our customers' products, which could reduce the demand for our encapsulants. We believe our European customers have lost market share to
low-cost module manufacturers, primarily from China, that continue to penetrate the European solar market and whom we do not sell encapsulants to. We have lost market share in the European
market due to emerging low-cost solar module manufacturers, primarily from China, and if we are not able to supply encapsulants to these new entrants in the future, we could lose further
market share and also face competition from new encapsulant manufacturers.

In
addition, a significant portion of our outstanding accounts receivable is derived from sales to a limited number of customers. The accounts receivable from our top five Solar
customers with the largest receivable balances represented 38.7% and 34.6% of our accounts receivable balance as of December 31, 2009 and December 31, 2008, respectively. Moreover, many
solar companies are facing and may continue to face significant liquidity and capital expenditure requirements, and as a result, our customers may have trouble making payments owed to us, which could
affect our business, financial condition and results of operations. Any one of the following events may cause material fluctuations or declines in our Solar net sales and have a material adverse
effect on our business, financial condition and results of operations:



Our Solar business's growth is dependent upon the growth of our key Solar customers and our ability to keep pace with our customers' growth.

In addition to relying on a small number of customers, we believe we were the primary supplier to each of our top 10 Solar customers in
2009. The future growth and success in our Solar business depends on the ability of such customers to grow their businesses and our ability to meet any such growth, principally through the addition of
manufacturing capacity. If our Solar customers do not increase production of solar modules, there will be no corresponding increase in encapsulant orders. Alternatively, in the event such customers
grow their businesses, we may not be able to meet their increased demands, which would require such customers to find alternative sources for encapsulants. In addition, it is possible that customers
for whom we are the exclusive supplier of encapsulants will seek to qualify and establish a secondary supplier of encapsulants, which would reduce our share with such customers and could increase that
customer's pricing leverage. If our Solar customers do not grow their businesses or they find alternative sources for encapsulants to meet their demands, it could limit our ability to grow our
business and increase our Solar net sales.

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Technological changes in the solar energy industry or our failure to develop and introduce or integrate new technologies could render our encapsulants uncompetitive or
obsolete, which would adversely affect our business.

The solar energy market is rapidly evolving and competitive and is characterized by continually changing technology requiring
continuous improvements in solar modules to increase efficiency and power output and improve aesthetics. This requires us and our customers to continuously invest significant financial resources to
develop new solar module technology and enhance existing solar modules to keep pace with evolving industry standards and changing customer requirements and to compete effectively in the future. Our
failure to further refine our encapsulant technology and develop and introduce new or enhanced encapsulants or other products, or our competitors' development of products and technologies that perform
better or are more cost effective than our products, could cause our encapsulants to become uncompetitive or obsolete, which would adversely affect our business, financial condition and results of
operations. Product development activities are inherently uncertain, and we could encounter difficulties in commercializing new technologies. As a result, our product development expenditures in our
Solar business may not produce corresponding benefits.

Moreover,
we produce a component utilized in the manufacturing of solar modules. New solar technologies may emerge or existing technologies may gain market share that do not require
encapsulants as we produce them, or at all. Also, manufacturing methods may emerge that could be more advanced or efficient than our current manufacturing capability. Such changes could result in
decreased demand for our encapsulants or render them obsolete, which would adversely affect our business, financial condition and results of operations.

We typically rely upon trade secrets and contractual restrictions, and not patents, to protect our proprietary rights. Failure to protect our intellectual property rights
may undermine our competitive position and protecting our rights or defending against third-party allegations of infringement may be costly.

Protection of proprietary processes, methods, documentation and other technology is critical to our business. Failure to protect,
monitor and control the use of our existing intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. We typically rely on trade secrets,
trademarks, copyrights and contractual restrictions to protect our intellectual property rights and currently do not hold any patents related to our Solar business. However, the measures we take to
protect our trade secrets and other intellectual property rights may be insufficient. While we enter into confidentiality agreements with our Solar employees and third parties to protect our
intellectual property rights, such confidentiality provisions related to our trade secrets could be breached and may not provide meaningful protection for our trade secrets. Also, others may
independently develop technologies or products that are similar or identical to ours. In such case, our trade secrets would not prevent third parties from competing with us.

Third
parties or employees may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could harm our business and operating results.
Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available.

We
are currently in litigation with a former employee, James P. Galica, in our Solar business and his current employer, JPS Elastomerics Corp., for the misappropriation and theft of our
trade secrets. In August 2008, the jury determined that the technology for our polymeric sheeting product line is a trade secret. The jury also determined that our former employee and his current
employer had not misappropriated our trade secrets. We have not decided if we will appeal the jury's determination. The jury also found that our former employee had breached his confidentiality
agreement with us. Subsequently, the judge determined that JPS and Galica had violated the Massachusetts Unfair and Deceptive Trade Practices Act, finding that the technology for our polymeric
sheeting product is a trade

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secret
and that JPS and Galica had misappropriated our trade secrets. The judge awarded us compensatory and punitive damages, attorneys' fees and costs and issued a temporary injunction preventing JPS
from manufacturing, marketing or selling the competing products, which are substantially similar to some of our encapsulants. The final amount of damages to be awarded to us, as well as the scope of a
permanent injunction, is still pending before the court and will be determined by the presiding judge. JPS has filed a motion for reconsideration of the court's decision that JPS and Galica had
violated the Massachusetts Unfair and Deceptive Trade Practices Act. Final judgment will not be entered until these pending matters are resolved. The court has ordered each party to brief the
remaining issues. Upon entry of final judgment, JPS will have the right to appeal the judge's ruling, and we will have the right to appeal the jury's verdict. If JPS or Galica is successful on the
appeals from both the jury's verdict and the judge's rulings, the result may be a new trial or a final determination that JPS may compete with us by continuing to sell a product that is substantially
similar to some of our encapsulants. JPS may also be allowed to compete with us on some encapsulant products based on the court's ruling on the scope and duration of the permanent injunction. Further,
in October 2009, counsel to JPS sent our counsel a letter demanding relief under the Massachusetts Unfair and Deceptive Trade Practices Act, the Sherman Antitrust Act, the Massachusetts Antitrust Act
and the Lanham Act.

We
responded to JPS's letter and have had no further contact with JPS regarding their October 2009 letter. On October 20, 2009, JPS moved for reconsideration of the judgment
against them under Massachusetts General Laws, chapter 93A. On November 19, 2009, the Court issued a Memorandum and Order Denying Further Modification of the Preliminary Injunction and
Associated Directives. On December 10, 2009, JPS filed a petition for relief in the Massachusetts Appeals Court which the court denied. On December 21, 2009, JPS filed a notice of
interlocutory appeal with the Massachusetts Appeals Court. On January 20, 2010, the parties filed a stipulation of dismissal of JPS's notice of interlocutory appeal. The parties are currently
scheduling proceedings in connection with the damage and injunctive relief matters that are pending with the court.

We face competition in our Solar business from other companies producing encapsulants for solar modules.

The market for encapsulants is highly competitive and continually evolving. We compete with a number of encapsulant manufacturers, some
of which are large, global companies with substantial financial, manufacturing and logistics resources and strong customer relationships. If we fail to attract and retain customers for our current and
future products, we will be unable to increase our revenues and market share. Our primary encapsulant competitors include Bridgestone Corporation, ETIMEX Primary Packaging GmbH and Mitsui
Chemicals, Inc. We also expect to compete with new entrants to the encapsulant market, including those that may offer more advanced technological solutions, possess advanced or more efficient
manufacturing capabilities or that have greater financial resources than we do. Further, as the China solar market matures, we expect other encapsulant providers from China and the greater Asian
markets will compete with us. Our competitors may develop and produce or may be currently producing encapsulants that offer advantages over our products. A widespread adoption of any of these
technologies could result in a rapid decline in our position in the encapsulant market and our revenues and adversely affect our margins.

Our failure to build and operate new manufacturing facilities and increase production capacity at our existing facilities to meet our customers' requirements could harm our
business and damage our customer relationships in the event demand for encapsulants increases. Conversely, expanding our production in times of overcapacity could have an adverse impact on our results
of operations.

Prior to the fourth quarter of 2008, our manufacturing facilities generally operated at full production capacity, which constrained our
ability to meet increased demand from our customers. The future success of our Solar business depends, in part, on our ability to increase production capacity to

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satisfy
any increased demand from our customers. We may be unable to expand our Solar business, satisfy customer requirements, maintain our competitive position and improve profitability if we are
unable to build and operate new manufacturing facilities and increase production capacity at our existing facilities to meet any increased demand for our Solar products. For example, if there are
delays in our new Malaysian facility achieving target yields and output, we will not meet our target for adding capacity, which would limit our ability to increase encapsulant sales and result in
lower than expected Solar net sales and higher than expected costs and expenses. Moreover, we may experience delays in receiving equipment and be unable to meet any increases in customer demand.
Failure to satisfy customer demand may result in a loss of market share to competitors and may damage our relationships with key customers.

In
addition, due to the lead time required to produce the equipment used in our encapsulant manufacturing process, it can take up to a year to obtain new machines after they are ordered.
Accordingly, we are required to order production equipment well in advance of expanding our facilities or opening new facilities and in advance of accepting additional customer orders. If such
facilities are not expanded or completed on a timely basis or if anticipated customer orders do not materialize, we may not be able to generate sufficient Solar net sales to offset the costs of new
production equipment, which could have an adverse impact on our results of operations. Furthermore, we rely on longer-term forecasts from our Solar customers to plan our capital
expenditures. If these forecasts prove to be inaccurate, either we may have spent too much on capacity growth, which could require us to consolidate facilities, in which case our financial results
would be adversely affected, or we may have spent too little on capital expenditures, in which case we may be unable to satisfy customer demand, which could adversely affect our business. Furthermore,
our ability to establish and operate new manufacturing facilities and expand production capacity is subject to significant risks and uncertainties, including:



If
we are unable to establish or successfully operate additional manufacturing facilities or to increase production capacity at our existing facilities, as a result of the risks
described above or otherwise, we may not be able to expand our business as planned and our Solar net sales may be lower than expected. Alternatively, if we build additional manufacturing facilities or
increase production capacity at our existing facilities, we may not be able to generate sufficient customer demand for our encapsulants to support the increased production levels, which would
adversely affect our business and operating margins.

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Our Solar business is exposed to risks related to running our facilities at full production capacity from time to time that could result in decreased Solar net sales and
affect our ability to grow our business in future periods.

Prior to the fourth quarter of 2008, our manufacturing facilities generally operated at full production capacity. If any of our current
or future production lines or equipment were to experience any problems or downtime, such as in 2005 when one of our plants was without electricity for five days following a hurricane, we may not be
able to shift production to new lines and may not be able to meet our production targets, which would result in decreased Solar net sales and adversely affect our customer relationships. As a result,
our per-unit manufacturing costs would increase, we would be unable to increase sales as planned and our earnings would likely be negatively impacted. In addition, when our encapsulant
production lines are running at full capacity, they are generally used solely to meet current customers' orders. As such, there is very limited production line availability to test new technologies or
further refine existing technologies that are important for keeping pace with evolving industry standards and changing customer requirements and competing effectively in the future. Limitations in our
ability to test new products or enhancements to our existing products could cause our encapsulants to become uncompetitive or obsolete, which would adversely affect our business.

We may be subject to claims that we have infringed, misappropriated or otherwise violated the patent or other intellectual property rights of a third party. The outcome of
any such claims is uncertain and any unfavorable result could adversely affect our business, financial condition and results of operations.

We may be subject to claims by third parties that we have infringed, misappropriated or otherwise violated their intellectual property
rights. These claims may be costly to
defend, and we ultimately may not be successful. An adverse determination in any such litigation could subject us to significant liability to third parties (potentially including treble damages),
require us to seek licenses from third parties (which may not be available on reasonable terms, or at all), make substantial one-time or ongoing royalty payments, redesign our products or
subject us to temporary or permanent injunctions prohibiting the manufacture and sale of our products, the use of our technologies or the conduct of our business. Protracted litigation could also
result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation. In addition, we may have no insurance coverage in
connection with such litigation and may have to bear all costs arising from any such litigation to the extent we are unable to recover them from other parties. Any of these outcomes could have a
material adverse effect on our business, financial condition and results of operations.

We generally operate on a purchase order basis with our Solar customers, and their ability to cancel, reduce, or postpone orders could reduce our Solar net sales and
increase our costs.

Sales to our Solar customers are typically made through non-exclusive, short-term purchase order arrangements
that specify prices and delivery parameters. The timing of placing these orders and the amounts of these orders are at our customers' discretion. Customers may cancel, reduce or postpone purchase
orders with us prior to production on relatively short notice. If customers cancel, reduce or postpone existing orders or fail to make anticipated orders, it could result in the delay or loss of
anticipated sales, which could lead to excess inventory and unabsorbed overhead costs. Because our encapsulants have a limited shelf life from the time they are produced until they are incorporated
into a solar module, we may be required to sell any excess inventory at a reduced price, or we may not be able to sell it at all and incur an inventory write-off, which could reduce our
Solar net sales and increase our costs. During the first half of 2009, we experienced postponements and cancellations in orders and, as a result, incurred approximately $1.0 million of
inventory write-offs.

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We may be unable to manage the expansion of our Solar operations effectively.

We expect to expand our existing facilities and add new facilities to meet future demand for encapsulants. We recently completed
expansions in our facilities in Connecticut and Spain. The production line qualification on our Malaysian facility has been completed, and we began shipping production quantities of encapsulants from
that facility in the third quarter of 2009. To manage the potential growth of our operations, we will be required to improve operational and financial systems, procedures and controls, increase
manufacturing capacity and output and expand, train and manage our growing employee base. Furthermore, management will be required to maintain and expand our relationships with our customers,
suppliers and other third parties. Our Solar business's current and planned operations, personnel, systems, internal procedures and controls may not be
adequate to support our future growth. If we are unable to manage the growth of our Solar business effectively, we may not be able to take advantage of market opportunities, execute our business
strategies or respond to competitive pressures.

Our dependence on a limited number of third-party suppliers for raw materials for our encapsulants and other significant materials used in our process could prevent us from
timely delivering encapsulants to our customers in the required quantities, which could result in order cancellations and decreased revenues.

We purchase resin and paper liner, the two main components used in our manufacturing process, from multiple third-party suppliers. If
we fail to develop or maintain our relationships with these suppliers or our other suppliers, or if the suppliers' facilities are affected by events beyond our control, we may be unable to manufacture
our encapsulants or our encapsulants may be available only for customers in lesser quantities, at a higher cost or after a long delay. We may be unable to pass along any price increases relating to
materials costs to our customers, in which case our margins could be reduced. In addition, we do not maintain long-term supply contracts with our suppliers. Our inventory of raw materials
for our encapsulants, including back-up supplies of resin, may not be sufficient in the event of a supply disruption. In 2005, we encountered a supply disruption when one of our resin
suppliers had its facilities damaged by a hurricane, and another supplier had a reactor fire at the same time. This forced us to use our back-up supplies of resin. The failure of a
supplier to supply materials and components, or a supplier's failure to supply materials that meet our quality, quantity and cost requirements in a timely manner, could impair our ability to
manufacture our products to specifications, particularly if we are unable to obtain these materials and components from alternative sources on a timely basis or on commercially reasonable terms. If we
are forced to change suppliers, our customers may require us to undertake testing to ensure that our encapsulants meet the customer's specifications.

Our Solar gross margins and profitability may be adversely affected by rising commodity costs.

We are dependent on certain raw and other materials, particularly resin and paper, for the manufacture of our encapsulants. In
addition, the cost of equipment used to manufacture our encapsulants is affected by steel prices. The prices for resin, paper and steel have been volatile over the past few years and could increase.
If the prices for the commodities and equipment we use in our Solar business increase, our gross margins and results of operations may be adversely affected.

As a supplier to solar module manufacturers, disruptions in any other component of the supply chain to solar module manufacturers may adversely affect our customers and
consequently limit the growth of our business and revenue.

We supply a component to solar module manufacturers. As such, if there are disruptions in any other area of the supply chain for solar
module manufacturers, it could affect the overall demand for our encapsulants. For example, the increased demand for polysilicon due to the rapid growth of the solar energy and computer industries and
the significant lead time required for building additional

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capacity
for polysilicon production led to an industry-wide shortage of polysilicon from 2005 through 2008, which is an essential raw material in the production of most of the solar
modules produced by many of our customers. This and other disruptions to the supply chain may force our customers to reduce production, which in turn would decrease customer demand for our
encapsulants and could adversely affect our Solar net sales. In addition, reduced orders for our encapsulants could result in underutilization of our production facilities and cause an increase of our
marginal production cost. During the first half of 2009, we experienced postponements and cancellations in orders and, as a result, incurred approximately $1.0 million of inventory
write-offs.

The sales cycle for our encapsulants can be lengthy, which could result in uncertainty and delays in generating Solar net sales.

The integration and testing of our encapsulants with prospective customers' solar modules or enhancements to existing customers' solar
modules requires a substantial amount of time and resources. A Solar customer may need up to one year to test, evaluate and adopt our encapsulants and qualify a new solar module, before ordering our
encapsulants. Our Solar customers then need additional time to begin volume production of solar modules that incorporate our encapsulants. As a result, the complete sales cycle for our Solar business
can be lengthy. We may experience a significant delay between the time we increase our expenditures for product development, sales and marketing efforts and inventory for our Solar business and the
time we generate Solar net sales, if any, from these expenditures. In addition, because we typically do not have long-term commitments from our Solar customers, we must repeat the sales
process on a continual basis even for existing customers that develop new solar modules or enhancements to their existing solar modules.

Our Solar business could be adversely affected by seasonal trends and construction cycles.

We may be subject to industry-specific seasonal fluctuations in the future, particularly in climates that experience colder weather
during the winter months, such as Germany. For example, in 2009, we experienced a decline in our Solar business mainly due to decreased global demand for solar energy as a result of legislative
changes, such as the cap in feed-in tariffs in Spain implemented in 2008, the global recession and the worldwide credit crisis. There are various reasons for seasonality fluctuations,
mostly related to economic incentives and weather patterns. In Germany, the construction of solar energy systems is concentrated in the second half of the calendar year, largely due to the annual
reduction of the applicable minimum feed-in tariff. Recently, the German government has announced potential legislation that will probably reduce feed-in tariffs in the second
half of 2010. This announcement has resulted in the pull-in of demand from solar module manufacturers due to increased end-user demand being driven by the incentive to purchase
a solar system prior to the expected enactment of the decreased feed-in tariff incentives. As such, we may see atypical Solar sales during the first half of 2010 that may not occur during
the second half of 2010. In the United States, solar module customers will sometimes make purchasing decisions towards the end of the year in order to take advantage of tax credits or for budgetary
reasons. In addition, construction levels are typically slower in colder months. Accordingly, our business and results of operations could be affected by seasonal fluctuations in the future.

Problems with product quality or product performance, including defects, could result in a decrease in customers and Solar net sales, unexpected expenses and loss of market
share.

Our encapsulants are complex and must meet stringent quality requirements. Products as complex as our encapsulants may contain
undetected defects, especially when first introduced. For example, our encapsulants may contain defects that are not detected until after they are shipped or are installed because we cannot test for
all possible scenarios. These defects could cause us to incur significant costs, including costs to service or replace products, divert the attention of our engineering personnel from

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product
development efforts and significantly affect our customer relations and business reputation. If we deliver products with defects, or if there is a perception that our products contain errors
or defects, our credibility and the market acceptance and sales of our encapsulants could materially decline. In addition, we could be subject to product liability claims and could experience
increased costs and expenses related to significant product liability claims or other legal judgments against us, or a widespread product recall by us or a solar module manufacturer. For example,
during the second half of 2008, we recorded an accrual of $5.6 million relating to specific product performance matters, which amount represents management's best estimate of the costs to
repair or replace such product. The majority of this accrual relates to a quality claim by one of our customers in connection with a non-encapsulant product that we purchased from a vendor
in 2005 and 2006 and resold.
We stopped selling this product in 2006 and are currently attempting to resolve this matter. We may increase our accruals in future periods or incur charges in excess of that amount, which would
result in increased expenses in future periods that adversely affect our results of operations.

The
manufacturing process for our encapsulants is highly complex. Minor deviations in the manufacturing process can cause substantial decreases in yield and, in some cases, cause
production to be suspended. We have from time to time experienced lower than anticipated manufacturing yields. This typically occurs during the production of new encapsulants or the installation and
start-up of new process technologies or equipment. As we expand our production capacity, we may experience lower yields initially as is typical with any new equipment or process. If we do
not achieve planned yields, our costs of sales could increase, and product availability would decrease resulting in lower Solar net sales than expected.

Changes to existing regulations in the utility sector and the solar energy industry may present technical, regulatory and economic barriers to the purchase and use of solar
modules, which in turn may significantly reduce demand for our products.

The market for power generation products is heavily influenced by government regulations and policies concerning the electric utility
industry, as well as the internal policies of electric utility companies. These regulations and policies often relate to electricity pricing and technical interconnection of end user-owned
power generation. In a number of countries, these regulations and policies are being modified and may continue to be modified. End users' purchases of alternative energy sources, including solar
modules, could be deterred by these regulations and policies. For example, utility companies sometimes charge fees to larger, industrial customers for disconnecting from the electricity transmission
grid or relying on the electricity transmission grid for back-up purposes. Such fees could increase the costs of using solar modules, which may lead to reduced demand for solar modules
and, in turn, our encapsulants.

We
anticipate that solar modules and their installation will continue to be subject to oversight and regulation in accordance with national and local ordinances relating to building
codes, safety, environmental protection, utility interconnection and metering and related matters in various countries. Any new government regulations or utility policies pertaining to solar modules
may result in significant additional expenses to our Solar customers, and their distributors and end users, which could cause a significant reduction in demand for solar modules and, in turn, our
encapsulants.

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Risks Related to Our Quality Assurance Business

The quality assurance testing markets are highly competitive, and many of the companies with which we compete have substantially greater resources and geographical presence
than us.

The quality assurance industry is highly competitive, and our Quality Assurance business competes in the United States and
internationally with many well-established quality assurance and certification companies on the basis of technical and industry knowledge, pricing, geographic proximity, client service,
timeliness, accuracy, marketing, breadth of service offering, level of consultation and actionable information and technical excellence in a given product category. Our global competitors operate in
multiple geographic areas while other competitors operate locally. In addition, we compete with non-profit certification companies and in-house quality assurance programs
maintained and operated by manufacturers and retailers themselves. The ability to increase or maintain our Quality Assurance net sales or gross margins in the global market or in various local markets
may be limited as a result of actions by competitors.

Our
competitors may be able to provide clients with different or greater capabilities or benefits than we can provide in areas such as geographical presence, technical qualifications,
price and the availability of human resources. The inability of our Quality Assurance business to compete effectively with respect to any of these or other factors could have a material adverse effect
on our business, financial condition or results of operations. In order to remain competitive in the quality assurance testing industry, we must also keep pace with changing technologies and client
preferences. If we are unable to expand our geographic presence and testing capacity, maintain or enter into strategic partnerships or differentiate our services from those of our competitors, our
Quality Assurance business may not be able to obtain new clients or it may lose existing clients. Competitors may in the future adopt aggressive pricing policies and diversify their service offerings.
In addition, new competitors or alliances among competitors may emerge and compete more effectively than our Quality Assurance business can. There is also a trend towards consolidation in certain
markets that our Quality Assurance business serves, which may result in the emergence of new or bigger competitors. If we cannot offer prices, services or a quality of service at least comparable to
those offered by our competitors, we could lose market share or our profitability may be affected. These competitive pressures could materially and adversely affect our business, financial condition
and results of operations.

Failure to maintain professional accreditations and memberships may affect our Quality Assurance business's ability to compete or generate net sales.

Our Quality Assurance clients rely on our numerous professional accreditations and memberships, including ISO 9000,
ISO 17025, SA 8000 and Underwriters Laboratories, to ensure continued compliance with their quality assurance and social audit standards. Certain accreditations are granted for limited
periods of time and are subject to periodic renewal. Any failure to meet our ongoing professional responsibilities could lead us to lose, either temporarily or on a permanent basis, one or more of
such accreditations or memberships. In addition, a public authority or professional organization that has granted one or more accreditations or memberships to us could decide to unilaterally withdraw
such accreditations and memberships. If our accreditations and memberships with these or other professional organizations are suspended or revoked, our clients may decrease the amount of business that
they do with our Quality Assurance business, or stop doing business with us altogether, which would negatively affect our business, financial condition and results of operations.

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Damage to the professional reputation of our Quality Assurance business would adversely affect our Quality Assurance net sales and the growth prospects of our Quality
Assurance business.

Our Quality Assurance business depends on longstanding relationships with our clients, including leading global retailers and consumer
product manufacturers, for a significant portion of our Quality Assurance net sales. Product liability claims, poor performance, lax standards, violations of laws or regulations, employee misconduct,
information security breaches or other action affecting our Quality Assurance business could damage our reputation. Providing quality assurance services for products for human use or consumption
involves inherent legal and reputational risks and our success depends on the ability of our Quality Assurance business to maintain service quality for our existing clients. Service quality issues,
real or alleged, or allegations of product defects, contamination, tampering, misbranding, spoliation, or other adulteration, even when false or unfounded, could tarnish the image of our Quality
Assurance business and may cause our clients to choose other quality assurance providers. We also provide our clients with limited indemnities for our failure to meet applicable standards. Quality
assurance testing protocols only identify known risks, and we have cleared products in the past that later were determined to present a previously unknown risk. No testing protocol can discern unknown
risks but we may nevertheless be held liable for those risks. A significant product liability or other legal judgment against our Quality Assurance business, or a widespread product recall of a tested
product, may adversely affect our profitability. Moreover, even if a product liability or consumer fraud claim is unsuccessful, has no merit or is not pursued, the negative publicity surrounding
assertions against products or processes that our Quality Assurance business tested could adversely affect our reputation, which in turn could lead to a loss of existing clients or
make it more difficult to attract new clients. If our Quality Assurance business's reputation is damaged, our net sales and growth prospects could be adversely affected.

Our Quality Assurance business's growth depends on our ability to expand our operations and capacity and manage such expansion effectively.

In order to maintain our current clients and grow our Quality Assurance business, we must be able to meet increasing client demand,
which requires additional space, equipment and human resources. The future success of our Quality Assurance business depends on our ability to increase our service capacity, and if we are unable to
expand our operations, obtain testing equipment and hire additional qualified personnel, we may be unable to expand our Quality Assurance business and satisfy client demands. The testing equipment our
Quality Assurance business uses is highly customized and is built to order, which results in significant lead times. Therefore, it can take several months to obtain, install and calibrate new
equipment once ordered, and we must have the facilities available to accommodate it. Building a new testing facility can take up to a year.

We
have recently expanded our Quality Assurance operations and plan to continue to expand such operations, which can result in significant demands on administrative, operational and
financial personnel and other resources. Additional expansion in existing or new markets could strain these resources and increase capital needs, and our personnel, systems, procedures, controls and
existing space may not be adequate to support further expansion. Additionally, international growth in our Quality Assurance business may be limited by the fact that in some countries we are required
to operate with a local strategic partner. Finding these partners may be difficult or impossible, and our arrangements with them may negatively affect our Quality Assurance net sales.

Moreover,
we have a limited number of laboratories in which to process engagements and a limited number of trained personnel to conduct inspections and audits. When these laboratories or
our personnel resources are at capacity, we cannot accept more engagements. Our Quality Assurance clients may require capacity and resources greater than that which we can provide. If we cannot
process engagements in the time our clients require due to capacity or other resource constraints, we may lose clients or experience a decline in engagements.

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Our Quality Assurance business may lose money or experience reduced margins if we do not adequately estimate the cost of our Quality Assurance engagements.

We perform the majority of our Quality Assurance engagements on a fixed-price basis. Fixed-price contracts require us to price our
contracts by predicting expenditures in advance. In addition, some engagements obligate our Quality Assurance business to provide ongoing and other supporting or ancillary services on a fixed-price
basis or with limitations on our ability to increase prices. When making proposals for engagements on a fixed-price basis, we rely on our estimates of costs and timing for completing the projects.
These estimates reflect management's best judgment regarding our Quality Assurance business's capability to complete the task efficiently. Any increased or unexpected costs or unanticipated delays in
connection with the performance of fixed-price contracts, including delays caused by factors outside our control, such as increased energy and labor costs, could result in losses or reduced margins.
Unexpected costs and unanticipated delays may cause our Quality Assurance business to incur losses or reduced margins on fixed-price contracts. In addition, some of our Quality Assurance engagements
are on a time-and-material basis. While these types of contracts are generally subject to less uncertainty than fixed-price contracts, to the extent that actual labor and other
costs are higher than the contract rates, these contracts may be less profitable or unprofitable.

Our failure to establish and maintain partnerships and other strategic alliances with other quality assurance providers may delay the expansion or provision of our services,
harm our reputation and cause us to lose clients or prevent us from growing our Quality Assurance business.

Our Quality Assurance business serves a diverse and global client base, which requires us to operate where such clients operate. We are
required to work with a partner in certain countries either because of local laws and regulations or because such arrangements are customary to doing business in such countries. Also, we enter into
and will continue to enter into strategic alliances with other quality assurance services in order to meet client demands in countries in which it may not be practicable for us to operate on a
stand-alone basis. We do not generally have long-term contracts with our strategic partners, so they may cease doing business with us on relatively short or no notice. Yet if performance
issues arise with respect to a strategic partner's services, such issues could damage our Quality Assurance business's reputation and exclusivity arrangements with such partners could prevent us from
engaging in new strategic alliances for certain testing and inspection services in particular markets. In addition, we have also entered into joint venture agreements that restrict our ability to
enter into certain product testing markets in specified geographic markets, either with another strategic partner or on our own. If we are unable to establish or maintain relationships with strategic
partners, if such partners damage our reputation or if contract arrangements with such partners prevent us from entering certain testing markets, we could lose quality assurance clients or may not be
able to expand our Quality Assurance business, either of which could have an adverse effect on our results of operations.

Our Quality Assurance business's failure to develop and protect its proprietary systems of design reviews and research processes could negatively affect its business and
future growth.

Similar to our Solar business, our Quality Assurance business does not rely on any patents and relies primarily on trade secrets,
trademarks, copyrights and other contractual restrictions to protect our intellectual property. In addition to breaching confidentiality agreements, former employees and others may obtain knowledge of
our Quality Assurance business's trade secrets through independent development or other legal means. Policing unauthorized use of proprietary technology can be difficult and expensive, and adequate
remedies may not be available in the event of unauthorized use or disclosure of trade secrets. Any lawsuits to protect our Quality Assurance business's intellectual property may be costly and may
divert management attention and other resources away from our business, and any such litigation may not be resolved in our favor. An adverse determination in any

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such
litigation will impair our Quality Assurance business's intellectual property rights and may harm our business, prospects and competitive position. In addition, we have no insurance coverage
against such litigation costs and have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties.

Our Quality Assurance business may be subject to professional liability claims and may not have adequate insurance coverage.

Quality assurance testing protocols are only designed to identify known risks. In the past, our Quality Assurance business has cleared
products that only later were determined to present a previously unknown risk. Testing protocols cannot discern unknown risks, for which we nevertheless may be held liable. Also, there may be a
significant delay between the provision of services and the making of a related claim. While we maintain insurance for our Quality Assurance business to protect against losses from professional
liability claims, such insurance may not be available, is subject to deductibles and may not be adequate to cover all the costs and expenses related to a significant professional liability or other
legal judgment against us, which could adversely affect the results of operations of our Quality Assurance business.

In
addition, the insurance market could evolve in a manner unfavorable to us, resulting in increased premiums or making it impossible or much more expensive to obtain adequate insurance
coverage. These factors could result in a substantial increase in our insurance costs, cause us to operate without insurance or cause us to withdraw from certain markets, which could have a
significant adverse effect on our Quality Assurance business and related results of operations.

Changes in regulations applicable to our Quality Assurance business could have a significant effect on our business, financial condition, results of operations or future
growth.

Our Quality Assurance business conducts operations in a heavily regulated environment, with regulations differing, sometimes
substantially, from one country to another. Regulations applicable to our Quality Assurance business may change either favorably or unfavorably for us. The strengthening or enforcement of regulations,
while in some cases creating new business opportunities, may also create operating conditions that increase our operating costs, limit our business areas or more generally slow the development of our
Quality Assurance business. In extreme cases, such changes in the regulatory environment could lead us to exit certain markets where we consider the regulation to be overly burdensome. In general,
rapid and/or important changes in regulations could have a significant adverse effect on our business, financial condition, results of operations or future growth.

Risks Related to Our Businesses

The global financial crisis and adverse worldwide economic conditions may have significant effects on our business, financial condition and results of operations.

The global financial crisiswhich has included, among other things, significant reductions in available capital and
liquidity, substantial reductions and/or fluctuations in equity and currency values and a worldwide recession may materially adversely affect both our Solar and Quality Assurance businesses. Factors
such as lack of consumer spending, business investment and government spending, the volatility and weakness of the capital markets, and inflation all affect the business and economic environment and,
ultimately, the amount and profitability of our business. In an economic downturn like the one experienced in 2009, which was characterized by higher unemployment, lower family income, lower corporate
earnings, lower business investment and lower consumer spending, the demand for our products and services may be adversely affected. Continued market disruptions and broader economic downturns may
affect our and our customers' access to capital, lead to lower demand for our products and services, increase our exposure to losses from bad debts or result in our customers

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ceasing
operations, any of which could materially adversely affect our business, financial condition and results of operations.

In
recent years, the credit markets have experienced unprecedented levels of volatility and disruption. In many cases, the markets still have limited credit capacity for certain issuers,
and lenders have requested more restrictive terms. The market for new debt financing is extremely limited and in some cases not available at all. In addition, the markets have increased the
uncertainty that lenders will be able to comply with their previous commitments. If current levels of market disruption and volatility continue or worsen, we may not be able to refinance our existing
debt, draw upon our revolving credit facility or incur additional debt, which may require us to seek other funding sources to meet our liquidity needs or to fund planned expansion. As such, we may not
be able to obtain debt or other financing on reasonable terms, or at all. Furthermore, the tightening of credit in financial markets may delay or prevent our customers from securing funding adequate
to operate their businesses and purchase our products and services and could lead to an increase in our bad debt levels.

Our future success depends on our ability to retain our key employees.

We are dependent on the services of Dennis L. Jilot, our Chairman, President and Chief Executive Officer, Barry A. Morris, our
Executive Vice President and Chief Financial Officer, Robert S. Yorgensen, our Vice President and President of STR Solar, Mark A. Duffy, our Vice President and President of STR Quality Assurance and
other members of our senior management team. The loss of any member of our senior management team could have a material adverse effect on us. Members of our senior management team may terminate their
employment with us upon little or no notice. There is a risk that we will not be able to retain or replace these key employees.

If we are unable to attract, train and retain technical personnel, our businesses may be materially and adversely affected.

Our future success depends, to a significant extent, on our ability to attract, train and retain qualified technical personnel. There
is substantial competition for qualified technical personnel for both our Solar and Quality Assurance businesses, and we may be unable to attract or retain our technical personnel. If we are unable to
attract and retain qualified employees, our businesses may be materially and adversely affected.

Our substantial international operations subject us to a number of risks.

We operate in 36 countries worldwide, we have encapsulant manufacturing facilities operating in Spain and Malaysia, and our Quality
Assurance business annually conducts audits or inspections in over 100 countries. Of our total net sales, 44.2%, 49.3% and 57.5% were generated from outside the United States in the years ended
December 31, 2009, 2008 and 2007,
respectively, and we expect that our international operations will continue to grow. As such, our international operations are subject to a number of risks, including:



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We and our results of operations could be materially and adversely affected by violations of applicable anti-corruption laws, including the FCPA.

We operate in a number of countries throughout the world, including countries known to have a reputation for corruption, and are
subject to the risk that our employees and agents may take actions that are determined to be in violation of anti-corruption laws, including the FCPA. Any violation of the FCPA or other
anti-corruption laws could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in
certain jurisdictions and might adversely affect our business, results of operations or financial condition. Other requirements can also be imposed on companies that violate the FCPA, including the
appointment of a government-approved monitor or the implementation of enhanced compliance procedures. In addition, actual or alleged violations could damage our reputation and ability to do business
and, if material, could be deemed a breach or event of default under our credit facilities. Further, detecting, investigating, and resolving actual or alleged violations is expensive and can consume
significant time and attention of our senior management.

In
late 2008, in the course of routine monitoring of our internal controls, our internal audit staff discovered certain payments made and expenses for entertainment provided to
government officials in India from approximately 2006 to 2008 that may have been in violation of the FCPA as well as Indian law. The payments and entertainment expenses were related to our quality
assurance business and totaled approximately $26,000. Upon discovering such payments and expenses and performing an initial review and evaluation with the assistance of an outside forensic accounting
firm, our Audit Committee directed outside legal counsel to perform an investigation. Our internal audit staff, outside legal counsel or forensic accounting firm performed investigative procedures in
12 of our foreign locations where major international operations are conducted. In the course of that investigation, we discovered up to approximately $74,000 in additional expenses since 2003 in two
other jurisdictions that also may be inconsistent with the requirements of the FCPA. Our internal investigation uncovered no evidence that the payments or expenses were related to
(i) falsifying, altering or otherwise influencing the conduct of our quality assurance tests or test results or (ii) securing any government contracts.

After
completing our internal investigation, we made personnel changes in India and enhanced our FCPA-related policies and procedures, including providing additional ethical
and FCPA training to key

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employees,
enhancing our monitoring of expenses and other internal controls and appointing a chief compliance director. It is possible that despite our efforts, additional FCPA issues, or issues under
anti-corruption laws of other jurisdictions, could arise in the future. Any failure by us to comply with the FCPA or anti-corruption laws in the future could have a material
adverse effect on our business, financial condition, results of operations and cash flows.

In
early June 2009, we self-reported the results of our inquiry to the U.S. Department of Justice, or the DOJ, and the enforcement division of the U.S. Securities and
Exchange Commission, or the SEC. To our knowledge, the DOJ and SEC were not aware of this matter prior to our report. Shortly after our report, we provided additional information requested by the DOJ
and SEC. Since providing that additional information, and as of the date of this filing, the DOJ has not responded to our report or requested any additional information from us. As of March 18,
2010, the DOJ has not informed us as to whether it intends to pursue this matter further. In addition, in connection with our initial public offering, the SEC advised us that because it does not
appear that we were subject to the SEC's jurisdiction during the relevant period, the SEC does not intend to pursue this matter at this time. We cannot predict the outcome resulting from our report to
the DOJ. Any criminal prosecution would be costly and time-consuming to defend and such defense may not be successful and would have a material adverse effect on our business, result in
harm to our reputation and
negatively impact our results of operations. In addition, any fines or penalties imposed by the DOJ could be substantial and any requirements imposed upon us by the DOJ could be difficult,
time-consuming and expensive to implement and comply with and could result in difficulties in conducting business in foreign jurisdictions and maintaining existing and attracting new
customer relationships. Any failure to comply with any such requirements could result in further prosecution, fines or penalties. Any adverse determination by the DOJ, if material, could also be
deemed to be a breach of covenants and an event of default under our credit facilities, which could result in our being required to immediately repay the principal amount outstanding under such
facilities and prevent us from borrowing under our revolving credit facility, and adversely affect our liquidity and financial condition.

Fluctuations in exchange rates could have an adverse effect on our results of operations, even if our underlying business results improve or remain steady.

Our reporting currency is the U.S. dollar, and we are exposed to foreign exchange rate risk because a significant portion of our net
sales and costs are currently denominated in a number of foreign currencies, primarily Euros, Hong Kong dollars, Chinese renminbi and British pounds sterling, which we convert to U.S. dollars for
financial reporting purposes. We do not engage in any hedging activities with respect to currency fluctuations. Changes in exchange rates on the translation of the earnings in foreign currencies into
U.S. dollars are directly reflected in our financial results. As such, to the extent the value of the U.S. dollar increases against these foreign currencies, it will negatively impact our net sales,
even if our results of operations have improved or remained steady. While the currency of our net sales and costs are generally matched, to the extent our costs and net sales are not denominated in
the same currency for a particular location, we could experience further exposure to foreign currency fluctuations. We cannot predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the future.

Our indebtedness could adversely affect our financial health, harm our ability to react to changes to our business and prevent us from fulfilling our obligations under our
indebtedness.

As a result of the DLJ Transactions, we have a significant amount of indebtedness. As of December 31, 2009, we had total
indebtedness of approximately $240.5 million. Based on that level of indebtedness and interest rates applicable at December 31, 2009, our annual interest expense, excluding the effect of
interest rate swaps, would have been $9.9 million. Although we believe that our current cash flows will be sufficient to cover our annual interest expense, any increase in the amount of our

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indebtedness
or any decline in the amount of cash available to make interest payments could require us to divert funds identified for other purposes for debt service and impair our liquidity position.

Our
indebtedness could also have other significant consequences. For example, it could:



Increases in interest rates could increase interest payable under our variable rate indebtedness.

We are subject to interest rate risk in connection with our variable rate indebtedness. Interest rate changes could increase the amount
of our interest payments and thus negatively impact our future earnings and cash flows. We currently estimate that our annual interest expense on our floating rate indebtedness would increase by
approximately $2.4 million, before giving effect to our interest rate swap, for each increase in interest rates of 1%. If we do not have sufficient earnings, we may be required to refinance all
or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee we will be able to do. Although we have hedging arrangements for a portion of our
variable rate debt, they may prove inadequate or ineffective or we may not renew them when they expire in September 2010.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our
substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our
credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in
compliance with these restrictions could be substantial. For example, we had $20.0 million of borrowings available under our revolving credit facility as of December 31, 2009. If we
incur additional debt above the levels currently in effect, the risks associated with our substantial leverage would increase.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund our operations will depend on our ability to generate
cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Specific events that
might adversely affect our cash flow include the loss of a key customer or declines in orders for our products or decreased use of our services. Accordingly, we may not be able to generate cash to
service our indebtedness, which could lead to a default under our credit agreements and adversely affect our financial condition.

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We are a holding company with no business operations of our own and depend on our subsidiaries for cash.

We are a holding company with no significant business operations of our own. Our operations are conducted through our subsidiaries.
Dividends from, and cash generated by, our subsidiaries are our principal sources of cash to repay indebtedness, fund operations and pay dividends, if any, which such payment is prohibited under the
terms of our credit facilities. Accordingly, our ability to repay our indebtedness, fund operations and pay any dividends to our stockholders is dependent on the earnings and the distributions of
funds from our subsidiaries. The agreements governing our credit facilities significantly restrict our subsidiaries from paying dividends and otherwise transferring cash or other assets to us. In
addition, our subsidiaries are permitted under the agreements governing our credit facilities to incur additional indebtedness that may severely restrict or prohibit the making of distributions, the
payment of dividends or the making of loans by our subsidiaries to us.

Restrictive covenants in the agreements governing our credit facilities may restrict our ability to pursue our business strategies.

The agreements governing our credit facilities contain a number of restrictive covenants that impose significant operating and
financial restrictions on us and may limit our ability to pursue our business strategies or undertake actions that may be in our best interests. Our credit facilities include covenants restricting,
among other things, our ability to:



Compliance with environmental and health and safety regulations can be expensive, and noncompliance with these regulations may result in adverse publicity, potentially
significant liabilities and monetary damages and fines.

We are required to comply with federal, state, local and foreign laws and regulations regarding protection of the environment and
health and safety. If more stringent laws and regulations are adopted in the future, the costs of compliance with these new laws and regulations could be substantial. If we do not comply with such
present or future laws and regulations or related permits, we may be required to pay substantial fines, suspend production or cease operations. We use, generate and discharge hazardous substances,
chemicals and wastes in our product development, testing and manufacturing activities. Any failure by us to control the use of, to remediate the presence of, or to restrict adequately the discharge
of, such substances, chemicals or wastes could subject us to potentially significant liabilities, clean-up costs, monetary damages, fines or suspensions in our business operations.

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We may undertake acquisitions, investments, joint ventures or other strategic alliances, which may have a material adverse effect on our ability to manage our business, and
such undertakings may be unsuccessful.

Acquisitions, joint ventures and strategic alliances may expose us to new operational, regulatory, market and geographic risks as well
as risks associated with additional capital requirements.

These
risks include:



Any
of these events could disrupt our ability to manage our business, which in turn could have a material adverse effect on our financial condition and results of operations. Such risks
could also result in our failure to derive the intended benefits of the acquisitions, strategic investments, joint ventures or strategic alliances, and we may be unable to recover our investment in
such initiatives.

Risks Related to Owning Our Common Stock

As a public company, we are subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy.

We have historically operated our business as a private company. Since the completion of our IPO, we are now required to file with the
SEC annual and quarterly information and other reports that are specified in Section 13 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We are required to ensure that
we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. We are also subject to other reporting and corporate governance
requirements, including the requirements of the New York Stock Exchange ("NYSE"), and certain provisions of the Sarbanes-Oxley Act of 2002 and
the regulations promulgated thereunder, which impose significant compliance obligations upon us. As a public company, we are required to:



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These
changes require a significant commitment of additional resources. We may not be successful in implementing these requirements and implementing them could adversely affect our
business or operating results. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a
timely and accurate basis could be impaired.

Prior to December 31, 2009, our independent registered public accounting firm reported to us that we had material weaknesses and significant deficiencies in our
internal controls.

Our independent registered public accounting firm previously reported to us that at December 31, 2007, we had material
weaknesses with respect to our controls in our financial accounting and reporting and tax functions and significant deficiencies in our internal controls over documentation of our information
technology systems, general computer controls, policies and procedures, and the documentation of our overall internal control environment. Such controls are necessary in order to produce Public
Company Accounting Oversight Board, or ("PCAOB"), compliant financial statements. Under standards established by the PCAOB, a "material weakness" is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis, and a "significant deficiency" is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness,
yet important enough to merit attention by those responsible for oversight of the registrant's financial reporting.

For
the year ended December 31, 2008, we remediated the material weakness related to our financial accounting and reporting function and partially remediated the material weakness
related to our tax function. Our independent registered public accounting firm reported to us that at December 31, 2008, we had remaining significant deficiencies in our internal controls with
respect to our tax function, our overall internal control structure and our information technology general computer controls.

As
of December 31, 2009, all remaining 2008 significant deficiencies have been fully remediated resulting in no remaining significant deficiencies or material weaknesses. Our
remediation efforts during 2009 included hiring additional qualified personnel, providing additional training, implementing additional financial accounting controls and procedures and hiring a
consultant to assist us in our procedure documentation and development of key controls with respect to our information technology systems.

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We are in the process of implementing the standards required by Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), and failure to achieve and
maintain effective internal control over financial reporting in accordance with Section 404 could have a material adverse effect on us.

We are in the early stages of documenting and testing our internal control procedures to satisfy the requirements of
Section 404, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. If, as a public company, we are not able to implement the
requirements of Section 404 by December 31, 2010 or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our
internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may
suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. There could also be a negative reaction in the
financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

In
addition, we will incur additional costs in order to comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting
and administrative staff.

Insiders have substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our principal stockholders, directors and executive officers and entities affiliated with them owned approximately 57.0% of the
outstanding shares of our common stock at December 31, 2009. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which
you disagree and which may be adverse to your interests. In addition, we have elected to opt out of Section 203 of the Delaware General Corporation Law, which prohibits a
publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder," and we will be able to enter into such transactions with
our principal stockholders. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our Company, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale of our Company and might ultimately affect the market price of our common stock.

We expect that our stock price will fluctuate significantly, which could cause the value of your investment to decline, and you may not be able to resell your shares at or
above the applicable purchase price.

Securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations.
This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock regardless of our operating performance. The trading price of our
common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:



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These
and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of
common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes
instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the
lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our common stock could decline.

If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could
decrease significantly. The perception in the public market that such stockholders might sell shares of common stock could also depress the market price of our common stock. As of March 19,
2010 we had 41,349,710 shares of common stock outstanding. Our directors, executive officers, the selling stockholders in our IPO and substantially all of our other stockholders prior to the IPO are
subject to the lock-up agreements and are subject to the Rule 144 holding period requirements. After these lock-up agreements have expired and holding periods have
elapsed and the lock-up periods set forth in our registration rights agreement have expired, 29,049,710 additional shares, some of which will be subject to vesting, will be eligible for
sale in the public market. The market price of shares of our common stock may drop significantly when the restrictions on resale by these stockholders lapse. A decline in the price of shares of our
common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our
results of operations do not meet their expectations, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our
stock price could decline.

Some provisions of Delaware law and our certificate of incorporation and bylaws may deter third parties from acquiring us and diminish the value of our common stock.

Our certificate of incorporation and bylaws provide for, among other things:



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These
provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a transaction involving a change of control of our Company that is in the best interest
of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as
discouraging future takeover attempts.

We do not anticipate paying any cash dividends for the foreseeable future.

We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the
development and growth of our business. We do not intend to pay any dividends to holders of our common stock and the agreements governing our credit facilities prohibit our payment of dividends. As a
result, capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our common stock.

Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities.

Our certificate of incorporation provides for the allocation of certain corporate opportunities between us and DLJ Merchant Banking
Partners IV, L.P. and its affiliated investment funds, or DLJMB. Under these provisions, neither DLJMB, its affiliates and subsidiaries, nor any of their officers, directors, agents,
stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we
operate. For instance, a director of our Company who also serves as a director, officer or employee of DLJMB or any of its subsidiaries or affiliates may pursue certain acquisition or other
opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a
material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by DLJMB to itself or its subsidiaries or
affiliates instead of to us.

ITEM 1B.    Unresolved Staff Comments

None.

ITEM 2.    Properties

Our principal executive offices are located at 10 Water Street, Enfield, Connecticut 06082. As of December 31, 2009, our Solar
business had five production facilities and our
Quality Assurance business operated a network of 17 laboratories, 72 inspection and audit offices and 21 sales offices in 36 countries across North America, South America, Europe, Asia, Indian
sub-continent and Africa.

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The
following tables summarize information regarding our significant owned and leased properties as of December 31, 2009:

Location

Square Feet

Owned/LeasedCorporateEnfield, Connecticut*


11,000

OwnedSolarAsturias, Spain


105,000

OwnedJohor, Malaysia


80,000

OwnedSomers, Connecticut


42,000

LeasedSt. Augustine, Florida


23,500

LeasedEnfield, Connecticut*


18,000

OwnedQuality AssuranceShenzhen, China


75,000

LeasedHong Kong, China


61,000

LeasedShanghai, China


45,000

LeasedCanton, Massachusetts


44,000

LeasedEnfield, Connecticut*


40,500

OwnedReading, United Kingdom


30,000

LeasedTaipei, Taiwan


18,000

LeasedHaryana, India


16,500

LeasedSteinach, Switzerland


16,000

LeasedNottingham, United Kingdom


12,000

Leased


*Co-located.


From
time to time, we evaluate our production and service needs and may consolidate facilities or open future facilities.

ITEM 3.    Legal Proceedings

From time to time, we are and have been a party to litigation that arises in the ordinary course of our business. We have no material
litigation pending at this time other than as set forth below.

Galica/JPS

In October 2007, we filed a complaint against defendants James P. Galica and JPS Elastomerics Corp. in the Massachusetts Superior Court
in Hampshire County. Galica left our employment in mid-2005. JPS hired Galica in the fall of 2006. Shortly after hiring Galica, JPS introduced a product that competes with certain of our
Solar business's products and appeared to substantially incorporate technology we use in our encapsulant, also known as the polymeric sheeting product line. We believe that this technology provides us
with a competitive advantage in the marketplace. Our complaint alleged six separate claims. Specifically, we alleged that JPS and Galica violated Massachusetts General Laws, chapter 93A,
§§ 42 and 42A, misappropriated trade secrets, and violated the Massachusetts Unfair and Deceptive Trade Practices Act. Additionally, our complaint alleged breaches of
contract, breaches of the implied covenant of good faith and fair dealing, and breaches of fiduciary duty against Galica. We sought both monetary and injunctive relief. The trial was completed in
August 2008. The jury, which deliberated on all counts except the chapter 93A claim and the request for injunctive relief, determined that the technology for our polymeric sheeting product line
is a trade secret. The jury also determined that JPS and Galica had not misappropriated our trade secrets. We have not decided if we will appeal the jury's determination. The jury also found that
Galica had breached his confidentiality

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agreement
with us. Subsequently, the judge, ruling on the chapter 93A claims and the request for injunctive relief, determined that JPS and Galica had violated the Massachusetts Unfair and
Deceptive Trade Practices Act, finding that the technology for our polymeric sheeting product is a trade secret and that JPS and Galica had misappropriated our trade secrets. The judge awarded us
compensatory
and punitive damages, attorneys' fees and costs and issued a temporary injunction preventing JPS from manufacturing, marketing or selling the competing products, which are substantially similar to
some of our encapsulants. The final amount of damages to be awarded to us, as well as the scope of a permanent injunction, is still pending before the court and will be determined by the presiding
judge. JPS has filed a motion for reconsideration of the court's decision that JPS and Galica had violated the Massachusetts Unfair and Deceptive Trade Practices Act. Final judgment will not be
entered until these pending matters are resolved. The court has ordered each party to brief the remaining issues. Upon entry of final judgment, JPS will have the right to appeal the judge's ruling,
and we will have the right to appeal the jury's verdict. If JPS or Galica is successful on the appeals from both the jury's verdict and the judge's rulings, the result may be a new trial or a final
determination that JPS may compete with us by continuing to sell a product that is substantially similar to some of our encapsulants. JPS may also be allowed to compete with us on some encapsulant
products based on the court's ruling on the scope and duration of the permanent injunction. Further, in October 2009, counsel to JPS sent our counsel a letter demanding relief under the Massachusetts
Unfair and Deceptive Trade Practices Act, the Sherman Antitrust Act, the Massachusetts Antitrust Act and the Lanham Act.

We
responded to JPS's letter and have had no further contact with JPS regarding their October 2009 letter. On October 20, 2009, JPS moved for reconsideration of the judgment
against them under Massachusetts General Laws, chapter 93A. On November 19, 2009, the Court issued a Memorandum and Order Denying Further Modification of the Preliminary Injunction and
Associated Directives. On December 10, 2009, JPS filed a petition for relief in the Massachusetts Appeals Court which the court denied. On December 21, 2009, JPS filed a notice of
interlocutory appeal with the Massachusetts Appeals Court. On January 20, 2010, the parties filed a stipulation of dismissal of JPS's notice of interlocutory appeal. The parties are currently
scheduling proceedings in connection with the damage and injunctive relief matters that are pending with the court.

ITEM 4.    Reserved

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PART II

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

Our common stock began trading on the NYSE on November 6, 2009 under the symbol "STRI." Prior to this, there was no public
market for our common stock. At March 15, 2010, there were approximately 1,000 holders of record of our common stock.

The
table below sets forth for the periods indicated the high and low sales prices per share of our common stock reported on the NYSE since our IPO.

Common Stock
Price RangeHigh

LowFiscal 20091st Quarter

$
N/A

$
N/A2nd Quarter


N/A


N/A3rd Quarter


N/A


N/A4th Quarter


16.56


9.50


At
December 31, 2009, there were 41,349,710 shares issued and outstanding. Our authorized number of shares of common stock is 200,000,000 shares. The closing sale price per share
of our common stock on March 15, 2010 was $17.65.

Dividend Program

Since the DLJ Transactions, we have not declared or paid cash dividends on our shares. We do not anticipate paying any cash dividends
on our common stock for the foreseeable future and are currently prohibited from doing so under the terms of our credit facilities. We intend to retain all available funds and any future earnings to
fund the development and growth of our business and to reduce debt.

Any
future determination to pay dividends will be at the discretion of our board of directors and will take into account:



Issuer Purchases of Equity Securities

Our Board of Directors has not established a share repurchase program for our common stock. Accordingly, as of December 31,
2009, no shares have been repurchased. Currently, we have no plans to repurchase shares for the foreseeable future.

Sales of Unregistered Securities

On September 30, 2009, STR Holdings (New) LLC, a Delaware limited liability company was formed. Specialized Technology
Resources, Inc. purchased 10 units representing membership interests in STR Holdings (New) LLC for $1,000 in a transaction exempt from registration pursuant to

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Section 4(2)
of the Securities Act, as it was a transaction by an issuer that did not involve a public offering of securities.

In
connection with the corporate reorganization completed in connection with the IPO, STR Holdings (New) LLC issued units to the unitholders of STR Holdings LLC, which then
converted into shares of STR Holdings, Inc.'s common stock, par value $0.01 per share. The issuance of the units of STR Holdings (New) LLC and the shares of common stock of STR
Holdings, Inc. in the corporate reorganization were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof, as it was a transaction by the
issuer not involving a public offering of securities. The following share numbers of STR Holdings, Inc.'s common stock are based upon the IPO price of $10.00 per share:



Use of Proceeds from Public Offering of Common Stock

On November 12, 2009, we closed our IPO, in which 12,300,000 shares of common stock were sold at a price to the public of $10
per share. We sold 3,300,000 shares of our common stock in the offering and selling stockholders sold 9,000,000 of the shares of common stock in the offering. On December 7, 2009, we closed the
partial exercise of the over-allotment option granted by the selling stockholders in the IPO, in which 1,695,000 shares of common stock were sold at the IPO price of $10 per share. The
aggregate offering price for all shares sold in the offering, including shares sold by us and the selling stockholders, was $124.7 million. The offer and sale of all of the shares in the IPO
were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-162376), which was declared effective by the SEC on
November 6, 2009. The offering commenced as of November 6, 2009 and terminated before all but 150,000 shares of our common stock (which were subject to the underwriters'
over-allotment option) registered in the registration statement were sold. Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co. acted as representatives of the
underwriters. We raised approximately $25.0 million in net proceeds after deducting underwriting discounts, commissions and other offering costs of approximately $7.8 million. We made
final payments with a portion of the

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proceeds
from our IPO to DLJ Merchant Banking, Inc. and to Dennis L. Jilot, our Chairman, President and Chief Executive Officer, of $2.4 million and $0.2 million, respectively, in
connection with the termination of an advisory services agreement. No other payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their
associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board or board committee
service, or as a result of sales of shares of common stock by selling stockholders in the initial public offering. We also repaid $15.0 million of borrowings under our credit facilities. We
intend to use the remaining net proceeds for working capital and general corporate purposes. There has been no material change in the
planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) on November 9, 2009.

Performance GraphTotal Stockholder Return

The following is a line graph comparing cumulative, total shareholder return with three general market indexes, "The S&P 500",
"The Russell 2000" and "The NASDAQ Clean Edge Green Energy" selected by us. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each
index on November 6, 2009, our IPO date, and its relative performance is tracked through December 31, 2009. Total percentage return for us is based on the IPO price of $10. No cash
dividends have been declared on shares of our common stock. This performance graph is not "soliciting material," is not deemed filed with the SEC and is not to be incorporated by reference in any
filing by us under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and
shall not otherwise be deemed filed under such Acts. The stock price performance shown on the graph represents past performance and should not be considered an indication of future price performance.

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COMPARISON OF CUMULATIVE TOTAL RETURN*Among STR Holdings, Inc., The S&P 500 Index,  The Russell 2000 Index And The NASDAQ Clean Edge Green Energy Index

GRAPHIC

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Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

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ITEM 6.    Selected Financial Data

The following table sets forth our selected historical consolidated financial data for the periods and as of the dates indicated. The
balance sheet data as of December 31, 2009, 2008 and 2007 and the statement of operations and other data for each of (i) the years ended December 31, 2009 and 2008,
(ii) the period from June 15 to December 31, 2007, (iii) the period from January 1 to June 14, 2007 and (iv) the years ended December 31, 2006
and 2005 are derived from our Consolidated Financial Statements.

The
basic and diluted net income per share and weighted average shares outstanding data in the selected historical consolidated financial data table presented below give effect to our
corporate reorganization, as described under "Item 1 BusinessCorporate Reorganization and Initial Public Offering."

On
June 15, 2007, DLJMB and its co-investors, together with members of our board of directors, our executive officers and other members of management, through STR
Holdings LLC, acquired Specialized Technology Resources, Inc. All periods prior to June 15, 2007 are referred to as "Predecessor," and all periods including and after such date
are referred to as "Successor." The consolidated financial statements for all Successor periods are not comparable to those of the Predecessor periods.

The
results indicated below and elsewhere in this annual report are not necessarily indicative of our future performance. You should read this information together with
"Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included in Item 8
of this Annual Report.

Successor

PredecessorYear Ended
December 31,
2009

Year Ended
December 31,
2008

Period from
June 15 to
December 31,
2007

Period from
January 1 to
June 14,
2007

Year Ended
December 31,
2006

Year Ended
December 31,
2005Statement of Operations:Net sales

$
264,945

$
288,578

$
109,284

$
64,760

$
130,607

$
114,862Operating income


48,102


70,567


24,634


7,522


29,657


25,129Net income

$
22,989

$
28,105

$
4,111

$
732

$
15,294

$
13,073Net income per share/unit data:Basic

$
0.63

$
0.78

$
0.11

$
0.08

$
1.81

$
1.60Diluted

$
0.61

$
0.75

$
0.11

$
0.08

$
1.68

$
1.44Weighted average shares/units outstanding:Basic


36,638,402


36,083,982


35,846,880


8,632,893


8,439,658


8,147,169Diluted


37,514,790


37,411,765


36,636,433


9,134,536


9,122,840


9,102,179Amortization of intangibles

$
11,503

$
11,503

$
6,231

$
50

$
109

$
109Capital expenditures

$
17,833

$
35,288

$
10,064

$
3,510

$
2,604

$
5,142Cash dividends declared per common share/unit

$


$


$


$


$


$
1.34Cash and short-term investments

$
70,150

$
27,868

$
21,180

$


$
17,939

$
8,305Total assets

$
645,860

$
620,922

$
575,157

$


$
77,640

$
70,751Total debt

$
240,506

$
257,521

$
259,526

$


$
68,101

$
74,762Contingently redeemable units

$


$
2,930

$
1,463

$


$


$
Total stockholders'/unitholders' equity (deficit)

$
271,270

$
211,967

$
185,382

$


$
(9,397
)
$
(20,898
)


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ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read
together with "Item 6Selected Historical Consolidated Financial Data" and our Consolidated Financial Statements and the related Notes included in Item 8 of this Annual
Report. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Item 1ARisk Factors"
in this Annual Report.

Overview

We are a leading global provider of encapsulants to the solar module industry. Encapsulants, which are specialty extruded sheets and
film that hold a solar module together and protect the embedded semiconductor circuit, are a critical component used in solar modules. Our PhotoCap® products consist primarily of
ethylene-vinyl-acetate, or EVA, which is modified with additives and put through our proprietary manufacturing process to increase product stability and make the encapsulant suitable for use in
extreme, long-term outdoor applications. We supply solar module encapsulants to many of the major solar module manufacturers and we believe we were the primary supplier of encapsulants to
each of our top 10 customers in 2009, which we believe is due to our superior products and customer service. Our encapsulants are used in both crystalline and thin-film solar modules. Our
Solar segment net sales have increased from $9.9 million in 2003 to $149.5 million in 2009, representing a CAGR of 57.2%. In 2009, our Solar segment was impacted by decreased global
demand for solar energy as a result of legislative changes, such as the cap in feed-in tariffs in Spain implemented in late 2008, the global recession and the worldwide credit crisis.
Also, our European encapsulant customers have lost market share to emerging low-cost solar module manufacturers, primarily from China, that continue to penetrate the solar market.

Our
Quality Assurance business is a leader in the consumer products quality assurance market, and we believe our Quality Assurance business represents the only global testing service
provider exclusively focused on the consumer products market. Our Quality Assurance business provides inspection, testing, auditing and consulting services that enable retailers and manufacturers to
determine whether products and facilities meet applicable safety, regulatory, quality, performance and social standards. Our Quality Assurance net sales have increased from $66.5 million in
2003 to $115.4 million in 2009, representing a CAGR of 9.6%.

We
were founded in 1944 as a plastics research and development company. We launched our Quality Assurance business in 1973, and we commenced sales of our Solar encapsulant products in
the late 1970s.

On
June 15, 2007, DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds ("DLJMB"), and its co-investors, together with members of our board of
directors, our executive officers and other members of management, acquired 100% of the voting equity interests in our wholly-owned subsidiary, Specialized Technology Resources, Inc., for
$365.6 million, including transaction costs. In connection with the acquisition:



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We
refer to the foregoing transactions collectively as the "DLJ Transactions."

For
purposes of our management discussion and analysis that follows, our consolidated results of operations for the period ended December 31, 2007 have been presented on a pro
forma basis, as if the DLJ Transactions had taken place on January 1, 2007. Pro forma adjustments include amortization expense of acquired intangible assets, increased cost of goods sold
expense due to the step up of our inventory to fair value, increased depreciation expense due to the step up to fair value of property, plant and equipment, increased interest expense associated with
increased borrowings and the associated tax effect of those adjustments. The consolidated financial statements for all Successor Company periods beginning after June 15, 2007 reflect the fair
value adjustments made to our assets and liabilities in recording the DLJ Transactions. As a result, the consolidated financial statements for all periods on or after June 15, 2007 are not
directly comparable to those of any prior period.

Prior
to November 5, 2009, we conducted our business through STR Holdings LLC and its subsidiaries. STR Holdings (New) LLC ("NewCo"), a Delaware limited liability
company, was formed on September 30, 2009 as an indirect subsidiary of STR Holdings LLC and held no material assets and did not engage in any operations.

Pursuant
to the corporate reorganization on November 5, 2009, STR Holdings LLC liquidated. A subsidiary of NewCo merged with and into STRI and, as a result, STRI became a
wholly-owned subsidiary of NewCo. The unitholders of STR Holdings LLC became unitholders of NewCo. On November 6, 2009, NewCo converted from a limited liability company into a Delaware
'C' corporation, named STR Holdings, Inc., and the outstanding units of NewCo converted into a single class of common stock of STR Holdings, Inc. pursuant to the terms of the LLC
agreement. For further information, see"Item 1 BusinessCorporate Reorganization and Initial Public Offering" included in this Annual Report.

On
November 12, 2009, we closed our IPO of 12,300,000 shares of common stock at an offering price of $10 per share, of which 3,300,000 shares were sold by us and 9,000,000 shares
were sold by selling stockholders, resulting in net proceeds to us of approximately $25.0 million in net proceeds after deducting underwriting discounts, commissions and other offering costs of
approximately $7.8 million. Effective with the conversion of NewCo into STR Holdings, Inc., our outstanding units were automatically converted into shares of common stock and restricted
common stock. In connection with our IPO, we repaid $15.0 million of borrowings under our first lien credit facility, and also paid

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$2.6 million
to terminate an advisory services and monitoring agreement we entered into in connection with the DLJ Transactions.

Under
the STR Holdings LLC Agreement, STR Holdings LLC's Class A, B, C, D, E and F units were subject to a priority distribution of shares of common stock in the
event of an IPO. In connection with the IPO, the priority distribution of shares was based on our equity value as represented by the IPO price. For the units issued in connection with the DLJ
Transactions, the shares of common stock were distributed as follows: (i) first, the Class A unitholders received an aggregate amount of common stock equal in value to their aggregate
capital contributions; and (ii) second, a pro rata distribution was made with respect to the Class A, B, C, D and F units until the Class A unitholders received an aggregate
amount of common stock equal in value to 2.5 times their aggregate capital contributions; and (iii) finally, a pro rata distribution was made of the remaining shares to each Class A, B,
C, D, E and F unitholder based upon the number of units held by each unitholder. Class C and D incentive units that were issued in 2008 did not convert nor did any of the Class E
incentive units that were issued as a result of not meeting the required aggregate value distribution thresholds.

The
following table presents the number of shares of common stock and unvested restricted common stock issued for the respective units upon conversion. The number of shares of common
stock and unvested restricted common stock issued was based upon the vesting provisions of the outstanding units and reflect the units vested and unvested at the date of conversion:

Class of Units

Shares of
Common Stock

Shares of Unvested
Restricted
Common Stock

Total Shares of
Common StockA units


35,352,504


397,491


35,749,995B units


195,053





195,053C units


542,685


553,588


1,096,273D units


176,211


217,884


394,095E units








F units


478,578


95,716


574,294Total


36,745,031


1,264,679


38,009,710


On
December 7, 2009, we closed the partial exercise of the over-allotment option granted by the selling stockholders given in connection with the IPO which resulted in
a total purchase of 1,695,000 shares at the IPO price of $10 per share. We did not receive any of the proceeds from the sale of the shares as a result of the exercise of the over-allotment
option.

Our Business Segments

We operate in two business segments: Solar and Quality Assurance.

The
following table sets forth our net sales for each segment and the percentage of total net sales by segment for the periods presented.

Year Ended
December 31, 2009

Year Ended
December 31, 2008

Year Ended
December 31, 2007$

%

$

%

$

%Net salesSolar

$
149,521


56
%
$
182,311


63
%
$
78,615


45
%Net salesQuality Assurance


115,424


44
%

106,267


37
%

95,429


55
%Total net sales

$
264,945


100
%
$
288,578


100
%
$
174,044


100
%


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Solar

Our Solar segment manufactures encapsulants for sale to solar module manufacturers. Our Solar customer base is comprised of over 130
solar module manufacturers. Our Solar segment grew rapidly through 2008 and became our largest segment in terms of net sales beginning in the first quarter of 2008. In 2009, our Solar segment was
impacted by decreased global demand for solar energy as a result of legislative changes, such as the cap in feed-in tariffs in Spain implemented in late 2008, the global recession and the
worldwide credit crisis. Operations for our Solar segment are conducted in five locations in the United States, Spain and Malaysia. For the years ended December 31, 2009, 2008 and 2007, our
Solar net sales were $149.5 million, $182.3 and $78.6 million, respectively.

We
expect the following factors to affect our Solar segment's results of operations in future periods:





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Quality Assurance

Our Quality Assurance segment offers services that help clients determine whether the products designed and manufactured by them or on
their behalf meet applicable safety, regulatory, quality, performance and social standards. These services, which include testing, inspection, auditing and consulting, are provided to retailers and
manufacturers worldwide. We have a broad client base, serving over 5,000 clients in 2009. For the years ended December 31, 2009, 2008 and 2007, our Quality Assurance net sales were
$115.4 million, $106.3 million and $95.4 million, respectively.

We
expect our Quality Assurance segment to be impacted by the desire of product designers, retailers and manufacturers to meet applicable safety, regulatory, quality, performance and
social standards and to ensure that product quality and standards are met as retailers, importers and manufacturers choose to outsource production to developing countries. To meet the demand for
quality assurance services, we have developed an extensive network of 17 laboratories, 72 inspection and audit offices and 21 sales offices in 36 countries across North America, South America, Europe,
Asia, Indian sub-continent and Africa. In addition, we have more than 40 internationally recognized accreditations and memberships.

We
expect the following factors to affect our Quality Assurance segment's results of operations in future periods:



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Components of Net Sales and Expenses

Net SalesSolar

Our Solar net sales are primarily derived from the sale of encapsulants to both crystalline and thin-film solar module
manufacturers. We expect that our results of operations, for the foreseeable future, will depend primarily on the sale of encapsulants to a relatively small number of our existing customers. Sales to
First Solar accounted for 27.1%, 19.1%, and 13.8% of our Solar net sales in the years ended December 31, 2009, 2008 and 2007, respectively. The top five customers in our Solar segment accounted
for approximately 55.0%, 47.0% and 46.0% of our Solar net sales in the years ended December 31, 2009, 2008 and 2007, respectively.

Sales
to our Solar customers have been typically made through non-exclusive, short-term purchase order arrangements that specify prices and delivery parameters
but do not obligate the customer to purchase any minimum amounts. As our customers look to secure materials or access to our production capacity to support their module production, we have recently
entered into, or are in negotiations to enter into, contracts that include periods of exclusivity and minimum purchase requirements. Although such contracts provide for the sale of encapsulants at
lower prices than our shorter-term arrangements, they will provide greater predictability of demand. As of December 31, 2009, we had entered into contracts with five of our largest
customers.

Our
Solar net sales are affected by our ability to meet customer demand, both in terms of encapsulant production and timing of delivery. We have five encapsulant manufacturing
facilities, located in the United States, Spain and Malaysia. Our expansion strategy, guided by our customers' forecasts of their demand for our products and independent research on solar energy, is
to meet our customers' anticipated growing demands and serve the markets in which they operate by adding production lines and facilities as our customers, and the market for our products generally
grow. We expect a larger proportion of our Solar net sales to be in the Asia-Pacific region in 2010 and beyond.

Demand
for our encapsulants depends, in large part, on government incentives aimed to promote greater use of solar energy. The German government recently has announced legislation that
we expect to reduce feed-in tariffs in the second half of 2010. We believe this announcement has resulted in the pull-in of demand from solar module manufacturers due to
increased end-user demand being driven by the incentive to purchase a solar system prior to the expected enactment of the decreased feed-in tariff incentives. As such, we may
see atypical Solar sales during 2010 compared to historical patterns.

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Pricing
of our encapsulants is impacted by the competition faced by our customers, and the quality and performance of our encapsulant formulations, including their impact on improving
our customers' manufacturing yields, their history in the field, our ability to meet our customers' delivery requirements, overall supply and demand levels in the industry and our customer service and
technical support. While our encapsulant pricing has not decreased as rapidly as other parts of the solar module supply chain, we expect our encapsulant pricing to be negatively impacted by increased
competition. We currently anticipate continued price reductions during 2010.

Net SalesQuality Assurance

We generate net sales in our Quality Assurance segment primarily by providing inspection, testing and audit services to our clients. We
enter into contracts on a fixed price, time and material, or a cost-plus fixed fee basis. We also provide services on a non-contract basis pursuant to a fixed price list.

We
have a broad client base, serving over 5,000 clients in 2009, with our top five clients accounting for approximately 22.1%, 18.0% and 18.2% of our Quality Assurance net sales in the
years ended December 31, 2009, 2008 and 2007, respectively. Our Quality Assurance business operates a network of 17 laboratories, 72 inspection and audit offices and 21 sales offices in 36
countries across North America, South America, Europe, Asia and Africa. In addition, because our Quality Assurance business serves a diverse and global client base, we strive to operate where such
clients operate and where the products they purchase are manufactured. We are required to work with a partner in certain countries either because of local laws and regulations or because such
arrangements are customary to doing business in such countries. Also, we may enter into strategic alliances with other quality assurance providers in order to meet client demands in countries where it
may not be practicable for us to operate on a stand-alone basis.

Net
sales in our Quality Assurance segment are typically lower in the first quarter of the year, in part due to the impact of holiday seasons on consumer products businesses. Pricing of
our Quality Assurance services is based on pricing in the quality assurance industry, which is generally highly competitive.

Cost of SalesSolar

In our Solar segment, we manufacture all of the products that we sell. Our cost of sales in our Solar segment consists of our costs
associated with raw materials and other components, direct labor, manufacturing overhead, salaries, other personnel-related expenses, write-off of excess or obsolete inventory, quality
control, freight, insurance, disposition of
defective product and depreciation and amortization of intangibles as a result of the DLJ Transactions. Resin constitutes the majority of our raw materials and components costs, and paper liner is the
second largest cost. The price and availability of resin and paper liner are subject to market conditions affecting supply and demand. The price of resin has been volatile and generally increases as
demand rises and as oil and gas prices rise. Paper prices have also been volatile. We have also experienced price increases in the equipment used in our production lines over the past three years.

Overall,
we expect our Solar cost of sales, as a percentage of Solar net sales, to increase over the next several years due to (i) reduced pricing in response to lower overall
solar module industry pricing driven by increased competition faced by our customers and reduced average selling price related to volume discounts and (ii) increased commodity costs, partially
offset by more efficient absorption of fixed costs driven by economies of scale, geographic diversification into lower-cost manufacturing regions, production efficiencies and continued
cost reduction efforts.

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Cost of SalesQuality Assurance

In our Quality Assurance segment, we conduct our testing primarily at our facilities and incur travel expense when performing
inspections and audits. Our cost of sales in our Quality Assurance segment consists primarily of our costs associated with direct labor, operational overhead, laboratory supplies, salaries and other
personnel-related expenses, travel expenses, insurance, depreciation and amortization of intangibles. Labor and benefits represented our largest cost of Quality Assurance sales in the years 2009, 2008
and 2007 at 29.2%, 30.8% and 41.1% of Quality Assurance net sales, respectively. Although we expect our Quality Assurance cost of sales to increase as we expand our operations, we believe our Quality
Assurance cost of sales as a percentage of Quality Assurance net sales will be positively affected by the expansion of operations in sites with lower operating costs, such as China and the Indian
sub-continent.

Gross Profit

Gross profit is affected by numerous factors, including our average selling prices, fluctuations in foreign exchange rates,
seasonality, our manufacturing costs and the effective utilization of our facilities. Another factor impacting gross profit is the time required for new
production facilities and the expansion of existing facilities to reach full production capacity. As a result, gross profit varies from quarter to quarter and year to year.

Selling, General and Administrative Expenses

Our selling and marketing expenses consist primarily of salaries, travel, commissions and other personnel-related expenses for
employees engaged in sales, marketing and support of our products and services, trade shows and promotions. General and administrative expenses consist of outside professional fees and expenses for
our executive, finance, administrative, information technology and human resource functions.

Our
selling, general and administrative expenses have increased in absolute terms over the past three years primarily as a result of increased headcount resulting from the strengthening
of our management and corporate infrastructure, particularly in our finance and information technology departments, and increasing marketing and legal costs.

We
expect our selling and marketing expenses to increase in absolute terms as we expand our direct sales force and increase our sales and marketing activities. However, we do not expect
them to increase significantly as a percentage of total net sales. We expect our general and administrative expenses will increase in absolute terms and as a percentage of net sales in the shorter
term as a result of the additional costs associated with operating as a public company.

Provision for Bad Debt Expense

We reserve for estimated losses that may result from the inability of our customers to make required payments. We review the
collectability of our receivables on an ongoing basis and reserve for uncollectible accounts after reasonable collection efforts have been made and collection is deemed questionable.

Earnings on Equity-Method Investments

We own 50% of the shares of CTC-Asia, Ltd., a joint venture with Le Centre Technique Cuir Chaussure Maroquinerie
("CTC"), which operates a laboratory in Hong Kong primarily involved in the testing of leather products. At December 31, 2009 and December 31, 2008, our investment in
CTC-Asia, Ltd. was $0.9 million and $0.6 million, respectively, and classified as Other noncurrent assets in the consolidated balance sheets.

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Transaction Costs

During the period from January 1 to June 14, 2007, we incurred and expensed our transaction costs in connection with the
DLJ Transactions, including merger and acquisition advisory fees, bonus payments and professional fees.

Interest Income

Interest income is comprised of interest income earned on our cash and cash equivalents and short-term investments.

Interest Expense

Interest expense consists primarily of interest on borrowings under our credit facilities entered into in connection with the DLJ
Transactions.

On
October 5, 2009, we entered into an amendment to the first lien credit agreement and an amendment to the second lien credit agreement. The amendments for both credit agreements
permitted us to enter into certain corporate reorganization transactions, including replacing STR Holdings LLC with STR Holdings (New) LLC as a guarantor under each credit agreement. The
amendments and the repayment of $15.0 million of borrowings under our first lien credit facility with the proceeds from the IPO resulted in deferred financing costs of $1.1 million,
which are being amortized to interest expense over the remaining term of the credit agreements.

Other Income (Expense) Items

Other income (expense) includes foreign currency transaction gains and losses and unrealized gains and losses on our interest rate
swap. We were required under the terms of both our first lien and second lien credit facilities to fix our interest costs on at least 50% of the principal amount of our funded indebtedness within
three months of entering into the credit facility for a minimum of three years. To manage our interest rate exposure and fulfill the requirements under our credit facilities, effective
September 13, 2007, we entered into a $200.0 million notional principal amount interest rate swap agreement with Credit Suisse International that effectively converted a portion of our
debt under our credit facilities from a floating interest rate to a fixed interest rate. The notional principal amount decreased to $130.0 million on October 1, 2008 and will remain at
that amount until the agreement terminates on September 30, 2010. Under the interest rate swap agreement, we pay interest at 4.622% and receive the floating three-month LIBOR rate from Credit
Suisse International on the notional principal amount. As of December 31, 2009, our interest rate swap had a fair value of a liability of $4.0 million. Unrealized gains and losses on
this interest rate swap represent the change in the fair value of the interest rate swap based on the floating interest rate and an assessment of counterparty credit risk.

Income Taxes

Income tax expense is comprised of federal, state, local and foreign taxes based on income in multiple jurisdictions and changes in
uncertain tax positions.

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Critical Accounting Policies

Our discussion and analysis of our consolidated financial position and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates including those related to bad debts, valuation of inventory, long-lived intangible and tangible assets, goodwill, product performance matters, income taxes and stock-based
compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.

The
accounting policies we believe to be most critical to understanding our financial results and condition and that require complex and subjective management judgments are discussed
below.

Revenue Recognition and Accounts Receivable

We recognize revenue when evidence of an arrangement exists, delivery of the product or service has occurred and title and risk of loss
have passed to the customer, the sales price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.

Our
Solar business recognizes revenue from the manufacture and sale of its products either at the time of shipping or at the time the product is received at the customer's port or dock,
depending upon terms of the contract.

Our
Quality Assurance business performs testing, quality assurance and compliance consulting on a fixed-price, time and material, or a cost plus fixed-fee basis. The majority
of our Quality Assurance contracts provide one service deliverable to the client, and revenue is recognized upon completion of such service when a report is provided to the client.

A
limited number of Quality Assurance contracts include the performance of multiple service offerings in an integrated package and are more long term in nature. The amount of revenue
recognized for these contracts amounted to approximately $3.7 million, $5.0 million and $4.5 million in the year ended December 31, 2009, the year ended December 31,
2008 and the year ended December 31, 2007, respectively. These contracts are accounted for under Accounting Standards Codification ("ASC") 605 Revenue Recognition. ASC 605 requires contract
consideration in which multiple service offerings are provided under a single contract to be allocated to each specific service offering based on each portion of the contract's respective fair value
in proportion to the contract's total fair value. We have determined that each deliverable under these contracts is a separate unit of accounting that possesses fair value that is represented by price
lists and historical billing practices. We recognize revenue on each contract deliverable when the services have been completed and communicated to our client. Contractual termination provisions exist
by which either party may cancel the contract with written notice. Upon notice, we are contractually entitled to receive compensation for all services performed up to and through the termination
period.

Billing
for these contracts occurs on a pre-determined schedule or at the end of the contractual term. Unbilled receivables represent revenue that has been recognized but not
billed, while billings in excess of earned revenues represent billings to clients in excess of revenues recognized on contracts.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. We review the collectability of our receivables on an

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ongoing
basis and write off accounts receivable after reasonable collection efforts have been made and collection is deemed questionable or the debt uncollectible.

Inventory Valuation

Our finished goods inventories are made-to-order and possess a shelf life of six to nine months from the date
of manufacture. Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis and includes both the costs of acquisition and the
costs of manufacturing. These costs include direct material, direct labor and fixed and variable indirect manufacturing costs, including depreciation and amortization.

We
write inventory down to net realizable value when it is probable that our finished goods inventories carrying cost is not fully recoverable through sale or other disposition. Our
write down considers overall market conditions, customer inventory levels, legal or contractual provisions and age of the finished goods inventories.

Prior
to 2009, obsolescence was not a significant factor in the valuation of inventory. Due to the recessionary economic environment during the early part of 2009, some customers
canceled or delayed the delivery of orders after the product was manufactured but not yet shipped. As such, $1.0 million of inventory write downs were recorded during the first half of the year
ended December 31, 2009.

Intangible Assets

We account for business acquisitions using the purchase method of accounting and record definite-lived intangible assets separately
from goodwill. Intangible assets are recorded at their estimated fair value based at the date of acquisition.

Our
intangible assets include our customer relationships, trademarks, proprietary technology and accreditations as a result of the DLJ Transactions.

Our
customer relationships consist of the value associated with existing contractual arrangements as well as expected value to be derived from future contract renewals of our Solar and
Quality Assurance customers. We determined their value using the income approach. Their useful life was determined by consideration of a number of factors, including our longstanding customer base and
historical attrition rates.

Our
trademarks represent the value of our STR® and Photocap® trademarks. We determined their value using the "relief-from-royalty" method.
The useful life of trademarks was determined by consideration of a number of factors, including elapsed time and anticipated future cash flows.

Our
proprietary technology represents the value of our Solar manufacturing processes. We determined its value using the "relief-from-royalty" method. The useful
life of proprietary technology was determined by consideration of a number of factors, including elapsed time, prior innovations and potential future technological changes.

Our
accreditations represent the value of our Quality Assurance business's technical skills and ability to provide worldwide product testing, inspection and audits under applicable
standards. We determined their value using the cost approach. The useful life for accreditations was determined by consideration of a number of factors, including the duration such accreditations were
expected to be in effect and anticipated future cash flows.

Determining
the fair value and useful lives of our intangible assets requires management's judgment and involves the use of significant estimates and assumptions, including assumptions
with respect to future cash flows, discount rates, asset lives and market royalty rates, among other items. While we believe our estimates are reasonable, different assumptions regarding items such as
future

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cash
flows and volatility in the markets we serve could affect our evaluations and result in a future impairment charge to the carrying amount of our intangible assets.

In
accordance with ASC 350IntangiblesGoodwill and Other, we assess the impairment of our definite-lived intangible assets whenever changes in events or
circumstances indicate that the carrying value of such assets may not be recoverable. During each reporting period, we assess if the following factors are present, which would cause an impairment
review: a significant or prolonged decrease in sales that are generated under our trademarks and accreditations; loss of a significant customer or reduction in our customers' demand for our products
driven by competition they encounter, a significant adverse change in the extent to or manner in which we use our accreditations, trademarks or proprietary technology; such assets becoming obsolete
due to new technology or manufacturing processes entering the markets or an adverse change in legal factors, such as the change in feed-in tariff policy implemented by the Spanish
government in 2008 or any potential plans to divest or dispose of such intangible assets. We have assessed these factors during 2009 and concluded that no impairment indicators exist that would
require an impairment valuation assessment. However, if we experience significant future reductions in our Solar net sales or a significant reduction of existing government incentives in the solar
industry that are not offset by potential increases in solar programs in other countries, such as the United States and China, certain of our intangible assets may be subject to future potential
impairment.

Long-Lived Assets

In accordance with ASC 360Property, Plant, and Equipment, we evaluate the carrying value of our long-lived
assets, including property, plant and equipment, for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If a long-lived
asset is found to be impaired, the amount recognized for impairment is based on the difference between the carrying value and the asset's fair value. Fair value is estimated based upon discounted
future cash flows or other reasonable estimates of fair market value.

Goodwill

Goodwill represents the excess of the purchase price consideration over the estimated fair value for the individual assets acquired and
liabilities assumed. As a result of the DLJ Transactions, we allocated the goodwill to each of our reportable segments, Solar and Quality Assurance, which are our reporting units, based on the
acquired net assets and on management's expectations regarding the extent to which each segment would benefit from the synergies of the acquired business. Our two reportable segments were determined
to be our reporting units because they are two distinct operating segments, each of which is managed by its own president. Additionally, our board of directors and chief executive officer review
financial information and allocate resources at the level of our reporting segments. We do not amortize goodwill, but instead test goodwill for impairment in accordance with the two-step
method described in ASC 350. We perform our annual impairment review of goodwill in the fourth quarter, and also perform a review if at any time facts and circumstances warrant. In assessing if there
is impairment to goodwill, we first determine the fair value of our two reporting units. We substantially passed the first step of the two-step impairment testing method in the fourth
quarter of 2009. At that time, step one of the impairment analysis described in ASC 350 resulted in approximately $107.6 million of excess fair value over the carrying value. The excess of fair
value over carrying value was approximately $53.0 million, or 17%, and $54.6 million, or 34%, for our Solar and Quality Assurance segments, respectively. If the fair value of either of
our two segments were to be less than its carrying value, we would allocate the current fair value of the segment to the assets and liabilities of the segment to estimate the segment's goodwill. If
such implied goodwill was less than the carrying value of such goodwill, we would record an impairment charge for the amount of such difference.

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The
estimate of fair value of each reporting unit was derived from the income approach that estimates the fair value of each of the reporting units using a discounted cash flow method.
This method was considered the most appropriate technique to estimate the fair value of the reporting units in the absence of market-based comparable acquisition transaction activity caused by the
global recession. The estimates of future cash flows used were consistent with the objective of measuring fair value and incorporate assumptions that marketplace participants would use in their
estimates of fair value, such as growth rates, discount rates and capital structure. In order to derive the fair value of each of the reporting units using the discounted cash flow method, the
discount rate for each reporting unit was calculated. A discount rate is generally used in asset valuation as the rate at which a series of future cash flows or earnings is reduced to present value.
In the goodwill impairment calculation, we based our assumption of a discount rate on the use of a weighted average cost of capital method. In calculating the weighted average cost of capital for each
reporting unit, we believe income risk is best determined by comparing it to the risk levels of guideline companies that operate in either of our business segments. Using these guideline companies, we
calculated a weighted average cost of capital based on inputs that marketplace participants would use to discount their projected cash flow for each reporting unit.

Product Performance Accrual

We typically do not provide contractual warranties on our products. However, on limited occasions, we incur costs to service our
products in connection with specific product performance matters. Anticipated future costs for product performance matters are recorded as part of cost of sales and accrued liabilities for specific
product performance matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. During the second half of 2008, we recorded an accrual
of $5.6 million relating to specific product performance matters, which amount represents management's best estimate of the costs to repair or replace such product. The majority of this accrual
relates to a quality claim by one of our customers in connection with a non-encapsulant product that we purchased from a vendor in 2005 and 2006 and resold. We stopped selling this product
in 2006 and are currently attempting to resolve this matter.

Income Taxes

We operate in multiple taxing jurisdictions and are subject to the jurisdiction of a number of U.S. and non-U.S. tax
authorities and to tax agreements and treaties among those authorities. Operations in these jurisdictions are taxed on various bases, including income before taxes as calculated in accordance with
jurisdictional regulations.

We
account for income taxes using the asset and liability method in accordance with ASC 740Income Taxes. Under this method, we recognize deferred tax assets and liabilities
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss
and tax credit carryforwards. We estimate our deferred tax assets and liabilities using the enacted tax laws expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled, and will recognize the effect of a change in tax laws on deferred tax assets and liabilities in the results of our operations during the period that includes the
enactment date. We record a valuation allowance to reduce our deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized.

ASC
740 also clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and how companies should recognize, measure, present and disclose
uncertain tax positions that have been or are expected to be taken. Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a
more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively

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settled,
which means that the appropriate taxing authority has completed its examination even though the statute of limitations remains open, or the statute of limitation expires. Interest and
penalties related to uncertain tax positions are recognized as part of our provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under
relevant tax law until such time that the related tax benefits are recognized.

Stock-Based Compensation

ASC 718CompensationStock Compensation, addresses accounting for share-based awards, including stock options,
with compensation expense measured using fair value and recorded over the requisite service or performance period of the award.

The
fair value of stock options issued in November 2009 upon the closing of our IPO was determined using the Black-Scholes option pricing model. Our assumptions about stock-price
volatility have been based exclusively on the implied volatilities of other publicly traded options to buy stock with contractual terms closest to the expected term of options granted to our
employees. The expected term represents the estimated time until employee exercise considering vesting schedules and using the Hull-White model. The risk-free interest rate for
periods within the contractual life of the award is based on the U.S. Treasury 10 year zero-coupon strip yield in effect at the time of grant. The expected dividend yield was based
on the assumption that no dividends are expected to be paid in the foreseeable future.

Year Ended
December 31, 2009Volatility


61.61
%Risk-free interest rates


1.96
%Expected term


2.7 to 4.9 YearsDividend yield


0.00
%Weighted average grant-date fair value:


$4.59


In
2007 and 2008, we had previously issued restricted incentive units for purposes of equity compensation to members of management, employees and directors. Some of these units were
subsequently converted into shares of either common or restricted common stock based on the amounts vested at the time of our IPO.

The
fair value of each incentive unit granted during the year ended December 31, 2008 and the period from June 15 to December 31, 2007 was determined on the
respective date of the grant using a Black-Scholes option-pricing model that used the assumptions noted in the following table, along with the associated weighted average fair values. The expected
volatilities are based on a peer group of companies. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected
life of the incentive units. The expected term represented the estimated time until a liquidity event. The expected dividend yield was based on the assumption that no dividends were expected to be
distributed in the near future.

Year Ended
December 31, 2008

Period from June 15
to
December 31, 2007Volatility


60.00
%

52.72
%Risk-free interest rates


1.71
%

4.98
%Expected term


2.2 Years


3.47 YearsDividend yield


0.00
%

0.00
%Weighted average grant-date fair value:Service-based


$7.26


$2.85Performance-based


$8.16


$3.22


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Consolidated Results of Operations

For purposes of the following discussion and analysis of our operating results, our consolidated net sales, costs and expenses for the
year ended December 31, 2007 have been presented on a pro forma basis, as if the DLJ Transactions had taken place on January 1, 2007. Pro forma adjustments include amortization expense
of acquired intangible assets, increased cost of goods sold expense due to the step up of our inventory to fair value, increased depreciation expense due to the step up to fair value of property,
plant and equipment, increased interest expense associated with increased borrowings and the associated tax effect of those adjustments.

We
believe the presentation of our pro forma results of operations for the year ended December 31, 2007 provides important information on the full year effect of the DLJ
Transactions for use in comparing our results of operations during these periods to our results in prior and future periods. The pro forma consolidated results of operations do not purport to
represent our actual results of operations for the successor and predecessor periods in 2007 or what our actual consolidated results of operations would have been had the DLJ Transactions actually
occurred on January 1, 2007, nor are they necessarily indicative of our future consolidated results of operations.

The
following table sets forth our consolidated results of operations for the predecessor period from January 1 to June 14, 2007, the successor period from June 15
to December 31, 2007 and the pro forma year ended December 31, 2007.

Successor

Predecessor

Pro FormaPeriod from June 15 to
December 31,
2007

Period from January 1 to
June 14,
2007

Year Ended
December 31,
2007(Unaudited)(dollars in thousands)Statement of Operations Data:Net salesSolar

$
52,967

$
25,648

$
78,615Net salesQuality Assurance


56,317


39,112


95,429Total net sales


109,284


64,760


174,044Cost of salesSolar


30,068


11,875


46,194Cost of salesQuality Assurance


35,620


25,225


62,797Total cost of sales


65,688


37,100


108,991Gross profit


43,596


27,660


65,053Selling, general and administrative expenses


18,484


12,063


30,157Provision for bad debt expense


562


384


946Earnings on equity-method investments


(84
)

(46
)

(130
)Transaction costs





7,737


7,737Operating income


24,634


7,522


26,343Interest income


203


143


346Interest expense


(13,090
)

(2,918
)

(24,422
)Foreign currency transaction losses


(76
)

(32
)

(108
)Unrealized loss on interest rate swap


(2,988
)




(2,988
)Income (loss) before income tax expense


8,683


4,715


(829
)Income tax expense


4,572


3,983


3,291Net income (loss)

$
4,111

$
732

$
(4,120
)


64

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Table of Contents

The
following tables set forth our consolidated results of operations in dollars and as a percentage of total net sales, or in the case of segment cost of sales, the percentage of solar
net sales and quality assurance net sales, as applicable, for the fiscal years ended December 31, 2009 and December 31, 2008, and the pro forma fiscal year ended December 31,
2007.

Pro FormaYear Ended
December 31,
2009

Year Ended
December 31,
2008

Year Ended
December 31,
2007(Unaudited)(dollars in thousands)Statement of Operations Data:Net salesSolar

$
149,521

$
182,311

$
78,615Net salesQuality Assurance


115,424


106,267


95,429Total net sales


264,945


288,578


174,044Cost of salesSolar


91,213


103,717


46,194Cost of salesQuality Assurance


75,759


70,930


62,797Total cost of sales


166,972


174,647


108,991Gross profit


97,973


113,931


65,053Selling, general and administrative expenses


48,785


41,592


30,157Provision for bad debt expense


1,403


1,950


946Earnings on equity-method investments


(317
)

(178
)

(130
)Transaction costs








7,737Operating income


48,102


70,567


26,343Interest income


136


249


346Interest expense


(17,068
)

(20,809
)

(24,422
)Foreign currency transaction loss


(134
)

(1,007
)

(108
)Unrealized gain (loss) on interest rate swap


1,995


(3,025
)

(2,988
)Income (loss) before income tax expense


33,031


45,975


(829
)Income tax expense


10,042


17,870


3,291Net income (loss)

$
22,989

$
28,105

$
(4,120
)


65

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Table of Contents



Pro FormaYear Ended
December 31,
2009

Year Ended
December 31,
2008

Year Ended
December 31,
2007(Unaudited)(dollars in thousands)Statement of Operations Data:Net salesSolar


56.4
%

63.2
%

45.2
%Net salesQuality Assurance


43.6
%

36.8
%

54.8
%Total net sales


100.0
%

100.0
%

100.0
%Cost of salesSolar


61.0
%

56.9
%

58.8
%Cost of salesQuality Assurance


65.6
%

66.8
%

65.8
%Total cost of sales


63.0
%

60.5
%

62.6
%Gross profit


37.0
%

39.5
%

37.4
%Selling, general and administrative expenses


18.4
%

14.4
%

17.3
%Provision for bad debt expense


0.5
%

0.7
%

0.5
%Earnings on equity-method investments


0.1
%

0.1
%

0.1
%Transaction costs


0.0
%

0.0
%

4.4
%Operating income


18.2
%

24.5
%

15.1
%Interest income


0.1
%

0.1
%

0.2
%Interest expense


(6.4)
%

(7.2)
%

(14.0)
%Foreign currency transaction loss


(0.1)
%

(0.3)
%

(0.1)
%Unrealized gain (loss) on interest rate swap


0.8
%

(1.0)
%

(1.7)
%Income (loss) before income tax expense


12.5
%

15.9
%

(0.5)
%Income tax expense


3.8
%

6.2
%

1.9
%Net income (loss)


8.7
%

9.7
%

(2.4)
%


Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Net Sales

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Net salesSolar

$
149,521


56.4
%
$
182,311


63.2
%
$
(32,790
)

(18.0)
%Net salesQuality Assurance

$
115,424


43.6
%
$
106,267


36.8
%
$
9,157


8.6
%Total net sales

$
264,945


100
%
$
288,578


100
%
$
(23,633
)

(8.2)
%


Net
sales decreased $23.6 million, or 8.2%, to $264.9 million for the year ended December 31, 2009 from $288.6 million in 2008 as a result of a decrease in
our Solar sales, partially offset by increased sales in our Quality Assurance business.

66

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Table of Contents

Net SalesSolar

Net sales in our Solar segment decreased $32.8 million, or 18.0%, to $149.5 million for the year ended
December 31, 2009 from $182.3 million in 2008. Volume decreased 10% as our European operations were negatively impacted by the change in Spanish feed-in tariff policy in late
2008. Also, the negative global economic and lending environment limited the amount of financing available to fund major projects, which further reduced the number of end market installations and
solar module demand during much of 2009. Pricing decreased 7% due to overall industry competition and in conjunction with the signing of contracts with five of our customers. The weakening of the Euro
against the U.S. dollar negatively impacted our 2009 net sales in Solar by 1%.

Although
2009 net sales in our Solar segment have decreased compared to 2008 net sales on a year over year basis, fourth quarter 2009 net sales increased by $15.0 million or 42%
on a sequential basis from third quarter 2009 net sales of $35.3 million. The majority of such increase was volume driven by improved user demand for solar modules primarily due to increased
sales in Germany and Italy. The increased demand in these countries was due to proposed changes in feed-in tariffs anticipated for the second half of 2010. End users have increased their
purchase of solar panels prior to the anticipated reductions of feed-in tariffs that reduce the return on their investment. This has led to an increase in solar module sales and increased
demand for our
encapsulants. As such, we may see increased Solar sales during the first half of 2010 that may not occur during the second half of 2010.

Our
European net sales decreased in 2009 by $32.1 million, or 36%, from the corresponding 2008 period and amounted to $57.1 million in 2009. Sales in Europe were negatively
impacted by foreign currency translation fluctuations, as the Euro weakened versus the U.S. dollar by approximately 5% in 2009 compared to its value in 2008. Our European Solar business was also
negatively impacted by industry-wide decreased demand in Germany and Spain in the first six months of 2009. During the latter part of 2008, the Spanish government changed its
feed-in tariff policy, capping its subsidized PV installations at 500 MW for 2009. Also, our European customers have lost market share to low-cost module manufacturers,
primarily from China, that continue to penetrate the European solar market. These events caused our European net sales in 2009 to be negatively impacted by a 30% reduction in volume, reduced pricing
of 4% and a 2% unfavorable foreign currency impact.

Our
U.S. Solar business generated net sales of $85.8 million, representing a decrease of $7.4 million, or 8%, during 2009 compared to 2008. Of this decrease, $6.6 million
of these sales were generated by our Malaysian plant which became operational in the third quarter of 2009. Overall, U.S. Solar sales volumes increased 1% after the impact of transferring customer
orders to our Malaysian plant and were offset by a negative price impact of 9%. We entered into contracts with five of our largest customers and sales were negatively impacted by lower unit pricing in
these contracts.

Net SalesQuality Assurance

Net sales in our Quality Assurance segment increased $9.2 million, or 8.6%, to $115.4 million for the year ended
December 31, 2009 from $106.3 million in 2008, primarily as a result of increased volume in the United States and Asia, partially offset by a decline in Europe. U.S. Quality Assurance
sales growth was driven by our social responsibility auditing business as well as increased testing of private label products, as retailers are ensuring their products possess the same or higher level
of quality as premium brands. In addition, toy-related testing increased as new U.S. safety regulations became effective in February 2009. Net sales in Asia also increased due to a higher
level of testing performed for toy manufacturers that distribute their products in the United States to comply with the new U.S. safety regulations.

67

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Table of Contents

Cost of Sales

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Cost of salesSolar

$
91,213


34.4
%
$
103,717


35.9
%
$
(12,504
)

(12.1
)%Cost of salesQuality Assurance

$
75,759


28.6
%
$
70,930


24.6
%
$
4,829


6.8
%Total cost of sales

$
166,972


63.0
%
$
174,647


60.5
%
$
(7,675
)

(4.4
)%


Cost
of sales decreased $7.6 million, or 4.4%, to $167.0 million for the year ended December 31, 2009 from $174.6 million in 2008 mainly as a result of the
decrease in our Solar net sales as noted above, partially offset by increased net sales in our Quality Assurance business. Our Solar segment accounted for 54.6% of our total cost of sales for the year
ended December 31, 2009 compared to 59.4% for our total cost of sales for the year ended December 31, 2008.

Cost of SalesSolar

Cost of sales in our Solar segment decreased $12.5 million, or 12.1%, to $91.2 million for the year ended
December 31, 2009 from $103.7 million in 2008. The decrease in our Solar segment's cost of sales was mainly due to reduced European sales volume, lower raw material costs and improved
product performance matter expense of $5.0 million. These drivers were partially offset by $1.2 million of increased depreciation expense, $0.9 million of incremental operating
costs associated with our recently opened Malaysian facility which did not occur in 2008, $1.0 million of inventory write-offs that occurred in the second quarter of 2009 and
$2.3 million of increased labor and benefit costs to support our manufacturing infrastructure.

Non-cash
intangible asset amortization expense of $8.4 million was included in cost of sales for the years ended December 31, 2009 and 2008, respectively.

Cost of SalesQuality Assurance

Cost of sales in our Quality Assurance segment increased $4.8 million, or 6.8%, to $75.8 million for the year ended
December 31, 2009 from $70.9 million in 2008. The increase in our Quality Assurance's cost of sales was due to $0.9 million for increased depreciation expense, $0.4 million
for increased rent expense, $0.3 million for laboratory supplies and $2.9 million for increased direct costs and labor expense mainly due to increased sales volume growth.

Non-cash
intangible asset amortization expense of $3.1 million was included in cost of sales for the years ended December 31, 2009 and 2008, respectively.

Gross Profit

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Gross profit

$
97,973


37.0
%
$
113,931


39.5
%
$
(15,958
)

(14.0
)%


Gross
profit decreased $15.9 million, or 14.0%, to $98.0 million for the year ended December 31, 2009 from $113.9 million for the year ended
December 31, 2008 primarily due to the sales decline in

68

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Table of Contents

our
Solar segment. As a percentage of sales, gross profit decreased 250 basis points from 39.5% for the year ended December 31, 2008 to 37.0% for the year ended December 31, 2009.

For
the year ended December 31, 2009, gross profit decreased as a percentage of sales primarily due to lower pricing and a reduction in operating leverage of fixed costs
associated with our Solar sales volume decline. Also, we generated a lower mix of net sales in our higher margin Solar business, which accounted for 56.4% and 63.2% of our consolidated net sales for
the years ended December 31, 2009 and 2008, respectively. We also incurred $1.0 million of inventory write-offs in our Solar segment during the second quarter of 2009. These
negative impacts to the 2009 gross margin percentage more than offset $5.0 million of lower product performance matter expense and a 110 basis point gross margin expansion for the year ended
December 31, 2009 in our Quality Assurance business resulting from improved labor cost efficiency based on better operating leverage associated with the sales growth and efforts to streamline
our Quality Assurance testing processes and improve turn-around time.

Non-cash
intangible asset amortization expense of $11.5 million reduced gross profit for the years ended December 31, 2009 and 2008, respectively.

Selling, General and Administrative Expenses ("SG&A")

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%SG&A

$
48,785


18.4
%
$
41,592


14.4
%
$
7,193


17.3
%


SG&A
increased 17.3% for the year ended December 31, 2009 compared to the corresponding period in the prior year. Non-cash stock-based compensation expense increased
by approximately $5.1 million, mainly due to the issuance of stock options in connection with our IPO. At the IPO date, we issued stock options for incentive units that only partially converted
or did not convert to common shares. The options have accelerated vesting clauses as of January 31, 2010. The first quarter of 2010 will also be negatively impacted by $3.3 million
associated with this issuance, with total stock based compensation for the first quarter of 2010 amounting to $3.8 million. We project that, based on current stock options issued and
outstanding, our stock-based compensation expense will be approximately $1.3 million per quarter beginning in the second quarter of 2010 for the remainder of 2010.

Due
to the IPO, $2.6 million was paid in conjunction with the termination of pre-IPO monitoring agreements. Salaries and benefits increased $2.9 million in 2009
due to increased headcount in our sales, information technology and finance functions necessary to support our anticipated growth and becoming a public company. The increase was partially offset by
lower professional fees of $4.0 million compared to the same period in 2008 due to the non-recurrence of legal fees associated with protecting our proprietary technology and
re-audits of our financial statements incurred in preparation for the filing of our initial Form S-1 with the SEC made during 2008.

Provision for Bad Debt Expense ("Bad debt")

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Bad debt

$
1,403


0.5
%
$
1,950


0.7
%
$
(547
)

(28.1
)%


69

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Table of Contents

Bad
debt decreased $0.5 million, or 28.1%, to $1.4 million for the year ended December 31, 2009 from $2.0 million for 2008. This reduction is primarily the
result of the avoidance of a $1.0 million increase in 2008 that did not occur again in 2009.

Interest Expense

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Interest expense

$
(17,068
)

(6.4
)%
$
(20,809
)

(7.2
)%
$
(3,741
)

(18.0
)%


Interest
expense decreased $3.7 million, or 18.0%, to $17.1 million for the year ended December 31, 2009 from $20.8 million for the year ended
December 31, 2008. This reduction was primarily the result of decreases in applicable interest rates on our variable rate debt.

Other Income (Expense) Items

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Other income (expense)

$
1,997


0.8
%
$
(3,783
)

(1.3
)%
$
5,780


152.8
%


During
the year ended December 31, 2009, we incurred a $2.0 million unrealized gain on our interest rate swap entered into during 2007 as a requirement under our credit
facilities compared to a $3.0 million loss in the corresponding 2008 period. Foreign currency transaction losses decreased $0.9 million during the year ended December 31, 2009 to a loss
of $0.1 million from a loss of $1.0 million during the year ended December 31, 2008.

Income Taxes

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Income taxes

$
10,042


3.8
%
$
17,870


6.2
%
$
(7,828
)

(43.8
)%


Income
tax expense decreased $7.8 million to $10.0 million for the year ended December 31, 2009 from $17.9 million in 2008. Our effective tax rate for the
year ended December 31, 2009 was 30.4% compared to the federal statutory rate of 35% and our effective tax rate for the year ended December 31, 2008 of 38.9%. The lower 2009 effective
tax rate benefited from income tax refunds received on prior year amended returns of approximately $1.0 million and reductions to deferred tax liabilities. We estimate that our normalized
effective rate for 2010 will approximate 36%. However, not included in our estimated effective rate is an $0.8 million Advanced Energy Project tax credit that we received in January of 2010
under the American Recovery and Reinvestment Act of 2009. This item will be accounted for as a discrete item during the first quarter of 2010 and will provide a one time benefit to our projected
effective tax rate. On a longer term basis, we should see improvement in our effective tax rate of 36% as we begin to benefit from our 10 year tax holiday in Malaysia that commences in the
second quarter of 2010.

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Table of Contents

Net Income

Years Ended December 31,2009

2008

ChangeAmount

% of
Total
Revenue

Amount

% of
Total
Revenue

Amount

%Net income

$
22,989


8.7
%
$
28,105


9.7
%
$
(5,116
)

(18.2
)%


Net
income decreased $5.1 million to $23.0 million for the year ended December 31, 2009 from net income of $28.1 million in 2008 primarily due to the
reduction in net sales, increased inventory write-offs and depreciation expense and overall increase in SG&A expense. These items were partially offset by decreased interest expense on our
variable rate debt, gain on our interest rate swap, lower product performance matter expense and our lower 2009 effective tax rate.

Segment Results of Operations

We report our business in two segments: Solar and Quality Assurance. The accounting policies of the segments are the same as those
described in the footnotes to the accompanying Consolidated Financial Statements included in Item 8 of this Annual Report. We measure segment performance based on total revenues and Adjusted
EBITDA. See Note 17-Reportable Segments and Geographical Information located in the Notes to the Consolidated Financial Statements for a definition of Adjusted EBITDA and further
information. Revenues for each of our segments are described in further detail above. Corporate overhead, that is not allocated to our segments, and therefore is not incorporated in the presentation
below, includes expenses associated with corporate headquarters, the executive management team and certain centralized functions that benefit us but are not attributable to the segments such as
finance and certain legal costs. The discussion that follows is a summary analysis of total revenues and the primary changes in Adjusted EBITDA by segment.

Solar

Years Ended December 31,2009

2008

ChangeAmount

Amount

Amount

%Net Sales

$
149,521

$
182,311

$
(32,790
)

(18.0
)%Adjusted EBITDA

$
67,253

$
83,042

$
(15,789
)

(19.0
)%Adjusted EBITDA as % of Segment Net Sales


45.0
%

45.6
%


Adjusted
EBITDA as percentage of net sales for this business segment decreased for the year ended December 31, 2009 compared to 2008 due to lower gross margins driven by the
reduction in net sales, lower absorption of fixed costs and $1.0 million of inventory write-offs that more than offset $5.0 of lower product performance matter expense. Partially
offsetting the negative impact of lower gross margins was a reduction to SG&A expenses of $0.6 million based on $3.1 million of lower professional fees related to legal costs, partially
offset by increased staffing and infrastructure expense.

71

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Table of Contents

Quality Assurance

Years Ended December 31,2009

2008

ChangeAmount

Amount

Amount

%Net Sales

$
115,424

$
106,267

$
9,157


8.6
%Adjusted EBITDA

$
22,857

$
17,586

$
5,271


30.0
%Adjusted EBITDA as % of Segment Net Sales


19.8
%

16.6
%


Adjusted
EBITDA as a percentage of net sales for this business segment increased for the year ended December 31, 2009 compared to 2008 due to higher gross margins driven by the
increase in sales volume. SG&A expenses increased by $3.0 million primarily driven by $0.5 million of professional fees and $2.2 million of labor and benefits expense primarily
due to increased sales and information technology staff.

Year Ended December 31, 2008 Compared to Pro Forma Year Ended December 31, 2007

Net Sales

Net sales increased $114.5 million, or 65.8%, to $288.6 million for the year ended December 31, 2008 from
$174.0 million for the pro forma year ended December 31, 2007. This increase was primarily the result of higher sales volumes to our existing Solar customers. Our Solar segment accounted
for 63.2% of our total net sales for the year ended December 31, 2008 compared to 45.2% for the pro forma year ended December 31, 2007.

Net
sales in our Solar segment increased $103.7 million, or 131.9%, to $182.3 million for the year ended December 31, 2008 from $78.6 million for the pro
forma year ended December 31, 2007. This increase was primarily the result of strong demand for our encapsulants from existing customers that we were able to meet with capacity from new
manufacturing lines.

Net
sales in our Quality Assurance segment increased $10.8 million, or 11.4%, to $106.3 million for the year ended December 31, 2008 from $95.4 million for
the pro forma year ended December 31, 2007. This increase was primarily the result of increased demand from our existing Quality Assurance clients, particularly in the United States and Asia.

Cost of Sales

Cost of sales increased $65.7 million, or 60.2%, to $174.6 million for the year ended December 31, 2008 from
$109.0 million for the pro forma year ended December 31, 2007. This increase was primarily the result of increased sales volume in our Solar segment.

Cost
of sales in our Solar segment increased $57.5 million, or 124.5%, to $103.7 million for the year ended December 31, 2008 from $46.2 million for the pro
forma year ended December 31, 2007. This increase was primarily the result of higher labor and raw material costs of $42.2 million to support our
higher net sales, higher indirect labor and benefits costs of $6.3 million and $5.6 million of product performance support costs.

Cost
of sales in our Quality Assurance segment increased $8.1 million, or 13.0%, to $70.9 million for the year ended December 31, 2008 from $62.8 million for
the pro forma year ended December 31, 2007. This increase was primarily the result of increased labor and travel expenses of $2.7 million to support our higher net sales volume, and
higher indirect labor and benefits costs of $3.7 million.

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Table of Contents

Gross Profit

Gross profit increased $48.9 million, or 75.1%, to $113.9 million for the year ended December 31, 2008 from
$65.1 million for the pro forma year ended December 31, 2007. This increase was primarily the result of increased Solar sales. As a percentage of sales, gross profit increased 210 basis
points to 39.5% for the year ended December 31, 2008 from 37.4% for the pro forma year ended December 31, 2007. Such increase was due to higher growth in our higher margin Solar segment
and manufacturing economies of scale associated with capacity expansion, partially offset by higher raw material and product performance support costs in our Solar segment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $11.4 million, or 37.9%, to $41.6 million for the year ended
December 31, 2008 from $30.2 million for the pro forma year ended December 31, 2007. This increase was primarily the result of increased professional fees of $11.6 million,
resulting primarily from the re-audit of our prior year financial statements
in preparation for our initial public offering. As a percentage of net sales, selling, general and administrative expenses decreased 290 basis points from 17.3% for the pro forma year ended
December 31, 2007 to 14.4% for the year ended December 31, 2008 due to operating leverage associated with the increase in sales.

Provision for Bad Debt Expenses

Bad debt increased $1.0 or 100% to $2.0 million for the year ended December 31, 2008 from $1.0 million for the pro
forma year ended December 31, 2007. The increase was directly related to one European solar customer that is no longer a customer.

Transaction Costs

No transaction costs in connection with the DLJ Transactions were incurred for the year ended December 31, 2008. During the
period from January 1 to June 14, 2007, we incurred and expensed our transaction costs in connection with the DLJ Transactions. Total transaction costs incurred during that period were
$7.7 million, consisting primarily of $4.2 million in merger and acquisition advisory fees, $2.5 million in bonus payments and $0.8 million in professional fees.

Interest Income

Interest income decreased $0.1 million, or 28.0%, to $0.2 million for the year ended December 31, 2008 from
$0.3 million for the pro forma year ended December 31, 2007. This decrease was primarily the result of lower prevailing interest rates applicable to our cash deposits.

Interest Expense

Interest expense decreased $3.6 million, or 14.8%, to $20.8 million for the year ended December 31, 2008 from
$24.4 million for the pro forma year ended December 31, 2007. This decrease was primarily the result of decreases in applicable interest rates on our debt.

Other Income (Expense) Items

During the year ended December 31, 2008, we incurred a $3.0 million unrealized loss on our interest rate swap entered
into as a requirement under our credit facilities. Foreign currency transaction losses increased $0.9 million during the year ended December 31, 2008 to a loss of $1.0 million
from a loss of $0.1 million during the pro forma year ended December 31, 2007.

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Table of Contents

Income Taxes

Income tax expense increased $14.6 million to $17.9 million for the year ended December 31, 2008 from
$3.3 million for the pro forma year ended December 31, 2007. Our effective tax rate for the year ended December 31, 2008 was 38.9% compared to the statutory rate of 35.0%,
primarily due to higher state income tax expense associated with our Solar business's increased profitability and repatriation of foreign earnings.

Net Income

Net income increased $32.2 million to $28.1 million for the year ended December 31, 2008 from a net loss of
$4.1 million for the pro forma year ended December 31, 2007. This increase was primarily the result of higher sales volume to our existing Solar customers and increased demand from our
existing Quality Assurance clients, particularly in the United States and Asia, partially offset by higher raw material, labor, travel and product performance support costs, professional fees and
taxes.

2007 Consolidated Results of OperationsActual

Set forth below is a discussion of our results of operations for both the period from January 1 to June 14, 2007 and the
period from June 15 to December 31, 2007. As a result of the DLJ Transactions, our consolidated financial statements for 2007 are not comparable to prior or subsequent periods, primarily
as a result of significantly increased interest, depreciation and amortization expenses.

Net Sales

Net sales were $64.8 million for the period from January 1 to June 14, 2007 and $109.3 million for the
period from June 15 to December 31, 2007. The increase in net sales during the period from June 15 to December 31, 2007 reflected higher sales volume primarily due to sales
to our existing Solar customers.

Cost of Sales

Cost of sales was $37.1 million for the period from January 1 to June 14, 2007 and $65.7 million for the
period from June 15 to December 31, 2007. Cost of sales for the period from June 15 to December 31, 2007 included $1.1 million additional depreciation expense as a
result of the step up of fair value of property, plant and equipment, $0.9 million related to the write-up to fair value of acquired inventory being sold and expensed to cost of
goods sold, and $4.7 million amortization expense associated with acquired assets.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $12.1 million for the period from January 1 to June 14, 2007 and
$18.5 million for the period from June 15 to December 31, 2007. The increase in selling, general and administrative expenses for the period from June 15 to
December 31, 2007 reflect higher labor and benefit expenses and professional fees offset by lower management advisory fee expense paid to DLJMB as compared to our previous owners.

Provision for Bad Debt Expenses

Bad debt expenses were $0.4 million for the period from January 1 to June 14, 2007 and $0.6 million for the
period from June 15 to December 31, 2007.

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Transaction Costs

Transaction costs were $7.7 million for the period from January 1 to June 14, 2007 related to the DLJ
Transactions. We did not incur transaction costs in connection with the DLJ Transactions during the period from June 15 to December 31, 2007.

Interest Income

Interest income was $0.1 million for the period from January 1 to June 14, 2007 and $0.2 for the period from
June 15 to December 31, 2007.

Interest Expense

Interest expense was $2.9 million for the period from January 1 to June 14, 2007 and $13.1 for the period from
June 15 to December 31, 2007. The higher interest expense during the period from June 15 to December 31, 2007 resulted from higher borrowings and deferred financing costs
associated with the DLJ Transactions.

Other Income (Expense) Items

We incurred a foreign currency transaction loss of approximately $32,000 during the period from January 1 to June 14,
2007. During the period from June 15 to December 31, 2007, we incurred $3.0 million of unrealized loss on our interest rate swap entered into as a requirement under our credit
facilities and a foreign currency transaction loss of $0.1 million.

Income Taxes

Income taxes were $4.0 million, an effective tax rate of 84.5%, for the period from January 1 to June 14, 2007 and
$4.6 million, an effective tax rate of 52.7%, for the period from June 15 to December 31, 2007. The increase in effective tax rate for the period from January 1 to
June 14, 2007 reflected the non-deductibility of certain transaction costs.

Net Income

Net income was $0.7 million for the period from January 1 to June 14, 2007 and $4.1 million for the period
from June 15 to December 31, 2007.

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Quarterly Consolidated Results of Operations

The following tables set forth our consolidated results of operations, other data and Adjusted EBITDA on a quarterly basis for the year
ended December 31, 2009 and the year ended December 31, 2008.

Year Ended December 31, 2009First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(Unaudited)(dollars in thousands)Statement of Operations Data:Net salesSolar

$
34,187

$
29,643

$
35,362

$
50,329Net salesQuality Assurance


23,928


29,920


31,956


29,620Total net sales


58,115


59,563


67,318


79,949Cost of salesSolar


20,794


20,273


21,837


28,309Cost of salesQuality Assurance


17,199


18,905


20,155


19,500Total cost of sales


37,993


39,178


41,992


47,809Gross profit


20,122


20,385


25,326


32,140Selling, general and administrative expenses


10,888


9,533


9,566


18,798Provision for bad debt expense


400


952


20


31Earnings on equity-method investments


(36
)

(123
)

(68
)

(90
)Operating income


8,870


10,023


15,808


13,401Interest income


14


56


46


20Interest expense


(4,059
)

(4,209
)

(4,195
)

(4,605
)Foreign currency transaction gain (loss)


(360
)

(83
)

(133
)

442Unrealized gain on interest rate swap


569


18


316


1,092Income before income tax expense


5,034


5,805


11,842


10,350Income tax expense


1,921


2,675


3,955


1,491Net income

$
3,113

$
3,130

$
7,887

$
8,859Other Data:Amortization of intangiblesSolar

$
2,108

$
2,108

$
2,108

$
2,108Amortization of intangiblesQuality Assurance


768


768


767


768Total amortization of intangibles

$
2,876

$
2,876

$
2,875

$
2,876Stock based compensationSolar

$
92

$
82

$
75

$
1,427Stock based compensationQuality Assurance


96


56


51


809Stock based compensationCorporate


216


451


733


3,220Total stock based compensation

$
404

$
589

$
859

$
5,456Adjusted EBITDA:(1)Adjusted EBITDASolar

$
15,138

$
11,621

$
16,485

$
24,009Adjusted EBITDAQuality Assurance


2,826


7,045


7,137


5,849Adjusted EBITDACorporate


(3,309
)

(2,215
)

(1,069
)

(1,886
)Total Adjusted EBITDA


14,655


16,451


22,553


27,972Depreciation and amortization


(5,626
)

(5,886
)

(5,938
)

(5,931
)Interest income


14


56


46


20Interest expense


(4,059
)

(4,209
)

(4,195
)

(4,605
)Income tax expense


(1,921
)

(2,675
)

(3,955
)

(1,491
)Management advisory fees


(150
)

(150
)

(149
)

(2,775
)Unrealized gain on interest rate swap


569


18


316


1,092Stock-based compensation


(404
)

(589
)

(859
)

(5,456
)Loss on disposal of property, plant and equipment


(1
)

(9
)




(57
)Earnings on equity-method investments


36


123


68


90Net income

$
3,113

$
3,130

$
7,887

$
8,859


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Year Ended December 31, 2008First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(Unaudited)(dollars in thousands)Statement of Operations Data:Net salesSolar

$
39,291

$
46,582

$
48,134

$
48,304Net salesQuality Assurance


21,986


28,873


28,333


27,075Total net sales


61,277


75,455


76,467


75,379Cost of salesSolar


19,947


23,136


26,324


34,310Cost of salesQuality Assurance


16,861


18,177


18,273


17,619Total cost of sales


36,808


41,313


44,597


51,929Gross profit


24,469


34,142


31,870


23,450Selling, general and administrative expenses


9,096


12,547


11,845


8,104Provision for bad debt expense


208


389


129


1,224Earnings on equity-method investments








(74
)

(104
)Transaction costs











Operating income


15,165


21,206


19,970


14,226Interest income


61


40


44


104Interest expense


(5,111
)

(5,542
)

(5,366
)

(4,790
)Foreign currency transaction gain (loss)


335


(107
)

(696
)

(539
)Unrealized (loss) gain on interest rate swap


(4,377
)

4,090


172


(2,910
)Income before income tax expense


6,073


19,687


14,124


6,091Income tax expense


2,279


7,508


5,219


2,864Net income

$
3,794

$
12,179

$
8,905

$
3,227Other Data:Amortization of intangiblesSolar

$
2,108

$
2,108

$
2,108

$
2,108Amortization of intangiblesQuality Assurance


768


768


767


768Total amortization of intangibles

$
2,876

$
2,876

$
2,875

$
2,876Stock based compensationSolar

$
109

$
109

$
94

$
92Stock based compensationQuality Assurance


115


114


99


97Stock based compensationCorporate


243


243


220


217Total stock based compensation

$
467

$
466

$
413

$
406Adjusted EBITDA:(1)Adjusted EBITDASolar

$
21,110

$
24,580

$
21,924

$
15,428Adjusted EBITDAQuality Assurance


1,014


5,608


5,550


5,414Adjusted EBITDACorporate


(240
)

(2,336
)

(353
)

(362
)Total Adjusted EBITDA


21,884


27,852


27,121


20,480Depreciation and amortization


(4,894
)

(4,959
)

(5,078
)

(6,317
)Interest income


61


40


44


104Interest expense


(5,111
)

(5,542
)

(5,366
)

(4,790
)Income tax expense


(2,279
)

(7,508
)

(5,219
)

(2,864
)Management advisory fees


(163
)

(162
)

(162
)

(151
)Unrealized (loss) gain on interest rate swap


(4,377
)

4,090


172


(2,910
)Stock-based compensation


(467
)

(466
)

(413
)

(406
)Gain on disposal of property, plant and equipment











3Earnings on equity-method investments








74


104Non-recurring items


(860
)

(1,166
)

(2,268
)

(26
)Net income

$
3,794

$
12,179

$
8,905

$
3,227


(1)We
define Adjusted EBITDA as net income before interest income and expense, income tax expense, depreciation, amortization, stock-based compensation
expense, transaction fees, equity earnings on investments and certain non-recurring income and expenses from the results of operations.


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Financial Condition, Liquidity and Capital Resources

We have financed our operations primarily through cash provided by operations. From 2003 through 2009, net cash provided by operating
activities has been sufficient to fund our working capital needs and capital expenditures. As of December 31, 2009, our principal sources of liquidity consisted of $70.2 million of cash
and short-term investments and $20.0 million of availability under the $20.0 million revolving portion of our first lien credit facilities. Our total indebtedness was $240.5 million as of
December 31, 2009.

Our
principal needs for liquidity have been, and for the foreseeable future will continue to be, for capital expenditures, debt service and working capital. The main portion of our
capital expenditures has been and is expected to continue to be for expansion. Working capital requirements have increased as a result of our overall growth in prior years and the need to fund higher
accounts receivable and inventory. We believe that our cash flow from operations, available cash and cash equivalents and available borrowings under the revolving portion of our credit facilities will
be sufficient to meet our liquidity needs, including for capital expenditures, through at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it
will be funded through borrowings under our credit facilities, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity.

Although
we have no plans to do so, if we decide to pursue one or more strategic acquisitions, we may incur additional debt, if permitted under our existing credit facilities, or sell
additional equity to finance the purchase of those businesses.

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Cash Flows

Cash Flow from Operating Activities

Net cash provided by operating activities was $47.9 million for the year ended December 31, 2009. Cash provided by
operating activities was attributable to $23.0 million in net income and non-cash expenses, including $23.4 million of depreciation and amortization, and $7.3 million
of stock-based compensation.

Net
cash provided by operating activities was $47.7 million for the year ended December 31, 2008. Cash provided by operating activities was attributable to
$28.1 million in net income and non-cash expenses, including $21.2 million of depreciation and amortization, $1.8 million of stock-based compensation and the
$3.0 million unrealized loss on our interest rate swap transaction.

Net
cash provided by operating activities was $12.1 million for the period from June 15 to December 31, 2007. This was primarily attributable to net income of
$4.1 million and non-cash expenses, including depreciation and amortization, stock-based compensation and the unrealized loss on our interest rate swap transaction. Net cash
provided by operating activities was $5.5 million for the period from January 1 to June 14, 2007. This was primarily attributable to net income of $0.7 million and
non-cash expenses, including depreciation and amortization and stock-based compensation, as well as an increase in net operating assets of $2.0 million.

Cash Flow from Investing Activities

Net cash used for investing activities was $18.8 million for the year ended December 31, 2009. We reduced our capital
expenditure activity from the prior year due to the current negative economic conditions and having sufficient capacity for expected business levels. We also have a certificate of deposit in the
amount of $1.0 million with a greater than 90 day maturity.

Net
cash used for investing activities for the year ended December 31, 2008 was $35.3 million for capital expenditures.

Net
cash used for investing activities was $327.0 million for the period from June 15 to December 31, 2007 for amounts paid in connection with the DLJ Transactions
as well as capital expenditures. Net cash used for investing activities was $3.5 million for the period from January 1 to June 14, 2007 for capital expenditures.

Cash Flow from Financing Activities

Net cash provided by financing activities was $11.4 million for the year ended December 31, 2009 resulting from IPO net
proceeds of $30.9 million offset by increased debt repayments of $15.0 million during 2009 as a result of our debt agreement mandatory pre-payment on the IPO date. Also, cash
payments of $1.1 million and $1.3 million were incurred in connection with our IPO and amendment of our debt agreements, respectively.

Net
cash used in financing activities was $5.3 million for the year ended December 31, 2008 primarily for payment of equity issuance costs of $3.3 million and
$2.0 million for debt repayments.

Net
cash provided by financing activities was $335.3 million for the period from June 15 to December 31, 2007 due to the receipt of proceeds from the issuance of
equity and the incurrence of debt in connection with the DLJ Transactions. Net cash used in financing activities was $6.1 million for the period from January 1 to June 14, 2007
for the repayment of indebtedness.

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Capital Expenditures

We had capital expenditures of $17.8 million, $35.3 million and $13.6 million in the year ended
December 31, 2009, the year ended December 31, 2008 and the periods from January 1 to June 14 and June 15 to December 31, 2007, respectively.

For
our Solar segment, we had capital expenditures of $7.2 million, $25.9 million and $9.0 million in the year ended December 31, 2009, the year ended
December 31, 2008 and the periods from January 1 to June 14 and June 15 to December 31, 2007, respectively. Our Solar capital expenditures for these periods
consisted primarily of equipment costs associated with the addition of new production lines and construction costs for our recently opened Malaysia facility.

For
our Quality Assurance segment, we had capital expenditures of $10.5 million, $8.9 million and $3.9 million in the year ended December 31, 2009, the year
ended December 31, 2008 and the periods from January 1 to June 14 and June 15 to December 31, 2007, respectively. Our Quality Assurance capital expenditures for
these periods consisted primarily of costs associated with equipment purchases for testing equipment, information systems and laboratory expansion in China and the Indian sub-continent.

For
corporate, we had capital expenditures of $0.1 million, $0.5 million and $0.7 million in the year ended December 31, 2009, the year ended
December 31, 2008 and the periods from January 1 to June 14 and June 15 to December 31, 2007, respectively. Our corporate capital expenditures for these periods
consisted primarily of costs for new information systems.

We
expect 2010 consolidated capital expenditures to be approximately $20.1 million, of which Solar capital expenditures represent approximately $8.0 million, Quality
Assurance capital expenditures represent approximately $11.8 million and corporate capital expenditures represent approximately $0.3 million.

Credit Facilities

In connection with the DLJ Transactions, we entered into a first lien credit facility and a second lien credit facility on
June 15, 2007, which we refer to collectively as our "credit facilities", in each case with Credit Suisse, as administrative agent and collateral agent. The first lien credit facility consists
of a $185.0 million term loan facility, which matures on June 15, 2014, and a $20.0 million revolving credit facility, none of which was outstanding at December 31, 2009,
which matures on June 15, 2012. The second lien credit facility consists of a $75.0 million term loan facility, which matures on December 15, 2014. The revolving credit facility
includes a sublimit of $15.0 million for letters of credit.

The
obligations under each credit facility are unconditional and are guaranteed by us and substantially all of our existing and subsequently acquired or organized domestic subsidiaries.
The first lien credit facility and related guarantees are secured on a first-priority basis, and the second lien credit facility and related guarantees are secured on a second-priority basis, in each
case, by security interests (subject to liens permitted under the credit agreements governing the credit facilities) in substantially all tangible and intangible assets owned by us, the obligors under
the credit facilities, and each of our other domestic subsidiaries, subject to certain exceptions, including limiting pledges of voting stock of foreign subsidiaries to 66% of such voting stock.

Borrowings
under the first lien credit facility bear interest at a rate equal to (1) in the case of term loans, at our option (i) the greater of (a) the rate of
interest per annum determined by Credit Suisse, from time to time, as its prime rate in effect at its principal office in the City of New York, and (b) the federal funds rate plus 0.50% per
annum (the "base rate"), and in each case plus 1.50% per annum or (ii) the LIBO plus 2.50% and (2) in the case of the revolving loans, at our option (subject to certain exceptions)
(i) the base rate plus 1.50% when our total leverage ratio (as defined in the first lien credit facility) is greater than or equal to 5.25 to 1.00 ("leverage level 1"), the base rate
plus 1.25% when our

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total
leverage ratio is greater than or equal to 4.50 to 1.00 but less than 5.25 to 1.00 ("leverage level 2") and the base rate plus 1.00% when our total leverage ratio is less than 4.50 to
1.00 ("leverage level 3") or (ii) the LIBO plus 2.50% in the case of leverage level 1, 2.25% in the case of leverage level 2 and 2.00% in the case of leverage
level 3. Borrowings under the second lien credit facility bear interest at a rate equal to, at our option (i) the base rate plus 6.00% or (ii) the LIBO plus 7.00%. For the first
five years of the second lien credit facility, we have the option to pay interest in cash or in kind, by increasing the outstanding principal amount of the loans by the amount of accrued interest.
Interest paid in kind on the second lien credit facility will be at the rate of interest applicable to such loan described above plus an additional 1.50% per annum. If we default on the payment of any
principal, interest, or any other amounts due under the credit facilities, we will be obligated to pay default interest. The default interest rate on principal payments will equal the interest rate
applicable to such loan plus 2.00% per annum, and the default interest rate on all other payments will equal the interest rate applicable to base rate loans plus 2.00% per annum.

As
of December 31, 2009 and December 31, 2008, the weighted average interest rate under our credit facilities was 4.14% and 4.27%, respectively, before the effect of our
interest rate swap. At the rate in effect on December 31, 2009 and assuming an outstanding balance of $240.4 million as of December 31, 2009, our annual debt service obligations
would be $11.8 million, consisting of $9.9 million of interest and $1.9 million of scheduled principal payments. See "Contractual Obligations and Other Commitments" below
for the effects of the principal prepayment made in November 2009.

In
addition to paying interest on outstanding principal under the credit facilities, we are required to pay a commitment fee at a rate equal to 0.50% per annum on the daily unused
commitments available to be drawn under the revolving portion of the first lien credit facility. We are also required to pay letter of credit fees, with respect to each letter of credit issued, at a
rate per annum equal to the applicable LIBO margin for revolving credit loans on the average daily amount of undrawn letters of credit plus the aggregate amount of all letter of credit disbursements
that have not been repaid by us. We are also required to pay fronting fees, with respect to each letter of credit issued, at a rate specified by the issuer of the letters of credit and to pay Credit
Suisse certain administrative fees from time to time, in its role as administrative agent. The term loans under the first lien credit facilities amortize in quarterly installments of 0.25% of the
principal amount. Under certain circumstances, we may be required to reimburse the lenders under our credit facilities for certain increased fees and expenses caused by a change of law.

We
are generally required to prepay term loan borrowings under the credit facilities with (1) 100% of the net cash proceeds we receive from non-ordinary course asset
sales or as a result of a casualty or condemnation, (2) 100% of the net cash proceeds we receive from the issuance of debt obligations other than debt obligations permitted under the credit
agreements, (3) 50% of the net cash proceeds of a public offering of equity and (4) 50% (or, if our leverage ratio is less than 5.25 to 1.00 but greater than or equal to 4.50 to 1.00,
25%) of excess cash flow (as defined in the credit agreements). Under the credit facilities, we are not required to prepay borrowings with excess cash flow if our leverage ratio is less than 4.50 to
1.00. Subject to a limited exception, all mandatory prepayments will first be applied to the first lien credit facility until all first lien obligations are paid in full and then to the second lien
facility.

The
first lien credit facility requires us to maintain certain financial ratios, including a maximum first lien debt ratio (based upon the ratio of indebtedness under the first lien
credit facility to consolidated EBITDA, as defined in the first lien credit facility), a maximum total leverage ratio (based upon the ratio of total indebtedness, net of unrestricted cash and cash
equivalents, to consolidated EBITDA) and a minimum interest coverage ratio (based upon the ratio of consolidated EBITDA to consolidated interest expense), which are tested quarterly. Based on the
formulas set forth in the first lien credit agreement, as of December 31, 2009, we were required to maintain a maximum first lien debt ratio of 4.25 to 1.00, a maximum total leverage ratio of
6.25 to 1.00 and a minimum interest

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coverage
ratio of 1.65 to 1.00. The second lien credit facility requires us to maintain a maximum total leverage ratio tested quarterly. Based on the formulas set forth in the second lien credit
agreement, as of December 31, 2009, we were required to maintain a maximum total leverage ratio of 6.50 to 1.00. As of December 31, 2009, our first lien debt ratio was 1.13 to 1.00, our
total leverage ratio was 2.03 to 1.00 and our interest coverage ratio was 4.90 to 1.00.

The
financial ratios required under the first and second lien facilities become more restrictive over time. Based on the formulas set forth in the first lien credit agreement, as of
March 31, 2010 and March 31, 2011, we are required to maintain a maximum first lien debt ratio of 4.00 to 1.00 and 3.00 to 1.00, respectively, a maximum total leverage ratio of 6.00 to
1.00 and 5.00 to 1.00, respectively, and a minimum interest coverage ratio of 1.80 to 1.00 and 2.00 to 1.00, respectively. Based on the formulas set forth in the second lien credit agreement, as of
March 31, 2010 and March 31, 2011, we are required to maintain a maximum total leverage ratio of 6.25 to 1.00 and 5.25 to 1.00, respectively.

The
credit agreements also contain a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions; sales of assets;
sale-leaseback transactions; investments and acquisitions; indebtedness; liens; affiliate transactions; the nature of our business; a prohibition on dividends and restrictions on other
restricted payments; modifications or prepayments of our second lien credit facility or other material subordinated indebtedness; and issuing redeemable, convertible or exchangeable equity securities.
Under the credit agreements, we are permitted maximum annual capital expenditures of $12.0 million in the fiscal year ending December 31, 2007, with such limit increasing by $1.0 to
$2.0 million for each fiscal year thereafter. Capital expenditure limits in any fiscal year may be increased by 40.0% of the excess of consolidated EBITDA for such fiscal year over baseline
EBITDA for that year, which is defined as $50.0 million for the fiscal
year ending December 31, 2009 and increasing by $5.0 million per year thereafter. The capital expenditure limitations are subject to a two-year carry-forward of the unused
amount from the previous fiscal year which will be approximately $15 million for the year ending December 31, 2010.

The
credit agreements contain events of default that are customary for similar facilities and transactions, including a cross-default provision with respect to other material
indebtedness (which, with respect to the first lien credit agreement, would include the second lien credit agreement and with respect to the second lien credit agreement, would include the first lien
credit agreement) and an event of default that would be triggered by a change of control, as defined in the credit agreements. As of December 31, 2009, we were in compliance with all of our
covenants and other obligations under the credit agreements.

On
October 5, 2009, we entered into an amendment to the first lien credit agreement and an amendment to the second lien credit agreement. The amendments for both credit agreements
permitted us to enter into certain corporate reorganization transactions, including replacing STR Holdings LLC with STR Holdings (New) LLC as a guarantor under each credit agreement. STR
Holdings, Inc. became a guarantor under each credit agreement as corporate successor to STR Holdings (New) LLC on November 6, 2009.

We
were required under the terms of both our first lien and second lien credit facilities to fix our interest costs on at least 50% of the principal amount of our funded indebtedness
within three months of entering into the credit facility for a minimum of three years. To manage our interest rate exposure and fulfill the requirements under our credit facilities, effective
September 13, 2007, we entered into a $200.0 million notional principal amount interest rate swap agreement with Credit Suisse International that effectively converted a portion of our
debt under our credit facilities from a floating interest rate to a fixed interest rate. The notional principal amount decreased to $130.0 million on October 1, 2008 and will remain at
that amount until the agreement terminates on September 30, 2010. Under the interest rate swap agreement, we pay interest at 4.622% and receive the floating three-month LIBOR rate from Credit
Suisse International on the notional principal amount.

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In
addition, one of our foreign subsidiaries maintains a line of credit facility in the amount of $0.5 million (0.5 million Swiss francs) bearing an interest rate of approximately
4.25% and 4.75% as of December 31, 2009 and December 31, 2008, respectively. The purpose of the credit facility is to provide funding for the subsidiary's working capital as deemed
necessary during the normal course of business. The facility was not utilized as of December 31, 2009 and December 31, 2008.

Contractual Obligations and Other Commitments

As of December 31, 2009, our contractual obligations and other commitments were as follows:

Payments Due by PeriodTotal

2010

2011-2012

2013-2014

Thereafter(dollars in thousands)Long-term debt obligations(a)

$
240,375

$
1,850

$
3,700

$
234,825

$
Interest costs(b)


44,149


9,947


19,664


14,538


Capital lease obligations(a)


131


131








Operating lease obligations


11,220


4,428


3,896


1,450


1,446Other contractual obligations(c)














Total

$
295,875

$
16,356

$
27,260

$
250,813

$
1,446


(a)Represents
principal payments only. No mandatory payment is required until June 30, 2011 due to the $15.0 million payment made in conjunction
with the IPO. However, we plan to continue to make such debt payments based on the original required maturity schedule.(b)Represents
estimated interest costs in such period based on interest rates for our outstanding long-term debt in effect as of
December 31, 2009.(c)Other
contractual obligations exclude our ASC 740 liabilities for unrecognized tax benefits. See Note 12 to our Consolidated Financial Statements
included in Item 8 in this Annual Report.


Off-Balance Sheet Arrangements

We have no off-balance sheet financing arrangements.

Effects of Inflation

Inflation generally affects us by increasing costs of raw materials, labor and equipment. We do not believe that inflation had any
material effect on our results of operations in the periods presented in our financial statements.

Recently Issued Accounting Standards

In June 2009, the FASB issuedThe FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FAS No. 162which was codified as ASC 105. ASC 105 requires that the FASB Accounting Standards Codification
(the "Codification") become the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of authoritative generally accepted accounting principles for SEC registrants. We adopted the provisions of ASC 105 effective
July 1, 2009, which did not have an impact on our results of operations or financial position.

In
June 2009, the FASB issued a standard related toAccounting for Transfers of Financial Assetsan amendment of FASB Statement
No. 140. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor's beneficial interest) and

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liabilities
incurred as a result of a transfer of financial assets accounted for as a sale. The standard must be applied as of the beginning of the first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting
periods thereafter. Earlier application is prohibited. The standard will not have an impact on our consolidated financial statements.

In
June 2009, the FASB issued a standardAmendments to FASB Interpretation No. 46(R). The standard requires enhanced disclosures
that will provide users of financial statements with more transparent information about an enterprise's involvement in a variable interest entity. The enhanced disclosures are required for any
enterprise that holds a variable interest in a variable interest entity. The standard is effective as of the beginning of the first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard will not have an impact on our
consolidated financial statements.

In
October 2009, the FASB issued Accounting Standards Update No. 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements. ASC 605-25 addresses the accounting for these arrangements and enables vendors to account for product and services (deliverables) separately rather
than as a combined unit. The amendment will significantly improve the reporting of these transactions to more closely resemble their underlying economics, eliminate the residual method of allocation
and improve financial reporting with greater transparency of how a vendor allocates revenue in its arrangements. The amendment in this update will be effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The standard will not have an impact on our consolidated financial
statements.

Forward-Looking Statements

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to inherent risks and uncertainties. These forward-looking statements present our current expectations and projections relating to our financial condition, results of
operations, plans, objectives, future performance and business and are based on assumptions that we have made in light of our industry experience and perceptions of historical trends, current
conditions, expected future developments and other factors management believes are appropriate under the circumstances. However, these forward-looking statements are not guarantees of future
performance or financial or operating results. In addition to the risks and uncertainties discussed in this Annual Report, we face risks and uncertainties that include, but are not limited to, the
following: (i) demand for solar energy in general and solar modules in particular; (ii) the timing and effects of the implementation of recently announced government incentives and
policies for renewable energy, primarily in China and the United States; (iii) the effects of the recently announced proposed cut to solar incentives in Germany and Italy; (iv) customer
concentration in our Solar business and our relationships with key customers; (v) the continual operation of our Malaysian plant which commenced shipments in August 2009; (vi) the need
to utilize our existing $20 million revolving credit facility, and the ability to further access the credit markets on acceptable terms; (vii) maintaining sufficient liquidity in order
to fund future profitable growth and long term vitality; (viii) the continuing effects of the ongoing recession on sales; (ix) pricing pressures and other competitive factors;
(x) the impact of the current negative credit markets may have on us or our customers or suppliers; (xi) loss of professional accreditations and memberships; (xii) the extent to
which we may be required to write-off accounts receivable or inventory; (xiii) our reliance on vendors and potential supply chain disruptions, including those resulting from
bankruptcy filings by customers or vendors; (xiv) any potential inflation of commodity costs, including paper and resin used in our encapsulants, and our ability to successfully manage any
increases in these commodity costs; (xv) potential product performance matters, product liability or professional liability claims and our

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ability
to manage them; (xvi) the impact of changes in foreign currency exchange rates on financial results, and the geographic distribution of revenues and earnings; (xvii) the impact
of changes in interest rates in relation to our variable rate debt; (xviii) the impact of events that cause or may cause disruption in our inspection, testing, manufacturing, distribution and
sales networks such as war, terrorist activities, and political unrest; (xix) the extent and duration of the current downturn in the global economy, including the timing of expected economic
recovery in the United States and abroad; (xx) outcomes of litigation and regulatory actions; (xxi) our ability to protect our intellectual property and (xxii) the other risks and
uncertainties described under "Item 1ARisk Factors" and "Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations" and in subsequent
periodic reports on Forms 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings which are available on
http://www.sec.gov or http://www.strholdings.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual results may vary
materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement contained in this Annual Report, whether as a result of
new information, future developments or otherwise, except as may be required by law.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk Management

We have foreign currency exposure related to our operations outside of the United States. This foreign currency exposure arises
primarily from the translation or re-measurement of our foreign subsidiaries' financial statements into U.S. dollars. Fluctuations in the rate of exchange between the U.S. dollar and
foreign currencies could adversely affect our consolidated results of operations. For the years ended December 31, 2009, 2008 and 2007, approximately $117.2 million, or 44.2%,
$142.2 million, or 49.3% and $100.1 million, or 57.5%, respectively, of our net sales were denominated in foreign currencies. We expect that the percentage of our net sales denominated
in foreign currencies will increase in the foreseeable future as we expand our international operations. Selling, marketing and general costs related to these foreign currency net sales are largely
denominated in the same respective currency, thereby partially offsetting our foreign exchange risk exposure. However, for net sales not denominated in U.S. dollars, if there is an increase in the
rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases
and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products or services in U.S. dollars
and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted
in the local currency.

In
addition, our assets and liabilities of foreign operations are recorded in foreign currencies and translated into U.S. dollars. If the U.S. dollar increases in value against these
foreign currencies, the value in U.S. dollars of the assets and liabilities recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases in value against these foreign
currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. dollar
relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in
their original currency.

We
do not engage in any hedging activities related to this exchange rate risk. As such, a 10% change in the U.S. dollar exchange rates in effect as of December 31, 2009 would
cause a change in consolidated net assets of approximately $7.7 million and a change in net sales of approximately $11.7 million.

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Interest Rate Risk

We are exposed to interest rate risk in connection with our first lien term loan facility, our second lien term loan facility and any
borrowings under our revolving credit facility. Our first lien and second lien facilities bear interest at floating rates based on the LIBOR or the greater of the prime rate or the federal funds rate
plus an applicable borrowing margin. Borrowings under our revolving credit facility bear interest at floating rates based on the LIBOR or a base rate plus an applicable borrowing margin. For variable
rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant.

To
manage our interest rate exposure and fulfill requirements under our credit facilities, effective September 13, 2007, we entered into an interest rate swap with Credit Suisse
International that effectively converted a portion of our debt under our credit facilities from a floating interest rate to a fixed interest rate. As of December 31, 2009 and
December 31, 2008, our interest rate swap agreement was for a $130.0 million notional principal amount that expires on September 30, 2010 under our credit facilities and had a
fair value of a liability of $4.0 million and $6.0 million, respectively. Such amount was reduced from the December 31, 2007 notional amount of $200.0 million on
October 1, 2008. Based on the amount outstanding under our first lien and second lien facilities at December 31, 2009, a change of one percentage point in the applicable interest rate,
before the effect of our interest rate swap, would cause an increase or decrease in interest expense of approximately $2.4 million on an annual basis. For further information on the interest
rate swap agreement, see"Components of Net Sales and ExpensesOther Income (Expense) Items" above and Note 8 to our Consolidated Financial Statements included in
Item 8 in this Annual Report.

Commodity Price Risk

The major raw material that we purchase for production of our encapsulants for our Solar segment is resin, and paper liner is the
second largest raw material cost. The price and availability of these materials are subject to market conditions affecting supply and demand. In particular, the price of many of our raw materials can
be impacted by fluctuations in petrochemical and pulp prices. Additionally, our distribution costs can be impacted by fluctuations in diesel prices. We currently do not have a hedging program in place
to manage fluctuations in commodity prices.

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ITEM 8.    Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders of STR Holdings, Inc.:

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of changes in stockholders'/ unitholders'
equity (deficit), and of cash flows present fairly, in all material respects, the financial position of STR Holdings, Inc. and subsidiaries (Successor Company) at December 31, 2009 and
2008 and the results of their operations and their cash flows for the years ended December 31, 2009 and 2008, and for the period from June 15, 2007 to December 31, 2007 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule of valuation and qualifying accounts for the
Successor Company appearing under Item 15(a) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits. We conducted our audits of these statements 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 19, 2010

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Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders of STR Holdings, Inc.:

In
our opinion, the accompanying consolidated statements of operations and comprehensive income, of changes in stockholders'/ unitholders' equity (deficit), and of cash flows for the
period from January 1, 2007 to June 14, 2007, present fairly, in all material respects, the results of operations and cash flows of STR Holdings, Inc. and subsidiaries
(Predecessor Company) for the period from January 1, 2007 to
June 14, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule of valuation and
qualifying accounts for the Predecessor Company appearing under Item 15(a) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We conducted our audit of these statements 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As
discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.

/s/
PricewaterhouseCoopers LLP
Hartford, Connecticut
July 31, 2008

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STR Holdings, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

All amounts in thousands except share / unit and per share / unit amounts

December 31,
2009

December 31,
2008ASSETSCURRENT ASSETSCash and cash equivalents

$
69,149

$
27,868Short-term investments


1,001


Accounts receivable, trade, less allowances for doubtful accounts of $2,468 and $3,015 in 2009 and 2008, respectively


33,744


36,454Unbilled receivables


2,462


3,349Inventories


12,267


18,771Prepaid expenses and other current assets


3,513


2,115Current deferred tax assets


2,987


1,681Total current assets


125,123


90,238Property, plant and equipment, net


68,895


62,516Intangible assets, net


216,163


227,666Goodwill


223,359


223,299Deferred financing costs


5,797


6,194Deferred tax assets


5,240


5,200Other noncurrent assets


1,283


5,809Total assets

$
645,860

$
620,922LIABILITIES, CONTINGENTLY REDEEMABLE UNITS AND STOCKHOLDERS' / UNITHOLDERS' EQUITYCURRENT LIABILITIESCurrent portion of long-term debt

$
1,981

$
2,015Book overdraft


685


571Interest rate swap liability


4,018


Accounts payable


10,404


13,632Billings in excess of earned revenues


4,630


5,863Accrued liabilities


14,680


14,637Income taxes payable


3,587


10,352Total current liabilities


39,985


47,070Long-term debt, less current portion


238,525


255,506Interest rate swap liability





6,013Other long-term liabilities


3,118


4,621Deferred tax liabilities


92,962


92,815Total liabilities


374,590


406,025COMMITMENTS AND CONTINGENCIES (Note 15)Contingently redeemable units





2,930Stockholders' / unitholders' equityPreferred stock, $0.01 par value, 20,000,000 shares authorized; no shares issued and outstanding





Common stock, $0.01 par value, 200,000,000 shares authorized; 41,349,710 issued and outstanding in 2009 (Note 10)


402


UnitsClass A17,864,924 units authorized and outstanding in 2008





178,649Class F588,171 units authorized and outstanding in 2008





1,456Additional paid-in capital


214,954


Retained earnings


55,205


32,216Accumulated other comprehensive income (expense), net


709


(354
)Total stockholders' / unitholders' equity


271,270


211,967Total liabilities, contingently redeemable units and stockholders' / unitholders' equity

$
645,860

$
620,922


See accompanying notes to these consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

All amounts in thousands except share and per share amounts

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

For the Period
from
June 15 to
December 31, 2007

For the Period
from
January 1 to
June 14, 2007Net salesSolar

$
149,521

$
182,311

$
52,967

$
25,648Net salesQuality Assurance


115,424


106,267


56,317


39,112Total net sales


264,945


288,578


109,284


64,760Cost of salesSolar


91,213


103,717


30,068


11,875Cost of salesQuality Assurance


75,759


70,930


35,620


25,225Total cost of sales


166,972


174,647


65,688


37,100Gross profit


97,973


113,931


43,596


27,660Selling, general and administrative expenses


48,785


41,592


18,484


12,063Provision for bad debt expense


1,403


1,950


562


384Earnings on equity-method investments


(317
)

(178
)

(84
)

(46
)Transaction costs











7,737Operating income


48,102


70,567


24,634


7,522Interest income


136


249


203


143Interest expense


(17,068
)

(20,809
)

(13,090
)

(2,918
)Foreign currency transaction loss


(134
)

(1,007
)

(76
)

(32
)Unrealized gain (loss) on interest rate swap


1,995


(3,025
)

(2,988
)

Income before income tax expense


33,031


45,975


8,683


4,715Income tax expense


10,042


17,870


4,572


3,983Net income

$
22,989

$
28,105

$
4,111

$
732Other comprehensive income:Foreign currency translation


1,063


(1,805
)

1,451


448Total comprehensive income

$
24,052

$
26,300

$
5,562

$
1,180Net income per share (Note 3):Basic

$
0.63

$
0.78

$
0.11

$
0.08Diluted

$
0.61

$
0.75

$
0.11

$
0.08Weighted average shares outstanding (Note 3):Basic


36,638,402


36,083,982


35,846,880


8,632,893Diluted


37,514,790


37,411,765


36,636,433


9,134,536


See
accompanying notes to these consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' / UNITHOLDERS' EQUITY (DEFICIT)

All amounts in thousands except share / unit and per share / unit amounts

Common Stock
Class A

Common Stock
Class B

Units
Class A

Units
Class FCommon Stock



Accumulated
Other
Comprehensive
(Loss) Income



Retained
Earnings
(Accumulated
Deficit)

Total
Stockholders' /
Unitholders' Equity
(Deficit)Additional
Paid-In
Capital

Treasury
StockIssued

Amount

Issued

Amount

Issued

Amount

Issued

Amount

Issued

AmountPREDECESSOR:Balance at December 31, 2006


8,464

$
85


8,942

$
89




$





$





$


$
82

$
1,468

$
(10,353
)
$
(768
)
$
(9,397
)Adoption of ASC 740









































(883
)

(883
)Share based compensation









































732


732Tax benefit from exercise of stock options
































351











351Net income
































33











33Foreign currency translation



































448








448Balance at June 15, 2007


8,464

$
85


8,942

$
89




$





$





$


$
466

$
1,916

$
(10,353
)
$
(919
)
$
(8,716
)SUCCESSOR:Capitalization of Holdings in connection with acquisitions of Specialized Technology Resources, Inc. and subsidiaries




$





$



17,865

$
178,649




$





$


$


$


$


$


$
178,649Share based compensation




















294


1,171




















1,171Net income









































4,111


4,111Foreign currency translation



































1,451








1,451Balance at December 31, 2007




$





$



17,865

$
178,649


294

$
1,171




$


$


$
1,451

$


$
4,111

$
185,382Share based compensation




$





$





$



98

$
285




$


$


$


$


$


$
285Net income









































28,105


28,105Foreign currency translation



































(1,805
)







(1,805
)Balance at December 31, 2008




$





$



17,865

$
178,649


392

$
1,456




$


$


$
(354
)
$


$
32,216

$
211,967Share based compensation pre IPO




$





$





$



98

$
238




$


$


$


$


$


$
238Conversion of membership units into common shares














(17,865
)

(178,649
)

(490
)

(1,694
)

36,745,031


367


182,906











2,930Issuance of common stock pursuant to IPO, net of offering costs


























3,300,000


33


24,980











25,013Share based compensation


























121,366


2


7,068











7,070Net income









































22,989


22,989Foreign currency translation



































1,063








1,063Balance at December 31, 2009




$





$





$





$



40,166,397

$
402

$
214,954

$
709

$


$
55,205

$
271,270


See accompanying notes to these consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

All amounts in thousands except share and per share amounts

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

Period from
June 15 to
December 31, 2007

Period from
January 1
to
June 14, 2007OPERATING ACTIVITIESNet income

$
22,989

$
28,105

$
4,111

$
732Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


11,878


9,745


3,857


2,314Amortization of intangibles


11,503


11,503


6,231


50Amortization of deferred financing costs


1,522


1,150


621


140Stock-based compensation expense


7,308


1,752


2,634


33Unrealized (gain) loss on interest rate swap


(1,995
)

3,025


2,988


Earnings in equity investments


(317
)

(178
)

(84
)

(46
)Loss (gain) on disposal of property, plant and equipment


67


(3
)




3Provision for bad debt expense


1,403


1,950


562


384Provision for deferred taxes


(1,773
)

(4,392
)

(3,310
)

(138
)Changes in operating assets and liabilities:Accounts receivable


1,710


(10,517
)

(5,820
)

(3,752
)Inventories


6,607


(11,917
)

(1,149
)

(1,010
)Accounts payable


(3,240
)

6,181


3,292


20Accrued liabilities


(890
)

7,044


(5,888
)

5,992Income taxes payable


(6,847
)

3,543


2,635


493Other, net


(2,067
)

676


1,452


277Net cash provided by operating activities


47,858


47,667


12,132


5,492INVESTING ACTIVITIESAcquisition of STRI, net of cash acquired








(316,980
)

Capital expenditures


(17,833
)

(35,288
)

(10,064
)

(3,510
)Purchase of investments


(1,001
)







Net cash used in investing activities


(18,834
)

(35,288
)

(327,044
)

(3,510
)FINANCING ACTIVITIESLong-term debt borrowings








260,000


Long-term debt repayments


(16,850
)

(1,850
)

(62,425
)

(6,000
)Principal payments on capital lease obligations


(165
)

(155
)

(74
)

(76
)Proceeds received from issuance of common stock pursuant to IPO, net of offering costs


30,855








Other issuance costs


(2,458
)

(3,266
)

(7,933
)

Proceeds from issuance of Class A units








145,697


Net cash provided by (used in) financing activities


11,382


(5,271
)

335,265


(6,076
)Effect of exchange rate changes on cash


875


(420
)

827


(190
)Net increase (decrease) in cash and cash equivalents


41,281


6,688


21,180


(4,284
)Cash and cash equivalents, Beginning of period


27,868


21,180





17,939Cash and cash equivalents, End of period

$
69,149

$
27,868

$
21,180

$
13,655SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest

$
15,820

$
19,792

$
12,661

$
2,768Income taxes

$
15,647

$
19,495

$
5,466

$
3,729NON-CASH INVESTING AND FINANCING ACTIVITIESConversion of contingently redeemable units to common stock

$
2,930

$


$


$
Shares exchanged for stock interests in Predecessor

$


$


$
32,952

$



See accompanying notes to these consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (All amounts in thousands except per share / unit amounts unless
otherwise noted)

NOTE 1BASIS OF PRESENTATION AND NATURE OF OPERATIONS

Basis of Presentation

On June 15, 2007, DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds, or ("DLJMB"), and its
co-investors, together with members of STR Holdings, Inc.'s (the "Company") board of directors, its executive officers and other members of management, acquired 100% of the voting equity
interests in the Company's wholly-owned subsidiary, Specialized Technology Resources, Inc. for $365.6 million, including transaction costs. They acquired Specialized Technology
Resources, Inc. for investment purposes.

In
connection with the acquisition:



The
Company refers to the foregoing transactions collectively as the "DLJ Transactions".

Prior
to November 5, 2009 the Company conducted its business through STR Holdings LLC and its subsidiaries. STR Holdings (New) LLC ("NewCo"), a Delaware limited
liability company, was formed
on September 30, 2009 as an indirect subsidiary of STR Holdings LLC and held no material assets and did not engage in any operations.

Pursuant
to the corporate reorganization on November 5, 2009, STR Holdings LLC liquidated. A subsidiary of NewCo merged with and into Specialized Technology
Resources, Inc. and its subsidiaries

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 1BASIS OF PRESENTATION AND NATURE OF OPERATIONS (Continued)

("STRI")
and, as a result, STRI became a wholly-owned subsidiary of NewCo. The unitholders of STR Holdings LLC became unitholders of NewCo. NewCo converted from a limited liability company into
a Delaware 'C' corporation, named STR Holdings, Inc., and the outstanding units of NewCo converted into a single class of common stock of STR Holdings, Inc ("Holdings"). For further information
please refer to "Item 1BusinessCorporate Reorganization and Initial Public Offering" included in this Annual Report.

On
November 12, 2009, the Company closed its initial public offering ("IPO") of 12,300,000 shares of common stock at an offering price of $10 per share, of which 3,300,000 shares
were sold by the Company and 9,000,000 shares were sold by selling stockholders. The Company raised approximately $25.0 million in net proceeds after deducting underwriting discounts,
commissions and other offering costs of approximately $7.8 million. Effective with the conversion of NewCo into STR Holdings, Inc., the outstanding units were automatically converted
into shares of common stock and restricted common stock.

These
consolidated financial statements reflect the financial statements of Holdings and its subsidiaries on a consolidated basis. The consolidated financial statements presented for the
period from January 1 to June 14, 2007, present the historical basis of accounting for the "predecessor" entity, STRI. The consolidated financial statements for the years ended
December 31, 2009 and December 31, 2008, and the period from June 15 to December 31, 2007 represent the new basis of accounting for the "successor" entity. The consolidated
financial statements of the predecessor entity are not comparable with the consolidated financial statements of the successor entity, STR Holdings, Inc. and its subsidiaries.

The
accompanying consolidated financial statements and the related information contained within the notes to the consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the Unites States of America ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") for financial information and
annual reports on the Form 10-K.

Certain
prior periods' disclosures have been reclassified to conform to the current period's presentation.

Nature of Operations

STRI was incorporated in 1944 as a plastics and industrial materials research and development company. The Company operates in two
business segments: Solar and Quality Assurance ("QA").

Solar
designs, develops and manufactures encapsulants that protect the embedded semiconductor circuits of solar panels for sale to solar module manufacturers.

QA
provides product development, inspection, testing and audit services that enable retailers and manufacturers to determine whether products meet applicable safety, regulatory, quality,
performance and social standards.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies is as follows:

Basis of Accounting.The consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United
States of America.

Principles of Consolidation.The consolidated financial statements include the accounts of the Company and its wholly-owned and
majority-owned
subsidiaries. Intercompany transactions and account balances have been eliminated. The Company accounts for its 50% owned investments on an equity basis (See Note 6).

The
Company owns 51% of STR Registrar LLC ("Registrar"), a joint venture with Science Technology and Registration Holdings, Inc. Registrar operates in the United States for
the purpose of providing globally accepted and accredited management system registration services. At December 31, 2009 and December 31, 2008, the non-controlling interest
and financial performance of Registrar after elimination of intercompany transactions was deminimis.

Use of Estimates.The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United
States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company's significant
estimates include its revenue recognition, allowance for doubtful accounts receivable, inventory valuation, the recorded amounts and amortization periods of its intangible assets, valuation of
goodwill, product performance accrual, income taxes payable and deferred income taxes, its assessment of uncertain tax positions and its stock-based compensation costs. Actual results could differ
materially from these estimates.

Fair Value Estimates.The Company adopted ASC 820-10Fair Value Measurements, in the first quarter of 2008. As of
December 31, 2009, the Company did not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities. ASC 820-10 defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 classifies
the inputs used to measure fair value into the following hierarchy:

Level 1:

Unadjusted quoted prices in active markets for identical assets or liabilitiesLevel 2:

Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or liabilityLevel 3:

Unobservable inputs for the asset or liability(See Note 14).


The
carrying values for cash, accounts receivable, accounts payable, accrued liabilities and other current assets and liabilities approximate their fair values due to their short
maturities.

Foreign Currency Translation and Transactions.The Company's international operations use the local currency as their functional
currency other than
our Malaysian subsidiary whose functional

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

currency
is the U.S. Dollar. Assets and liabilities of international operations are translated at period-end rates of exchange; revenues and expenses are translated at average rates of
exchange. The resulting translation gains or losses are reflected in accumulated other comprehensive income. Gains or losses resulting from foreign currency transactions are included in net income.

Cash and Cash Equivalent and Short-Term Investments.All highly-liquid investments with a maturity of three months or less at the date
of
purchase are considered to be cash equivalents. Instruments with a maturity of greater than three months are classified as short-term investments. Short-term investments
include a compensating balance of $1.0 million held in a foreign country for the procurement of an overdraft facility. Although the compensating balance may be withdrawn, the availability of
the overdraft facility is dependent upon maintenance of the compensating balance.

Recognition of Revenue and Accounts Receivable.The Company recognizes revenue when evidence of an arrangement exists, delivery of the
product or
service has occurred and title and risk of loss have passed to the customer, the sales price is fixed or determinable, and collectability of the resulting receivable is reasonably assured.

Solar
recognizes revenue from the manufacture and sale of its products either at the time of shipping or at the time the product is received at the customer's port or dock, depending
upon terms of the contract.

Quality
Assurance performs testing, quality assurance and compliance consulting on a fixed-price, time and material, or a cost plus fixed-fee basis. The majority of the
Company's Quality Assurance contracts provide one service deliverable to the client, and revenue is recognized upon completion of such service when a report is provided to the client.

A
limited number of Quality Assurance contracts include the performance of multiple service offerings in an integrated package and are more long term in nature. The amount of revenue
recognized for these contracts amounted to $3.7 million, $5.0 million and $4.5 million for the year ended December 31, 2009, the year ended December 31, 2008 and the
year ended December 31, 2007, respectively. These contracts are accounted for under ASC 605Revenue Recognition. ASC 605 requires contract consideration in which multiple service
offerings are provided under a single contract to be allocated to each specific service offering based on each portion of the contract's respective fair value in proportion to the contract's total
fair value. The Company has determined that each deliverable under these contracts is a separate unit of accounting that possesses fair value that is represented by price lists and historical billing
practices. The Company recognizes revenue on each contract deliverable when the services have been completed and communicated to our client. Contractual termination provisions exist by which either
party may cancel the contract with written notice. Upon notice, the Company is contractually entitled to receive compensation for all services performed up to and through the termination period.

Billing
for these contracts occurs on a pre-determined schedule or at the end of the contractual term. Unbilled receivables represent revenue that has been recognized but not
billed, while billings in excess of earned revenues represent billings to clients in excess of revenues recognized on contracts.

Allowance for Doubtful Accounts.The Company maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of its
customers to make required payments. The Company

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

reviews
the collectability of its receivables on an ongoing basis and writes off accounts receivable after reasonable collection efforts have been made and collection is deemed questionable or
uncollectible.

Inventories.The Company's finished goods inventories are made-to-order and possess a shelf life of six to nine months from
the date of manufacture. Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis and includes both the costs of acquisition and
the costs of manufacturing. These costs include direct material, direct labor and fixed and variable indirect manufacturing costs, including depreciation and amortization.

The
Company will write down inventory to its net realizable value when it is probable that its finished goods inventories carrying cost is not fully recoverable through sale or other
disposition. The Company's write down considers overall market conditions, customer inventory levels, legal or contractual provisions and age of the finished goods inventories.

Prior
to 2009, obsolescence was not a significant factor in the valuation of inventory. Due to the recessionary economic environment that existed during the first six months of 2009,
some customers canceled or delayed the delivery of orders after the product was manufactured but not yet shipped. As such, $1.0 million of inventory write downs were recorded during the first
half of the year ended December 31, 2009 with such amounts being fully utilized as of December 31, 2009.

Property, Plant and Equipment.Property, plant and equipment are recorded at cost and include expenditures for items that increase the
useful lives
of existing equipment. Maintenance and repairs are expensed as incurred. The property, plant and equipment accounts are relieved at cost, less related accumulated depreciation, when properties are
disposed of or otherwise retired. Gains and losses from disposal of property, plant and equipment are included in net income.

The
Company incurs costs related to the development of computer software for internal use. These costs are accounted for under ASC
350 - 40IntangiblesGoodwill and OtherInternal-Use Software. The Company capitalizes external direct costs of materials and
services, internal payroll and payroll-related costs for employees who spend direct time working on the computer software project and a portion of interest cost incurred while developing the internal
use computer software. Training costs are expensed as incurred.

Goodwill.Goodwill represents the excess of the purchase price consideration over the estimated fair value assigned to the individual
assets acquired
and liabilities assumed. The Company does not amortize goodwill, but instead tests goodwill for impairment in accordance with the two-step method described in ASC 350
IntangiblesGoodwill and Other. The Company performs its annual impairment review of goodwill in the fourth quarter, and will also perform a review if at any time facts and circumstances
warrant. In assessing if there is an impairment
of goodwill, the Company first determines the fair value of its two reporting units, which are also its reportable segments, Solar and QA. If the fair value of either of its two segments, were to be
less than its carrying value, the Company would allocate the current fair value of the segment to the assets and liabilities of the segment to estimate the segment's goodwill. If such implied goodwill
was less than the carrying value of such goodwill, the Company would record an impairment charge for the amount of such difference. The Company completed its required annual impairment testing in the
fourth quarter of each of 2009, 2008 and 2007, which resulted in no impairments to the Company's goodwill.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible Assets.The Company accounts for business acquisitions using the purchase method of accounting and records definite-lived
intangible
assets separately from goodwill. Intangible assets are recorded at their estimated fair value at the date of acquisition.

The
Company's intangible assets include its customer relationships, trademarks, proprietary technology and accreditations and resulted from the DLJ Transactions that occurred in June of
2007.

The
Company's customer relationships consist of the value associated with existing contractual arrangements as well as expected value to be derived from future contract renewals of its
Solar and QA customers. The Company determined their value using the income approach. Their useful life was determined by consideration of a number of factors, including the Company's long-standing
customer base and attrition rates.

The
Company's trademarks represent the value of its STR® and Photocap® trademarks. The Company determined their value using the
"relief-from-royalty" method. The useful life of trademarks was determined by consideration of a number of factors, including elapsed time and anticipated future cash flows.

The
Company's proprietary technology represents the value of its Solar manufacturing processes. The Company determined its value using the "relief-from-royalty"
method. The useful life of proprietary technology was determined by consideration of a number of factors, including elapsed time, prior innovations and potential future technological changes.

The
Company's accreditations represent the value of QA's technical skills and ability to provide worldwide product testing, inspection and audits under applicable standards. The Company
determined their value based on the cost approach. The useful life for accreditations was determined by consideration of a number of factors, including the duration such accreditations will be in
effect and anticipated future cash flows.

Long-lived Assets.In accordance with ASC - 360Property, Plant, and Equipment, the Company reviews the carrying value of its
long-lived assets, including property, plant and equipment, for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If a
long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset's fair value. Fair value is estimated
based upon discounted future cash flows or other reasonable estimates of fair market value.

Asset Retirement Obligations.The Company accounts for asset retirement obligations in accordance with ASC 410Asset Retirement
and
Environmental Obligations, which requires a company to recognize a liability for the fair value of obligations to retire tangible long-lived assets when there is a contractual obligation
to incur such costs. The Company has recorded its asset retirement obligations relating to the cost of removing improvements from lease facilities at the end of the lease terms. The Company's
conditional asset retirement obligations are not material.

Deferred Financing Costs.The Company capitalizes debt issuance costs and amortizes the costs as a component of interest expense over
the term of the
related debt facility. Amortization of deferred financing costs was $1,522, $1,150, $621, and $140 for the year ended December 31, 2009, the year

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(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ended
December 31, 2008, the period from June 15 to December 31, 2007, and the period from January 1 to June 14, 2007, respectively.

Leases.The Company leases certain facilities and equipment used in its operations. The Company accounts for its leases under the
provisions of ASC
840Leases, which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in
property, plant and equipment, net. Operating lease expense is recorded on a straight-line basis over the lease term.

Income Taxes.The Company accounts for income taxes using the asset and liability method in accordance with ASC 740Income Taxes.
Under
this method, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. The Company estimates its deferred tax assets and liabilities using the enacted tax laws expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled, and will recognize the effect of a change in tax laws on deferred tax assets and
liabilities in the results of its operations during the period that includes the enactment date. The Company records a valuation allowance to reduce its deferred tax assets if it determines that it is
more likely than not that some or all of the deferred tax assets will not be realized.

The
Company operates in multiple taxing jurisdictions and is subject to the jurisdiction of a number of U.S. and non-U.S. tax authorities and to tax agreements and treaties
among those authorities. Operations in these jurisdictions are taxed on various bases, including income before taxes as calculated in accordance with jurisdictional regulations.

In
the first quarter of 2007, the Company adopted the provisions of ASC 740 related to uncertain tax positions. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements, and how companies should recognize, measure, present and disclose uncertain tax positions that have been or are expected to be taken. Tax benefits
related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when
a tax position has been effectively settled, which means that the appropriate taxing authority has completed their examination even though the statute of limitations remains open, or the statute of
limitation expires. Interest and penalties related to uncertain tax positions are recognized as part of the Company's provision for income taxes and are accrued beginning in the period that such
interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized. (See Note 12)

Product Performance Accrual.The Company typically does not provide contractual warranties on its products. However, on limited
occasions, the
Company incurs costs to service its products in connection with specific product performance matters. Anticipated future costs are recorded as part of cost of sales and accrued liabilities for
specific product performance matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. During the second half of 2008, the Company
recorded an accrual of $5.6 million relating to specific product performance matters, which amount represents management's best estimate of the costs to repair or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

replace
such product. The majority of this accrual relates to a quality claim by one of the Company's customers in connection with a non-encapsulant product that the Company purchased from
a vendor in 2005 and 2006 and resold. The Company stopped selling this product in 2006 and is currently attempting to resolve this matter.

Cost of SalesSolar.The Company includes the cost of inventory sold and related costs for the distribution of its product in cost
of
product sales. These costs include raw materials and other components, direct labor, product performance matters, manufacturing overhead, salaries, other personnel-related expenses,
write-off of excess or obsolete inventory, quality control, freight, insurance and depreciation and amortization of intangibles. Shipping and handling costs are classified as a component
of cost of product sales. Customer payments for shipping and handling costs are recorded as a component of net product sales.

Cost of SalesQuality Assurance.Included in the cost of sales of services are direct labor, operational overhead, laboratory
supplies,
salaries and other personnel-related expenses, travel expenses, insurance and depreciation and amortization of intangibles.

Selling, General and Administrative Expenses.Selling, general and administrative expenses consist primarily of salaries, travel,
commissions and
other personnel-related expenses for employees engaged in sales, marketing and support of the Company's products and services, trade shows and promotions. General and administrative expenses consist
of outside professional fees and expenses for the Company's executive, finance, administrative, information technology, compliance and human resource functions.

Share-Based Compensation.In accordance with ASC 718CompensationStock Compensation, the Company recognizes as compensation
expense the grant date fair value of stock-based awards over the vesting period of the awards.

Earnings Per Share.The Company computes net income per share/unit in accordance with ASC 260Earnings Per Share. Under the
provisions of ASC 260, basic net income per share is computed by dividing the net income available to common stockholders by the weighted average common shares outstanding during the period. Diluted
net income per common share adjusts basic net income per common share for the effects of stock options and restricted stock awards only in periods in which such effect is dilutive. ASC 260 also
requires the Company to present basic and diluted earnings per share information separately for each class of equity instruments that participate in any income distribution with primary equity
instruments (See Note 3).

Comprehensive Income.Comprehensive income consists of net income and the effects on the consolidated financial statements of
translating the
financial statements of the Company's international subsidiaries. Comprehensive income is presented in the consolidated statements of operations and comprehensive income. The Company's accumulated
other comprehensive income is presented as a component of equity in its consolidated balance sheets and consists of the cumulative amount of the Company's foreign currency translation adjustments, net
of tax impact.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements:

In June 2009, the FASB issuedThe FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FAS No. 162which was codified as ASC 105. ASC 105 requires that the FASB Accounting Standards Codification
(the "Codification") become the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Company adopted the provisions of ASC 105 effective July 1, 2009, which did
not have an impact on the Company's results of operations or financial position.

In
June 2009, the FASB issued a standard related toAccounting for Transfers of Financial Assetsan amendment of FASB Statement
No. 140. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor's beneficial interest) and
liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The standard must be applied as of the beginning of the first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard will
not have an impact on the Company's consolidated financial statements.

In
June 2009, the FASB issued a standard related toAmendments to FASB Interpretation No. 46(R). The standard requires enhanced
disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a variable interest entity. The enhanced disclosures are required for
any enterprise that holds a variable interest in a variable interest entity. The standard is effective as of the beginning of the first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard will not have an impact on
the Company's consolidated financial statements.

In
October 2009, the FASB issued Accounting Standards Update No. 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements. ASC 605-25 addresses the accounting for these arrangements and enables vendors to account for product and services (deliverables) separately rather
than as a combined unit. The amendments will significantly improve the reporting of these transactions to more closely resemble their underlying economics, eliminate the residual method of allocation
and improve financial reporting with greater transparency of how a vendor allocates revenue in its arrangements. The amendments in this update will be effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The standard will not have an impact on the Company's consolidated
financial statements.

NOTE 3EARNINGS PER SHARE

In connection with the Company's IPO, existing holders of Class A, B, C, D, E and F units were issued shares of common stock in exchange for their units. Shares of common stock
were issued for vested units and restricted common stock for unvested units based upon the equity value of the Company on the IPO date, in accordance with the STR Holdings LLC agreement
relating to priority distribution of units for shares.

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(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 3EARNINGS PER SHARE (Continued)

The
impact of this issuance has been applied on a retrospective basis to determine earnings per share for the Successor Company periods presented. The number of common shares reflected
in the calculation is the total number of shares (vested and unvested) issued to the Company's unitholders based upon their units held on the IPO date. The vesting provisions of the units have been
applied to the total common shares issued to determine basic earnings per share (based upon vested common shares equivalent to vested units) and diluted earnings per share (based upon the treasury
stock method for unvested restricted common shares equivalent to unvested units).

The
calculation of basic and diluted earnings per share for the periods presented is as follows:

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

Period from
June 15 to
December 31, 2007

Period from
January 1 to
June 14, 2007Basic and diluted net income per shareNumerator:Net income

$
22,989

$
28,105

$
4,111

$
732Denominator:Weighted-average shares outstanding


36,638,402


36,083,982


35,846,880


8,632,893Add: dilutive effect of stock options











501,643Add: dilutive effect of restricted common stock units


876,388


1,327,783


789,553


Weighted average shares outstanding with dilution


37,514,790


37,411,765


36,636,433


9,134,536Basic earnings per share

$
0.63

$
0.78

$
0.11

$
0.08Diluted earnings per share

$
0.61

$
0.75

$
0.11

$
0.08


All
3,495,685 stock options issued in November 2009 were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive.

NOTE 4INVENTORIES

Inventories consist of the following:

December 31,
2009

December 31,
2008Finished goods

$
2,547

$
2,655Raw materials


9,720


16,116$
12,267

$
18,771


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 5PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Estimated
Useful
Lives

December 31,
2009

December 31,
2008Land




$
4,589

$
3,095Buildings and improvements


15 - 40


20,766


10,318Machinery and equipment


5 - 8


45,175


41,170Furniture, fixtures and computer equipment


3 - 5


8,242


3,118Automobiles


5 - 7


342


24579,114


57,946Less: accumulated depreciation





(21,525
)

(11,695
)57,589


46,251Construction in progress





11,306


16,265Property, plant and equipment, net




$
68,895

$
62,516


Depreciation
expense was $11,878, $9,745, $3,857 and $2,314 for the year ended December 31, 2009, the year ended December 31, 2008, the period from June 15 to
December 31, 2007 and the period from January 1 to June 14, 2007, respectively.

NOTE 6INVESTMENTS

Equity Method Investments

The following is a summary of the Company's equity method investments all of which relate to the Quality Assurance segment. The
carrying value of all investments accounted for using the equity method is equal to the underlying equity in the net assets of the particular investment at the balance sheet date, unless the Company's
share of operating losses has reduced the carrying value of the investment to zero, in which case the investment is carried at zero. There is no readily determinable market value for the Company's
equity method investments.

The
Company owns 50% of the shares of CTC-Asia, Ltd., a joint venture with Le Centre Technique Cuir Chaussure Maroquinerie ("CTC"), which operates a laboratory in Hong
Kong primarily involved in the testing of leather products. At December 31, 2009 and December 31, 2008, the Company's investment in CTC-Asia, Ltd. was $866 and $549,
respectively, and classified as Other noncurrent assets in the consolidated balance sheets.

Specialised
Technology Resources (UK) Limited ("STR-UK") owns 50% of the shares of STR (France) SAS ("STR France"). STR France, a joint venture with CTC, is incorporated in
France for the purpose of carrying out studies, analyses, inspections and other provisions of services related to the manufacture and marketing of nonfood consumer products, primarily leather goods.
At December 31, 2009 and December 31, 2008, the Company's investment in STR France was zero as STR-UK's proportionate share of the losses of STR France exceeded the amount
invested.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 7INTANGIBLE ASSETS AND GOODWILL

The Company has recorded the estimated fair values of intangible assets acquired in connection with acquisitions. The amounts recorded, estimated lives, and amortization methods are as
follows:

December 31, 2009

December 31, 2008Gross
Carrying
Amount

Accumulated
Amortization

Net

Gross
Carrying
Amount

Accumulated
Amortization

Net

Useful
LivesCustomer relationships

$
102,700

$
13,051

$
89,649

$
102,700

$
7,916

$
94,784

20 yearsTrademarks


65,800


5,575


60,225


65,800


3,381


62,419

30 yearsProprietary technology


70,300


8,934


61,366


70,300


5,419


64,881

20 yearsAccreditations


6,600


1,677


4,923


6,600


1,018


5,582

10 years$
245,400

$
29,237

$
216,163

$
245,400

$
17,734

$
227,666


The
Company amortizes its intangible assets utilizing the straight line method as this method approximates the economic benefit derived from these assets. Amortization expense of such
assets was $11,503, $11,503, $6,231 and $50 for the year ended December 31, 2009, the year ended December 31, 2008, the period ended from June 15, 2007 to December 31, 2007
and the period from January 1, 2007 to June 14, 2007, respectively.

Estimated
future amortization expense at December 31, 2009 is as follows:

2010

$
11,5032011


11,5032012


11,5032013


11,5032014


11,503Thereafter


158,648$
216,163


Goodwill
was $223,359 and $223,299 at December 31, 2009 and December 31, 2008, respectively. Goodwill was allocated to the Solar and QA segments as follows:

Solar

Quality
Assurance

ConsolidatedBalance at December 31, 2008

$
146,432

$
76,867

$
223,299Purchase price adjustment


40


20


60Balance at December 31, 2009

$
146,472

$
76,887

$
223,359


Goodwill
was increased in 2009 by $60 to record additional amounts payable to the former Specialized Technology Resources, Inc. stockholders. Goodwill is not deductible for tax
purposes.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 8DEBT

The Company's long-term debt consists of the following:

December 31,
2009

December 31,
2008First Lien Term Loan

$
165,375

$
182,225Second Lien Term Loan


75,000


75,000Capital Leases (Note 9)


131


296$
240,506

$
257,521Less:Current portion of long-term debt


(1,981
)

(2,015
)Total long term debt, less current portion

$
238,525

$
255,506


In
connection with the Company's acquisition, on June 15, 2007 (the "Acquisition"), the Company entered into two credit agreements (collectively the "Agreements") with Credit
Suisse as administrative and collateral agent. The First Lien Credit Agreement ("First Lien") consists of a $185,000 term loan and a $20,000 revolving credit facility, which includes a sublimit for
issuance of letters of credit up to $15,000. The Second Lien Credit Agreement ("Second Lien") consists of a $75,000 term loan. Under the First Lien, the Company also has the ability to request the
bank to extend the credit under another term loan facility from time to time in the amount of $10,000. The Company incurred $7,967 of costs relating to these financings that were deferred and are
being amortized utilizing the straight line method over the remaining life of the loans.

The
Company incurred an additional $1,125 of costs relating to the Company entering into an amendment to the First Lien Agreement and the Second Lien Agreement on October 5, 2009.
The amendments for both Agreements permitted the Company to enter into certain corporate reorganization transactions, including replacing STR Holdings LLC with STR Holdings (New) LLC as
a guarantor under each Agreement. This amount that was deferred is also being amortized utilizing the straight line method over the remaining life of the loans.

Subsequent
to the closing of the Company's IPO, per the terms of the Company's First Lien Agreement, the Company has paid down $15,000 of its debt related to this facility and as result
of the prepayment, the Company wrote off deferred financing costs of approximately $342.

Borrowings
under the Agreements are collateralized by substantially all of the Company's current and future acquired assets (as defined in the Agreements). The Company and its
subsidiaries are guarantors of the obligations. The Company has no independent operations or assets other than through its interest in its subsidiaries. Accordingly, the ability of the Company to
obtain funds from its subsidiaries is restricted by the First Lien and Second Lien agreements.

The
Agreements contain customary covenants, including, among other things, limits on the Company's and its subsidiaries' ability to incur additional indebtedness, incur liens, prepay
subordinated debt, make loans and certain investments, merge or consolidate, sell assets, and restrict the payment of dividends. The Company is required to maintain financial covenants with respect to
capital expenditures, an interest coverage ratio, a debt ratio and a maximum total leverage ratio.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 8DEBT (Continued)

First Lien

Borrowings under both the First Lien term loan and the First Lien revolving credit, at the Company's option, are comprised entirely of
Alternate Base Rate ("ABR") or Eurodollar loans. The ABR loans bear interest at a rate equal to an applicable percentage rate plus a base rate of the greater of (1) the lender's prime rate or
(2) the federal funds rate plus one half of 1%. Eurodollar loans bear interest at an applicable percentage rate plus a London Interbank Offered Rate Reserve Adjusted ("LIBO") rate as determined
by the lenders. The initial applicable percentage for borrowings under the term loan facility and the revolving credit facility is 1.5% with respect to ABR borrowings and 2.5% with respect to
Eurodollar loans. The weighted average interest rate for 2009 was 2.85% and was 2.73% as of December 31, 2009. The weighted average interest rate for 2008 was 5.0% and was 2.96% as of
December 31, 2008.

The
applicable percentage for revolving credit facility borrowings may be reduced, subject to the Company attaining certain leverage ratios. Changes in the applicable percentage will be
determined by the administrative agent on an annual basis. In the event of default, the interest rate increases by 2%. There is a commitment fee of 0.5% on the unused portion of the revolving loan
facility. The revolving credit facility of $20 million was not used as of December 31, 2009 and December 31, 2008.

The
Company is required to prepay outstanding First Lien term loans, subject to certain exceptions and conditions, with excess cash flow, or in the event of certain asset sales and a
public offering of equity securities. Prior to the IPO, the Company was required to make minimum repayments on the First Lien term loan in quarterly principal amounts of $463. However, no mandatory
payment is required until June 30, 2011 due to the $15,000 payment made in conjunction with the IPO. Interest payments are due, depending on the type of loan, either monthly or quarterly.
Optional prepayments may be made at any time without premium or penalty and in a minimum amount of $1 million. The First Lien term loan matures on June 15, 2014 and the revolving credit
facility expires on June 15, 2012.

Second Lien

Borrowings under the Second Lien term loan, at the Company's option, are comprised entirely of ABR or Eurodollar loans. The ABR loans
bear interest at an applicable percentage rate plus a rate equal to a base rate of the greater of (1) the lender's prime rate or (2) the federal funds rate plus 1/2 of 1%.
Eurodollar loans bear interest at an applicable percentage rate plus a LIBO rate as determined by the lenders. The initial applicable percentage is 6.0% with respect to base rate borrowings and 7.0%
with respect to LIBO borrowings. In the event of default, the interest rate increases by 2%. The Company also has the option to pay interest entirely in cash or by increasing the outstanding principal
amount. However, if interest is not paid in cash, the interest rate is increased by an additional 1.5% per annum. Interest payments are made either monthly or quarterly. The weighted average interest
rate for 2009 was 7.35% and was 7.23% as of December 31, 2009. The weighted average interest rate for 2008 was 9.54% and was 7.46% as of December 31, 2008.

The
Second Lien term loan matures on December 15, 2014. A lump sum principal loan repayment is due on the maturity date only after all outstanding First Lien borrowings are repaid
in full.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 8DEBT (Continued)

As
of December 31, 2009, the Company was in compliance with all of its covenants and other obligations under the credit Agreements.

Interest Rate Swap

Effective September 13, 2007, the Company entered into an interest rate swap contract for $200 million notional principal amount
of its variable rate debt. The notional principal amount decreased to $130 million on October 1, 2008 and the contract terminates on September 30, 2010. The Company was required
under the terms of both First Lien and Second Lien agreement to fix its interest costs on at least 50% of its funded indebtedness for a minimum of three years to economically hedge against the
potential rise in interest rates. The interest rate swap was not designated by the Company as a cash flow hedge under ASC 815-10Accounting for Derivative Instruments and
Hedging Activities, as amended. As a result, changes in the fair value of the swap are recorded in the statement of operations. The fair value of the swap was a liability of $4,018 and $6,013 at
December 31, 2009 and December 31, 2008, respectively. The resulting change in fair value has been recorded in the respective consolidated balance sheets and in the consolidated
statements of operations and comprehensive income.

Other Debt

One of the Company's foreign subsidiaries maintains a line of credit in the amount of approximately $483 (CHF500) bearing an interest
rate of approximately 4.25% as of December 31, 2009 and 4.75% as of December 31, 2008. The purpose of the credit facility is to provide funding for the subsidiary's working capital as
deemed necessary during the normal course of business. The facility was not used as of December 31, 2009 and December 31, 2008.

Required
principal repayments of long-term debt, excluding payments on capital lease obligations, as of December 31, 2009 are as follows:

2010

$
1,8502011


1,8502012


1,8502013


1,8502014


232,975Total

$
240,375


The
fair value of the Company's debt was approximately $208.7 million and $200.0 million, determined by its mid-market bid/ask price as of December 31,
2009 and December 31, 2008, respectively.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 9LEASES

The Company leases certain machinery and equipment under capital leases which extend through 2010. Capital lease assets and related accumulated amortization, which are recorded as part
of property, plant and equipment, are as follows:

December 31,
2009

December 31,
2008Capital lease assets

$
556

$
556Accumulated amortization


(267
)

(162
)Net capital lease assets

$
289

$
394


Amortization
expense on capital lease assets was $105, $105, $57 and $47 for the year ended December 31, 2009, the year ended December 31, 2008, the period from
June 15 to December 31, 2007 and the period from January 1 to June 14, 2007, respectively.

Future
payments on capital leases as of December 31, 2009 are as follows:

Year Ended December 31, 2010

$
134Less amounts representing interest


(3
)Total

$
131


The
Company leases various production and Quality Assurance laboratories and office space under non-cancelable operating leases. The leases require the Company to pay
property taxes, common area maintenance and certain other costs in addition to base rent. The Company also leases certain machinery and equipment and office furniture and equipment under operating
leases. Future minimum payments under all non-cancelable operating leases were as follows as of December 31, 2009:

2010

$
4,4282011


2,4742012


1,4222013


9882014


462Thereafter


1,446$
11,220


Rental
expense on office space and equipment operating leases was $4,933, $4,220, $2,159 and $1,817 for the year ended December 31, 2009, the year ended December 31, 2008,
the period ended from June 15 to December 31, 2007 and the period from January 1 to June 14, 2007, respectively.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 10STOCKHOLDERS' / UNITHOLDERS' EQUITY

Successor Company

Preferred Stock

The Company's Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value, issuable in series. At
December 31, 2009, there were no shares issued or outstanding.

Common Stock

The Company's Board of Directors has authorized 200,000,000 shares of common stock, $0.01 par value. At December 31, 2009 there
were 41,349,710 shares of issued and outstanding common stock. Each share of common stock is entitled to one vote per share. Included in the 41,349,710 shares are 40,166,397 vested common shares and
1,183,313 restricted unvested common shares.

Prior LLC Units

Prior to the Company's IPO, the equity structure consisted of LLC member units:

The
Company had authorized a total of 17,864,924 Class A units, 199,766 Class B units, 1,487,750 Class C units, 530,016 Class D units, 530,016 Class E
units, and 588,171 Class F units.

The
Class A, B, C, D, E and F units were subject to a priority distribution in the event of a distribution, conversion to shares of common stock upon an IPO, liquidation, partial
liquidation, or dissolution of Holdings in three steps: first, 100% to all Class A units until each such unitholder had received an aggregate amount equal to their capital contributions;
second, pro rata to each Class A, B, C, D and F unit until each Class A unit had received 2.5 times its capital contributions; third, pro rata to each Class A, B, C, D, E and F
unit based upon units held by each unitholder. Such distribution or liquidation may have been in the form of cash, securities or other consideration. Dividends on unvested units were deferred and paid
only upon vesting. Unvested units vested immediately upon a change of control.

Each
Class A unit had voting rights. The Class B, C, D, E and F units had no voting rights.

Under
certain circumstances, certain unitholders had the option to sell their units back to the Company at fair value. In addition, the Company had the right to repurchase vested units
from a terminated employee at the greater of fair value, as determined by the Board of Managers, and the original purchase price paid to the Company if terminated without cause, or at the original
purchase price paid to the Company, if terminated for cause. These contingent rights did not meet the criteria for the units to be "liability" classified under ASC 718-10 or as liabilities
under ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. However, they met the definition of redeemable equity securities to be
classified as temporary equity in accordance with Rule 5-02.27 of SEC Regulation S-X.

In
connection with the Company's IPO, all units have been converted into shares of common stock.

The
following table presents the number of shares of common stock and unvested restricted common stock issued for the respective units upon conversion. The number of shares of common
stock

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 10STOCKHOLDERS' / UNITHOLDERS' EQUITY (Continued)

and
unvested restricted common stock issued was based upon the vesting provisions of the outstanding units and reflect the units vested and unvested at the date of conversion:

Class of Units

Shares of
Common
Stock

Shares of
Unvested
Restricted
Common
Stock

Total Shares of
Common
StockA units


35,352,504


397,491


35,749,995B units


195,053





195,053C units


542,685


553,588


1,096,273D units


176,211


217,884


394,095E units








F units


478,578


95,716


574,294Total


36,745,031


1,264,679


38,009,710


Predecessor Company

Prior to the Acquisition, the Company's capital structure provided for a $10 per share liquidation preference for all class B
common stockholders. If upon liquidation, dissolution, or winding up, the Company's assets were insufficient to permit this payment, then the assets available for distribution would be distributed
ratably to all class B common stockholders. After all amounts owed to class B common stockholders were paid in full, the remaining net assets of the Company would be distributed ratably
among all holders of the Company's class A common stock, class B common stock and class C common stock.

Holders
of all classes of the Company's common stock were entitled to receive special dividends, as from time to time may have been declared by the Company's Board of Directors.

Holders
of the class A common stock and class B common stock were required to vote as a class on all matters to be voted on by the stockholders of the Company. Each
stockholder was entitled to one vote per share of class A common stock and/or class B common stock held. Class C common stockholders had no voting rights, except as required by
applicable laws.

Conversion
features were available to class A common stockholders and class C common stockholders, such that at the option of the stockholders, each share of class A
common stock could have been converted to one share of class C common stock and each share of class C common stock could have been converted to a share of class A common stock.

NOTE 11STOCK-BASED COMPENSATION

On November 6, 2009, the Company's Board of Directors approved the Company's 2009 Equity Incentive Plan (the "2009 Plan") which became effective on the same day. A total of
4,750,000 shares of common stock, subject to increase on an annual basis, are reserved for issuance under the 2009 Plan. The 2009 Plan is administered by the Board of Directors or any committee
designated by the Board of Directors, which have the authority to designate participants and determine the number and type of awards to be granted, the time at which awards are exercisable, the method
of payment and any other

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

terms
or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, collectively, "options," stock appreciation
rights, shares of restricted stock, or "restricted stock," rights to dividend equivalents and other stock-based awards, collectively, the "awards." The committee will, with regard to each award,
determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in
assumption of or in substitution for outstanding awards previously granted by us or our affiliates, or a company acquired by us or with which we combine. Options generally vest monthly over a
five-year period and expire ten years from the date of grant.

On
November 6, 2009, the Company issued 3,495,685 options to purchase the Company's common stock at exercise prices ranging from $10.00 to $21.50 to certain employees and
directors under the 2009 Plan. There were 1,214,315 shares available for grant under the 2009 Plan as of December 31, 2009.

In
connection with the 3,495,685 options granted on November 6, 2009, there are varying service and/or performance conditions. Following is a summary of the characteristics of
each these shares:

Shares

Service/Performance Condition199,766

Vests 100% on January 31, 2010.371,010

Vests 5/6 on January 31, 2010 and the remaining 1/5 vests in June 15, 2010.461,966

Vests 5/60 on January 31, 2010 and the remaining options vesting ratably in equal 1/55 installments as of the last day of each of the successive 55 months thereafter.510,935

Vests 29/60 on January 31, 2010 and the remaining options vesting ratably in equal 1/31 installments as of the last day of each of the successive 31 months thereafter.31,292

Vests 22/60 on January 31, 2010 and the remaining options vesting ratably in equal 1/38 installments as of the last day of each of the successive 38 months thereafter.275,021

Vests 2/48 on January 31, 2010 and the remaining options vesting ratably in equal 1/46 installments as of the last day of each of the successive 46 months thereafter.851,384

Vests 31/60 on January 31, 2010 and the remaining options vesting ratably in equal 1/29 installments as of the last day of each of the successive 29 months thereafter.303,461

Vests 156,788 on January 31, 2010 and the remaining options vesting ratably in equal 1/29 installments as of the last day of each of the successive 29 months thereafter.181,798

Vests 93,929 on January 31, 2010 and the remaining options vesting ratably in equal 1/29 installments as of the last day of each of the successive 29 months thereafter.300,816

Vests 3/5 on January 31, 2010 and the remaining 2/5 will vest annually in equal installments over two years, commencing on 12/31/2010, subject to performance conditions per the stock option agreement.8,236

Vests 1/5 on January 31, 2010 and the remaining 4/5 will vest annually in equal installments over two years, commencing on 12/31/2010, subject to performance conditions per the stock option agreement.3,495,685


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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

The
fair value of the stock options issued upon the closing of the Company's IPO was determined using the Black-Scholes option pricing model. The Company's assumptions about stock-price
volatility have been based exclusively on the implied volatilities of other publicly traded options to buy stock with contractual terms closest to the expected life of options granted to the Company's
employees. The expected term represents the estimated time until employee exercise is estimated to occur taking into account vesting schedules and using the Hull-White model. The
risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury 10 year zero-coupon strip yield in effect at the time of
grant. The expected dividend yield was based on the assumption that no dividends are expected to be distributed in the near future.

The
following table presents the assumptions used to estimate the fair values of the stock options granted subsequent to the IPO:

2009Risk-free interest rate

1.96%Expected volatility

61.61%Expected life (in years)

2.7 to 4.9Dividend yield

Weighted-average estimated fair value of options granted during the year

$4.59


The
following table summarizes the options activity under the Company's 2009 Plan subsequent to the IPO:

Options OutstandingNumber of
Shares

Weighted-
Average
Exercise Price

Weighted -
Average
Remaining
Contractual
Term (in years)

Weighted Average
Grant-Date
Fair Value

Aggregate
Intrinsic Value(1)Balance at November 6, 2009




$
Options granted


3,495,685

$
10.65Exercised




$
Canceled/forfeited




$
Balance at December 31, 2009


3,495,685

$
10.65


9.83

$
4.59

$
17,697Vested and exercisable as of December 31, 2009




$





$


$
Vested and exercisable as of December 31, 2009 and expected to vest thereafter


3,495,685

$
10.65


9.83

$
4.59

$
17,697


(1)The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $15.71 of
the Company's common stock on December 31, 2009.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

The
following table summarizes additional information regarding outstanding, exercisable, and exercisable and vested stock options at December 31, 2009:

Options Outstanding

Options Exercisable

Options Exercisable
and VestedRange of Exercise
Prices

Number of
Shares

Weighted-
Average
Remaining Life
(Years)

Weighted-
Average
Exercise
Price

Number of
Shares

Weighted-
Average
Exercise
Price

Number of
Shares

Weighted-
Average
Exercise
Price$10.00


2,721,073


9.83

$
10.00




$





$
$12.81


735,084


9.83

$
12.81




$





$
$13.30


31,292


9.83

$
13.30




$





$
$21.50


8,236


9.83

$
21.50




$





$
$10.00 - $21.50


3,495,685


9.83

$
10.65




$





$



The
total grant date fair value of stock options vested and unvested during 2009 was $0 and $16.1 million, respectively. The aggregate intrinsic value of all options exercised
during 2009 was $0.

As
of December 31, 2009, there was $10.6 million of unrecognized compensation cost related to outstanding employee and director stock awards. This amount is expected to be
recognized over a weighted-average vesting period of 3.46 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to
these awards will be different from its expectations.

On
November 6, 2009, in connection with the IPO the Company issued 40,000 shares of restricted common stock with a fair value of $400 to four of its directors under the 2009 Plan.

Effective
as of April1, 2009, a total of 223,464 Phantom A units, with an estimated grant date fair value of $6.0 million, were granted to the Company's Chief Executive Officer.
This grant was accounted for as a liabilityclassified award and, accordingly, compensation expense and a liability of $552 was recorded prior to the IPO for the vested portion of the
award. Upon the IPO, the Phantom A units converted to 441,656 shares of the Company's common stock and, as a result, the liability was reclassified as an equity-based award.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

The
following table summarizes the restricted shares activities under the Company's 2009 Plan for the year ended December 31, 2009:

Unvested
Restricted SharesNumber of
Shares

Weighted-
Average
Grant-Date
Fair ValueUnvested at November 6, 2009(1)


1,264,679

$
10.00Granted


40,000

$
10.00Vested


(121,366
)Canceled


Unvested at December 31, 2009


1,183,313

$
10.00Expected to vest after December 31, 2009(2)


1,183,313

$
10.00


(1)The
1,264,679 shares unvested as of November 6, 2009 represent the restricted shares issued to former LLC unitholders and the Company's Chief
Executive Officer in connection with the conversion.(2)As
of December 31, 2009, there was $6.2 million of unrecognized compensation cost related to employee and director unvested restricted shares.
This amount is expected to be recognized over a weighted-average vesting period of 2.37 years. To the extent the actual forfeiture rate is different from what the Company has anticipated,
stock-based compensation related to these awards will be different from its expectations.


Stock-based
compensation expense was included in the following consolidated statement of operations and comprehensive income categories:

Years Ended December 31,2009

2008

2007Selling, general and administrative expense

$
7,308

$
1,752

$
2,634Total recognized tax benefit

$


$


$



LLC Units Prior to Initial Public Offering

In connection with and subsequent to the DLJMB acquisition of the Company (the "Acquisition"), Class B, Class C,
Class D, Class E and Class F incentive units were issued to employees and certain

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

non-employee
investors, each class of which had varying service and/or performance conditions. The following is a summary of the characteristics of each class of units:

Unit

Service/Performance ConditionClass B

Vested immediately upon issuance.Class C

Vested ratably at month end in 1/60th installments beginning the month following the date of issuance.Class D

Vested ratably in 1/5th annual installments beginning with the year ending on December 31, 2007 if the equity value performance target, as provided in the LLC agreement, was achieved. Equity value
performance targets were based on a multiple of management's projections of Consolidated EBITDA for such fiscal year, less estimated net indebtedness. Performance targets were met if the Company's actual equity valuation is 85% or greater of the
target equity value.Class E

Vested ratably at month end in 1/60th installments beginning the month following the date of issuance.Class F

Vested 50% immediately upon issuance and the remaining 50% vests one-third each year on the first, second and third anniversary of issuance.


During
the period from June 15 to December 31, 2007, 199,766 Class B units, 1,266,992 Class C units, 451,181 Class D units, 451,181 Class E
units and 588,171 Class F units were awarded. There was no consideration required to be paid by the unitholders in connection with the awards.

During
the year ended December 31, 2008, 11,666 Class C, 4,167 Class D, and 4,167 Class E units were awarded.

Valuation Assumptions:The fair value of each unit granted during the period from June 15 to December 31, 2007 was
retrospectively
determined. To determine the fair value of the 2007 grants, the Company used the enterprise value ascribed by the purchase price for the contemporaneous transaction and subtracted the amount of total
debt to determine the equity value. The Company then applied a Black-Scholes option-pricing model that used the assumptions noted in the following table, along with the associated weighted average
fair values attributable to each class of incentive units. Historical data was used to estimate pre-vesting forfeitures. To the extent actual results of forfeitures differed from the
estimates, such amounts were recorded as an adjustment in the period the estimates were revised. The expected volatilities are based on a peer group of companies, as the Company was a
non-public entity. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the units.
The expected term represented the estimated time until a liquidity event. The most likely liquidity event was an IPO in which units would be exchanged

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

for
restricted stock. The expected dividend yield was based on the assumption that no dividends were expected to be distributed in the near future.

Period from June 15 to December 31, 2007Volatility

52.72%Risk-free interest rates

4.98%Expected term

3.47 YearsDividend yield

0.00%Weighted average grant-date fair value:Service-based

$2.85Performance-based

$3.22


The
fair value of the units granted in 2008 was determined contemporaneously with the grant. In order to determine the fair value of the 2008 grants, the Company determined the
enterprise value of the Company based on the discounted cash flow and the prior transaction methods. The discounted cash flow method determined the present value of the Company's projected future free
cash flow. The prior transaction method utilized the value at the time of the Acquisition and applied implied multiples to various financial metrics, including revenue, earnings before interest and
taxes and Adjusted EBITDA and applied the multiples to the Company's results of operations for the more recent periods. The equity value was calculated based on a weighted average of the enterprise
values ascribed by each method minus the total amount of debt on the relevant date. The Company then applied a Black-Scholes option-pricing model that used the assumptions noted in the following
table, along with the associated weighted average fair values attributable to each class of incentive units. Historical data was used to estimate pre-vesting forfeitures. To the extent
actual results of forfeitures differed from the estimates, such amounts were recorded as an adjustment in the period the estimates were revised. The expected volatilities were based on a peer group of
companies, as the Company was a non-public entity at the time of the valuation. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for
periods corresponding with the expected term of the units. The expected term represented the estimated time until a liquidity event. The most likely liquidity event was an IPO in which units would be
exchanged for restricted stock. The expected dividend yield was based on the assumption that no dividends were expected to be distributed in the near future.

March 2008Volatility

60.00%Risk-free interest rates

1.71%Expected term

2.2 YearsDividend yield

0.00%Weighted average grant-date fair value:Service-based

$7.26Performance-based

$8.16


There
was no contractual term or expiration date for the Class B, C, D, E and F units that were issued.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

A
summary of unit activity during the period from June 15 to December 31, 2007, the year ended December 31, 2008 and the period from January 1, 2009 through
November 6, 2009 is presented below:

Service-Based Awards

Class B
Units

Class C
Units

Class E
Units

Class F
Units

Total
Units

Weighted
Average
Grant-Date
Fair ValueGranted


199,766


1,266,992


451,181


588,171


2,506,110

$
2.85Vested


(199,766
)

(116,744
)

(41,562
)

(294,086
)

(652,158
)
$
3.09Forfeited














Unvested as of December 31, 2007





1,150,248


409,619


294,085


1,853,952

$
2.76Granted





11,666


4,167





15,833

$
7.26Vested





(255,143
)

(90,867
)

(98,029
)

(444,039
)
$
2.81Forfeited














Unvested as of December 31, 2008





906,771


322,919


196,056


1,425,746

$
2.80Granted














Vested





(187,612
)

(66,775
)

(98,028
)

(352,415
)
$
2.86Forfeited





(144,239
)

(51,515
)




(195,754
)
$
2.67Unvested as of November 6, 2009





574,920


204,629


98,028


877,577

$
2.79


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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)



Class D Units

Weighted
Average
Grant-Date
Fair ValueGranted


451,181

$
3.22Vested


(90,231
)
$
3.22Forfeited


Unvested as of December 31, 2007


360,950

$
3.22Granted


4,167

$
8.16Vested


(91,076
)
$
3.27Forfeited


Unvested as of December 31, 2008


274,041

$
3.28Granted


Vested


Forfeited


(47,552
)
$
3.22Unvested as of November 6, 2009


226,489

$
3.29


Predecessor

Prior to the June 15, 2007 Acquisition, the Company had a stock option and restricted stock purchase plan which provided
selected employees the opportunity to be granted stock options or restricted stock awards of the Company. The Board of Directors determined the purchase or option exercise price. The awards generally
vested over three to four years. The maximum term for all options was 10 years.

Valuation Assumptions.The fair value of each option was estimated on the date of grant using a Black-Scholes based option valuation
model that used
certain relevant assumptions. The fair value was determined based on a contemporaneous internal valuation prepared by management and approved by the Board of Directors. Expected volatilities were
based on historical volatilities of comparable companies' stock and other factors. The Company used historical data to estimate option exercise and employee forfeitures within the valuation model. The
expected term of options granted was estimated from past exercise activity and represented the period of time that granted options were expected to be outstanding. The risk free rate for periods
within the contractual life of the option was based on the U.S. Treasury yield curve at the time of grant.

There
were no stock options granted in the period from January 1 to June 14, 2007.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 11STOCK-BASED COMPENSATION (Continued)

The
following table summarizes the Company's stock option activity for the Predecessor:

For the Period from
January 1 to June 14, 2007Shares

Weighted Average
Exercise PriceOutstanding at beginning of period


95,000

$
3.05Granted





Exercised





Forfeited





Outstanding at end of period


95,000

$
3.05




Options

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Terms

Aggregate
Intrinsic Value(Years)Vested or expected to vest at June 14, 2007


95,000

$
3.05


4.75

$
3,457Exercisable at June 14, 2007


92,500

$
3.13


4.73

$
3,360


The
total intrinsic value of options exercised during the period ended June 14, 2007 was $0.

The
Company has issued restricted stock awards which vested over varying periods of time. Activity related to these awards is as follows:

SharesUnvested at December 31, 2006


452,500Vested


Unvested at June 14, 2007


452,500


Stock-based
compensation expense was included in the following consolidated statements of operations and comprehensive income categories:

Period from
January 1 to
June 14, 2007Selling, general and administrative expense

$
33Total recognized tax benefit

$
12


In
connection with the June 15, 2007 Acquisition, the Company's outstanding stock options and restricted stock awards were settled by the acquiror. Options totaling 55,000 were
repurchased and converted into a deferred payment of $1,998. An additional 40,000 options were settled for a cash payment of $1,459. The Company's remaining unvested portion of its restricted stock
awards was accelerated and the awards became fully vested.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 12INCOME TAXES

Income before income tax expense is as follows:

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Domestic

$
12,126

$
11,444

$
(7,796
)
$
41Foreign


20,905


34,531


16,479


4,674Total

$
33,031

$
45,975

$
8,683

$
4,715


The
provision for income taxes (benefit) consists of the following components:

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Current tax expenseU.S. federal

$
4,338

$
10,515

$
2,588

$
2,065Foreign


6,916


10,895


4,958


1,760State and local


560


852


336


296Total current tax expense


11,814


22,262


7,882


4,121Deferred tax expense (benefit):U.S. federal


(1,308
)

(6,562
)

(4,302
)

(144
)Foreign


406


376


577


(35
)State and local


(870
)

1,794


415


41Total deferred tax benefit


(1,772
)

(4,392
)

(3,310
)

(138
)Total income tax expense

$
10,042

$
17,870

$
4,572

$
3,983


Tax
benefits of $0, $0, $0 and $351 for the year ended December 31, 2009, the year ended December 31, 2008, the period from June 15 to December 31, 2007 and
the period from January 1 to June 14, 2007, respectively, associated with the exercise of stock options were recorded to additional paid-in capital. Tax benefits associated
with the "Windfall" for stock options exercised are determined on a "with and without" basis.

A
deferred tax expense of $572, a tax benefit of $972, and a tax expense of $782 relating to the cumulative translation adjustment of the Company's foreign subsidiaries financial
statements is recorded in other comprehensive income for the year ended December 31, 2009, the year ended December 31, 2008 and the period from June 15, 2007 to
December 31, 2007, respectively.

During
the year ended December 31, 2008, the Company recorded adjustments to income tax expense and deferred income taxes related to the Acquisition. Amounts recorded in 2008 were
to recognize an income tax expense and deferred tax liability of $1,880 for Connecticut state income taxes and an income tax benefit and deferred tax asset of $735 for deferred compensation.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 12INCOME TAXES (Continued)

Following
is a reconciliation of the Company's effective income tax rate to the United States federal statutory tax rate:

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15, 2007 to
December 31, 2007

January 1, 2007 to
June 14, 2007Expected tax at U.S. statutory income tax rate


35.0
%

35.0
%

35.0
%

35.0
%U.S. state and local income taxesnet of federal income tax effect


(1.5
)%

3.7
%

5.6
%

4.7
%Foreign rate differential


(5.0
)%

(5.7
)%

(6.0
)%

(0.8
)%Foreign unremitted earnings


5.0
%

5.7
%

6.0
%

8.1
%Non-deductible fees and expenses


0.3
%

1.4
%

10.9
%

35.9
%Unrecognized tax benefits


(1.4
)%

1.1
%

1.6
%

1.5
%Other


(2.0
)%

(2.3
)%

(0.4
)%

0.1
%Effective tax rate


30.4
%

38.9
%

52.7
%

84.5
%


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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 12INCOME TAXES (Continued)

The
effect of temporary differences is included in deferred tax accounts as follows:

December 31, 2009

December 31, 2008Deferred tax assets:State tax loss and credit carryforwards

$
23

$
25Accrued bonuses


314


538Accrued lease liability





56Product performance accrual


1,616


1,542Bad debt reserves


568


440Foreign deferred tax assets





14Interest rate swap


1,465


2,212Deferred compensation


728


735Other reserves


515


761Non-Qualified stock option compensation


1,696


Foreign tax credits


1,302


558Total deferred tax assets


8,227


6,881Deferred tax liabilities:Fixed assets


(4,754
)

(3,862
)Intangible assets


(78,801
)

(83,760
)Foreign unremitted earnings


(6,842
)

(4,628
)Earnings from equity owned entities


(279
)

(165
)Restricted stock option compensation


(1,481
)

Foreign deferred tax liabilities


(805
)

(400
)Total deferred tax liabilities


(92,962
)

(92,815
)Total net deferred tax liabilities

$
(84,735
)
$
(85,934
)


Upon
the implementation of guidance with respect to uncertain tax positions, codified under ASC 740, the Company recorded a liability for unrecognized tax benefits of $883 that
was accounted for as a reduction to the Company's January 1, 2007 retained earnings. Approximately $305 is included in the unrecognized tax benefits recorded as of January 1, 2007, for
the payment of interest and for penalties associated with those positions.

The
Company recognizes interest accrued related to its liability for unrecognized tax benefits and penalties in income tax expense. The Company recorded interest and penalties related to
unrecognized tax benefits as a component of income tax expense in the amount of approximately $476, $130, $160 and $92 for the year ended December 31, 2009, the year ended December 31,
2008, the period from June 15 to December 31, 2007 and the period from January 1 to June 14, 2007, respectively. The Company had no accruals for interest or penalties prior
to 2007. The Company had approximately $1,028 and $637 for the payments of interest and penalties accrued at December 31, 2009 and December 31, 2008, respectively.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 12INCOME TAXES (Continued)

A reconciliation of the beginning and ending amount of the Company's liability for unrecognized tax benefits (excluding interest and penalties) is as follows:

PredecessorBalance at January 1, 2007

$
1,090Additions based on tax position related to the current year


73Additions for tax position of prior years


Balance at June 14, 2007

$
1,163SuccessorBalance at June 15, 2007

$
1,163Additions based on tax position related to the current year


178Additions for tax position of prior years


Balance at December 31, 2007

$
1,341Additions based on tax position related to the current year


117Additions for tax position of prior years


Reduction for tax position of prior years


(200
)Balance at December 31, 2008

$
1,258Additions based on tax positions related to the current year


Additions for tax positions of prior years


2,653Reductions for tax positions of prior years


(333
)Balance at December 31, 2009

$
3,578


The
amount of unrecognized tax benefit that would potentially impact the Company's effective tax rate was $2,569, $811 and $745 (excluding interest and penalties) as of
December 31, 2009, December 31, 2008 and January 1, 2007, respectively.

The
Company conducts its business globally and as a result, the Company and one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company is subject to examination by taxing authorities in each of these jurisdictions.

The
Company has open tax years from 2007-2009 for U.S. federal tax purposes. The Company has open tax years from 2005-2009 with various state tax jurisdictions.
The Company has open tax years from 2000-2009 with various foreign tax jurisdictions. It is reasonably possible that a reduction of unrecognized tax benefits may occur within the next
twelve months as a result of reductions of the uncertain tax positions. The Company estimates that unrecognized tax benefits, excluding interest and penalties, at December 31, 2009 could be
reduced by approximately $276.

In
connection with the examination of the Company's tax returns, contingencies can arise that generally result from differing interpretations of applicable tax laws and regulations as
they relate to the amount, timing or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. The Company believes it has sufficient
accruals for its contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns, although actual
results may

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 12INCOME TAXES (Continued)

differ.
The Company does not expect that such differences would have a material effect on its consolidated financial position, results of operations, or cash flows.

As
a result of the June 15, 2007 acquisition, the Company anticipates increased cash flow needs in the United States and expects to repatriate foreign earnings in the future. As a
result, as of June 15, 2007, the Company has provided for U.S. federal income tax on undistributed current earnings of foreign subsidiaries except for its Malaysia operations.

As
of December 31, 2009 the undistributed earnings of the Company's Malaysian subsidiary are considered to be indefinitely reinvested and, accordingly, no U.S. federal and state
income taxes have been provided thereon. The Company is currently pursuing an Asian growth strategy that will include capacity expansion in the region and such expansion will be funded by its
Malaysian subsidiary. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical because of the complexities
associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce a portion of the U.S. tax liability.

The
Company's state tax loss and credit carryforwards total approximately $117, which if not utilized, will expire at various times through 2027.

NOTE 13EMPLOYEE BENEFIT PLANS

The Company maintains two defined contribution benefit plans covering substantially all U.S. domestic employees. The Company makes matching contributions to the plans and can also make
discretionary contributions to the plans. The Company expense under these plans was $872, $823, $580 and $365 for the year ended December 31, 2009, the year ended December 31, 2008, the
period from June 15 to December 31, 2007 and the period from January 1 to June 14, 2007, respectively.

The
Company also maintains defined contribution benefit plans for certain foreign employees. The expense under these plans was $1,111, $983, $503 and $377 for the year ended
December 31, 2009, the year ended December 31, 2008, the period from June 15 to December 31, 2007 and the period from January 1 to June 14, 2007,
respectively.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 14FAIR VALUE MEASUREMENTS

The following table provides the Company's financial assets and liabilities reported at fair value and measured on a recurring basis as of December 31, 2009 and
December 31, 2008:

Description

Total

Quoted Prices in
Active Market for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Interest rate swap liability at December 31, 2008

$
(6,013
)
$


$
(6,013
)
$
Unrealized gain included in net income


1,995





1,995


Interest rate swap liability at December 31, 2009

$
(4,018
)
$


$
(4,018
)
$



The
fair value for the Company's interest rate swap is valued using observable current market information as of the reporting date.

NOTE 15COMMITMENTS AND CONTINGENCIES

The Company is a party to claims and litigation in the normal course of its operations. Management believes that the ultimate outcome of these matters will not have a material adverse
effect on the Company's financial position, results of operations, or cash flows.

The
Company typically does not provide contractual warranties on its products. However, on limited occasions, the Company incurs costs to service its products in connection with specific
product performance matters. Prior to 2008, the Company did not experience any material product performance matters. The Company has accrued for specific product performance matters incurred in 2008
and 2009 that are probable and estimable based on its best estimate of ultimate cash expenditures that it will incur for such items. The following table summarizes the Company's product performance
liability that is recorded in accrued liabilities in the consolidated balance sheets:

December 31,
2009

December 31,
2008Balance as of beginning of period

$
4,736

$
Additions


572


5,616Cash settlements


(1,098
)

(880
)Balance as of end of period

$
4,210

$
4,736


NOTE 16RELATED PARTIES

Certain of the Company's shareholders with aggregate interests of 15,471,945 in shares are affiliated with the Company's First and Second Lien term loan lender. The Company has entered
into an interest rate swap agreement with this lender. (See Note 8) One of these shareholders had an advisory services agreement until November 12, 2009, with the Company that provided
for the payment of $423 in annual
advisory fees. This shareholder had the right to appoint five of the seven Board members of the Company.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 16RELATED PARTIES (Continued)

Two
of the Company's Board members had an advisory services agreement until November 12, 2009, with the Company that provided for the payment of $1.4 million in fees
related to the DLJ Transactions in 2007 and provided for $150 in annual advisory fees. In 2007, these two Board members were also awarded a total of 517,510 of equivalent shares in connection with the
Acquisition.

A
former Board member and shareholder with 1,068,771 shares had had an advisory services agreement until November 12, 2009 with the Company, which was terminated in September 2008
and provided for the payment of $164 in fees related to the Acquisition and annual advisory services fees of $36. This former Board member was also awarded 27,126 of equivalent shares in connection
with the Acquisition.

On
November 12, 2009, the Company closed its IPO and paid $2.6 million to terminate all of the annual advisory services and monitoring agreements that it had entered into
in connection with the Acquisition.

Total
expense under these advisory services agreements was $3,224, $638, $352 and $687 for the year ended December 31, 2009, the year ended December 31, 2008, the period
from June 15 to December 31, 2007 and the period from January 1 to June 14, 2007, respectively.

NOTE 17REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION

ASC 280-10-50Disclosure about Segments of an Enterprise and Related Information, establishes standards for the manner in which companies report
information about operating segments, products, services, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes the
operating segments within the enterprise for making operating decisions and assessing financial performance. Based on the nature of its products and services, the Company has two reporting segments:
Solar and Quality Assurance. Information as to each of these operations is set forth below.

The
accounting policies of the Company's business segments are the same as those described in the summary of significant accounting policies included elsewhere herein.

Adjusted
EBITDA is the main metric used by the management team and the board to plan, forecast and review the Company's business performance. Adjusted EBITDA represents net income before
interest income and expense, income tax expense, depreciation, amortization, stock-based compensation expense, transaction fees, equity earnings on investments and certain non-recurring
income and expenses from the results of operations.

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 17REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

The
following table sets forth information about the Company's operations by its two reportable segments and by geographic area:

Operations by Reportable Segment

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Segment Adjusted EBITDASolar

$
67,253

$
83,042

$
28,999

$
13,089Quality Assurance


22,857


17,586


12,081


5,908Segment Adjusted EBITDA

$
90,110

$
100,628

$
41,080

$
18,997




Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Reconciliation of Adjusted EBITDA to Net incomeSegment Adjusted EBITDA

$
90,110

$
100,628

$
41,080

$
18,997Corporate Adjusted EBITDA


(8,479
)

(3,291
)

(1,776
)

(729
)Adjusted EBITDA


81,631


97,337


39,304


18,268Depreciation and amortization


(23,381
)

(21,248
)

(10,088
)

(2,364
)Interest income


136


249


203


143Interest expense


(17,068
)

(20,809
)

(13,090
)

(2,918
)Income taxes


(10,042
)

(17,870
)

(4,572
)

(3,983
)Management advisory fees


(3,224
)

(638
)

(352
)

(687
)Unrealized gain (loss) on interest rate swap


1,995


(3,025
)

(2,988
)

Stock-based compensation


(7,308
)

(1,752
)

(2,634
)

(33
)(Loss) gain on disposal of property, plant and equipment


(67
)

3





(3
)Earnings on equity-method investments


317


178


84


46Purchase accounting adjustments








(1,302
)

Non-recurring items





(4,320
)

(454
)

Transaction fees











(7,737
)Net Income

$
22,989

$
28,105

$
4,111

$
732


127

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 17REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

Operations by Geographic Area

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Net SalesUnited States

$
147,742

$
146,383

$
44,898

$
28,997Spain


57,056


89,116


27,853


11,394Hong Kong


31,145


30,438


16,288


10,851Other


29,002


22,641


20,245


13,518Total Net Sales

$
264,945

$
288,578

$
109,284

$
64,760


Depreciation and Amortization by Reportable Segment

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Depreciation and AmortizationSolar

$
13,640

$
12,403

$
5,654

$
482Quality Assurance


9,212


8,316


4,165


1,682Corporate


529


529


269


200Total Depreciation and Amortization

$
23,381

$
21,248

$
10,088

$
2,364


Capital Expenditures by Reportable Segment

Successor

PredecessorYear Ended
December 31, 2009

Year Ended
December 31, 2008

June 15 to
December 31, 2007

January 1 to
June 14, 2007Capital ExpendituresSolar

$
7,255

$
25,886

$
7,220

$
1,818Quality Assurance


10,469


8,946


2,637


1,245Corporate


109


456


207


447Total Capital Expenditures

$
17,833

$
35,288

$
10,064

$
3,510


128

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Table of Contents

STR Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All amounts in thousands except per share / unit amounts unless otherwise noted)

NOTE 17REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

Total Assets by Reportable Segment

December 31,
2009

December 31,
2008AssetsSolar

$
416,853

$
405,538Quality Assurance


214,787


203,417Corporate


14,220


11,967Total Assets

$
645,860

$
620,922


Long-Lived Assets by Reportable Segment

December 31,
2009

December 31,
2008Long-lived AssetsUnited States

$
240,017

$
246,983Spain


22,308


19,699Malaysia


9,576


6,820China


7,038


4,230Hong Kong


2,098


1,254Other countries


4,021


11,196Total Long-Lived Assets

$
285,058

$
290,182


Foreign
sales are based on the country in which the sales originated. Solar sales to one of the Company's major customers for the years ended December 31, 2009 and 2008 were
$40,420 and $35,620, respectively. Accounts receivable from that customer amounted to $1,319 and $4,134 as of December 31, 2009 and December 31, 2008, respectively. Solar sales to two of
the Company's major customers for the periods from June 15 to December 31, 2007 and January 1 to June 14, 2007 were $8,492 and $10,839, respectively.

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Table of Contents

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

None.

ITEM 9A(T).    Controls and Procedures

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's
Chairman, President and Chief Executive Officer ("CEO"), and the Company's Executive Vice President and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934, the
"Exchange Act") as of December 31, 2009. Based on this evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective such that the
material information required to be included in the Company's Securities and Exchange Commission ("SEC") reports is recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms relating to the Company, including its consolidated subsidiaries, and the information required to be disclosed was accumulated and communicated to management as appropriate to
allow timely decisions for disclosure.

Internal Control Over Financial Reporting

The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring every company that files reports with the
SEC to include a management report on such company's internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm must attest to our
internal control over financial reporting. This report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an
attestation report of our independent registered public accounting firm due to a transition period established by SEC rules applicable to newly public companies. Management will be required to provide
an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010. We believe we will have adequate resources and expertise, both internal and
external, in place to meet this requirement. However, there is no guarantee that our efforts will result in management's ability to conclude, or our independent registered public accounting firm to
attest, that our internal control over financial reporting is effective as of December 31, 2010.

Changes in Internal Control over Financial Reporting

There have not been any other changes in the Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the Company's
fiscal year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.    Other Information

Effective November 6, 2009, in connection with our IPO, our stockholders approved by written consent pursuant to
Section 228 of the Delaware General Corporation Law (i) the adoption of our 2009 Equity Incentive Plan, (ii) the adoption and ratification of the form, terms and conditions of our
Certificate of Incorporation, which had been previously approved by the members of STR Holdings (New) LLC and (iii) all actions taken and things done by the proper officers in connection
with such resolutions.

130

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Table of Contents

Holders
of our then outstanding shares of units, approved each of the foregoing matters. The number of votes cast in favor of each matter was as follows:

Total Votes Cast:


20,822,215Total Votes For:


20,822,215


100(
%)Total Votes Against:


0


0(
%)


PART III

All information in this Part may be found in the Company's proxy statement (the "Proxy Statement") to be delivered to stockholders in
connection with the annual meeting of stockholders, which is scheduled for June 3, 2010 (the "Annual Meeting") and such information is incorporated in this report by reference pursuant to
General Instruction G(2) of Form 10-K.

A
list of the Company's executive officers, together with their respective offices presently held with the Company or its subsidiaries, their business experience since January 1,
2005, and their ages as of the date of this report is set forth under "Item 1Business" above.

ITEM 10.    Directors, Executive Officers and Corporate Governance

The information required by this Item will be included in our Proxy Statement and is incorporated by reference herein.

ITEM 11.    Executive Compensation

The information required by this Item will be included in our Proxy Statement and is incorporated by reference herein.

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

The information required by this Item will be included in our Proxy Statement and is incorporated by reference herein.

ITEM 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be included in our Proxy Statement and is incorporated by reference herein.

ITEM 14.    Principal Accountant Fees and Services

The information required by this Item will be included in our Proxy Statement and is incorporated by reference herein.

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Table of Contents

PART IV

ITEM 15.    Exhibits, Financial Statement Schedules

(a)   List
of documents filed as part of this report or incorporated herein by reference:



The
following financial statements of the Registrant as set forth under Part II, Item 8 of this report on Form 10-K on the pages indicated.



Page in this
Form 10-KReports of Independent Registered Public Accounting Firm

87Consolidated Balance Sheets as of December 31, 2009 and 2008

89Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2009, 2008 and
2007

90Consolidated Statements of Changes in Stockholders' / Unitholders' Equity (Deficit) for the years ended
December 31, 2009, 2008 and 2007

91Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

92Notes to Consolidated Financial Statements

93




Schedule IIValuation and Qualifying Accounts

133


132

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Table of Contents



Schedule IIValuation and Qualifying Accounts

STR Holdings, Inc. and Subsidiaries

Beginning
Balance

Additions/
Charged to
Expenses

Deletions

Balance at
End of
PeriodSuccessorYear ended December 31, 2009Accounts receivable allowance for doubtful accounts

$
3,015


1,403


(1,950
)
$
2,468Year ended December 31, 2008Accounts receivable allowance for doubtful accounts

$
1,867


1,950


(802
)
$
3,015Period from June 15 to December 31, 2007Accounts receivable allowance for doubtful accounts

$
1,407


562


(102
)
$
1,867PredecessorPeriod from January 1 to June 14, 2007Accounts receivable allowance for doubtful accounts

$
1,074


384


(51
)
$
1,407




EXHIBIT INDEX

2.1

Agreement and Plan of Merger, dated as of November 5, 2009, among STR Holdings (New) LLC, STR Merger, Inc. and Specialized Technology Resources, Inc. (filed as Exhibit 2.1 to the Company's Quarterly
Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).2.2

Second and Amended and Restated Limited Liability Company Agreement of STR Holdings (New) LLC, dated as of November 5, 2009. (filed as Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q
filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).2.3

Plan of Conversion of STR Holdings (New) LLC, dated as of November 6, 2009. (filed as Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file
no. 001-34529) and incorporated herein by reference).3.1

Certificate of Incorporation of STR Holdings, Inc. (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein
by reference).3.2

Bylaws of the STR Holdings, Inc. (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by
reference).4.1

Form of Common Stock Certificate. (filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by
reference).4.2

Registration Rights Agreement, dated as of November 6, 2009, among STR Holdings, Inc. and the stockholders party thereto. (filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q filed
on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).


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Table of Contents

10.1

Form of Indemnification Agreement between STR Holdings, Inc. and each of its directors and executive officers. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 17,
 2009 (file no. 001-34529) and incorporated herein by reference).10.2

2009 Equity Incentive Plan. (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.3

Employment Agreement, dated as of July 18, 2008, between Specialized Technology Resources, Inc. and Dennis L. Jilot. (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on
November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.4

Amendment, dated as of September 3, 2009, to the Employment Agreement between Specialized Technology Resources, Inc. and Dennis L. Jilot. (filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.5

Employment Agreement, dated as of June 15, 2007, between Specialized Technology Resources, Inc. and Barry A. Morris. (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on
November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.6

Employment Agreement, dated as of June 15, 2007, between Specialized Technology Resources, Inc. and Robert S. Yorgensen. (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on
November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.7

Employment Agreement, dated as of August 17, 2009, between Specialized Technology Resources, Inc. and Mark A. Duffy. (filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on
November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.8

First Lien Credit Agreement, dated as of June 15, 2007, by and among Specialized Technology Resources, Inc., STR Holdings LLC, the lenders party thereto, and Credit Suisse. (filed as Exhibit 10.8
to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.9

Amendment No. 1 to the First Lien Credit Agreement, dated as of October 5, 2009, by and among Specialized Technology Resources, Inc., STR Holdings LLC, the lenders party thereto, and Credit Suisse.
(filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.10

First Lien Guarantee and Collateral Agreement, dated as of June 15, 2007, by and among Specialized Technology Resources, Inc., STR Holdings LLC, the subsidiaries of the borrower from time to time party
thereto, and Credit Suisse. (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.11

Supplement No. 1, dated as of November 5, 2009, to the First Lien Guarantee and Collateral Agreement dated as of June 15, 2007, among Specialized Technology Resources, Inc., the subsidiaries of
Specialized Technology Resources, Inc. party thereto, and Credit Suisse. (filed as Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by
reference).


134

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Table of Contents

10.12

Second Lien Credit Agreement, dated as of June 15, 2007, by and among Specialized Technology Resources, Inc., STR Holdings LLC, the lenders party thereto, and Credit Suisse. (filed as Exhibit 10.12 to
the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.13

Amendment No. 1 to the Second Lien Credit Agreement, dated as of October 5, 2009, by and among Specialized Technology Resources, Inc., STR Holdings LLC, the lenders party thereto, and Credit
Suisse. (filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.14

Second Lien Guarantee and Collateral Agreement, dated as of June 15, 2007, by and among Specialized Technology Resources, Inc., STR Holdings LLC, the subsidiaries of the borrower from time to time party
thereto, and Credit Suisse. (filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.15

Supplement No. 1, dated as of November 5, 2009, to the Second Lien Guarantee and Collateral Agreement dated as of June 15, 2007, among Specialized Technology Resources, Inc., the subsidiaries of
Specialized Technology Resources, Inc. party thereto, and Credit Suisse. (filed as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by
reference).10.16

Intercreditor Agreement, dated as of June 15, 2007, by and between Specialized Technology Resources, Inc., STR Holdings LLC and Credit Suisse. (filed as Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.17

Assignment and Assumption Agreement, dated as of November 5, 2009, between STR Holdings LLC and STR Holdings (New) LLC. (filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q
filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.18

Form of STR Holdings, Inc. Restricted Stock Agreement for executive officers that held incentive units in STR Holdings (New) LLC. (filed as Exhibit 10.18 to the Company's Quarterly Report on
Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.19

Form of STR Holdings, Inc. Restricted Stock Agreement for other holders of units in STR Holdings (New) LLC. (filed as Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q filed on
November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.20

Class A Unit Grant Agreement, dated as of November 5, 2009, between STR Holdings (New) LLC and Dennis L. Jilot. (filed as Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q filed on
November 17, 2009 (file no. 001-34529) and incorporated herein by reference).10.21

Restricted Stock Agreement, dated as of November 6, 2009, between STR Holdings, Inc, and Dennis L. Jilot. (filed as Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q filed on November 17,
 2009 (file no. 001-34529) and incorporated herein by reference).10.22

Form of Restricted Stock Agreement of STR Holdings, Inc. (filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated
herein by reference).


135

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Table of Contents

10.23

Specialized Technology Resources, Inc. Management Incentive Plan. (filed as Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and
incorporated herein by reference).10.24

Form of STR Holdings, Inc. Option Award Agreement for executive officers. (filed as Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529)
and incorporated herein by reference).10.25

Form of STR Holdings, Inc. Incentive Stock Option Award Agreement. (filed as Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and
incorporated herein by reference).10.26

Form of STR Holdings, Inc. Non Qualified Stock Option Award Agreement. (filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed on November 17, 2009 (file no. 001-34529)
and incorporated herein by reference).10.27

Subscription Agreement, dated as of September 30, 2009, by and between Specialized Technology Resources, Inc. and STR Holdings (New) LLC. (filed as Exhibit 10.27 to the Company's Quarterly Report
on Form 10-Q filed on November 17, 2009 (file no. 001-34529) and incorporated herein by reference).*21

Subsidiaries of STR Holdings, Inc.*23

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm*31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.**32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.**32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed
herewith.**Furnished
herewith.Management
contract or compensatory plan or arrangement.


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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

STR HOLDINGS, INC.
(Registrant)By:

/s/ DENNIS L. JILOTName:

Dennis L. JilotTitle:

Chairman, President and Chief Executive Officer


Dated:
March 19, 2010

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the date indicated.

Name

Title

DateBy:

/s/ DENNIS L. JILOT

Chairman, President and Chief Executive Officer

March 19, 2010Name:

Dennis L. Jilot

(Principal Executive Officer)By:

/s/ BARRY A. MORRIS

Executive Vice President and Chief Financial Officer

March 19, 2010Name:

Barry A. Morris

(Principal Financial Officer)By:

/s/ JOSEPH C. RADZIEWICZ

Controller and Principal Accounting Officer

March 19, 2010Name:

Joseph C. Radziewicz

(Principal Accounting Officer)By:

/s/ SCOTT S. BROWN

Director

March 19, 2010Name:

Scott S. BrownBy:

/s/ JOHN A. JANITZ

Director

March 19, 2010Name:

John A. JanitzBy:

/s/ ANDREW M. LEITCH

Director

March 19, 2010Name:

Andrew M. LeitchBy:

/s/ JASON L. METAKIS

Director

March 19, 2010Name:

Jason L. MetakisBy:

/s/ DOMINICK J. SCHIANO

Director

March 19, 2010Name:

Dominick J. SchianoBy:

/s/ SUSAN C. SCHNABEL

Director

March 19, 2010Name:

Susan C. SchnabelBy:

/s/ RYAN M. SPROTT

Director

March 19, 2010Name:

Ryan M. Sprott


137

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